Okay, why don't we start right away because we're trying to keep on time here. Thanks, Scott, for joining me this morning. Before we begin, and I should have said this with Royal Bank of Canada, but this does apply for the entire conference. Scott, your comments today may include forward-looking statements. Actual results could differ materially from forecast projections or conditions in the statements, conclusions in the statements.
Listeners can find additional details in the public filings of Scotiabank and Royal Bank of Canada. With that out of the way, Scott, thanks again for joining us today. You took over as president at Scotiabank on December 1st. You've been on the board for six years, and we know there's still about a month or so before you're officially the CEO.
You are known to a lot of investors that are in this room. You know, you've had time at BCE, Talisman and Finning, of course. Why don't we take this opportunity because this is actually only the second time I've ever seen Scott. Why don't you take this opportunity here to maybe, you know, let us get to know you a bit better. Maybe focus on your experiences and sort of how it's shaped you and prepared you for this new role.
Great. Thanks, Darko. Welcome everyone. I feel very honored and privileged to be here today and humbled to the ability to step into this role and build on the great work that Brian's done and the legacy that he's left. I look forward to working with all of you going forward.
As you mentioned, Darko, you know, I've varied experience set across a large number of industries, and I think there's two themes across those experiences set. One is the ability to step into complex organizations at a senior level and build teams, lead teams, motivate teams with success. That would be one theme. The second theme across those experiences would be customer.
You know, as you think about my financial industries experience, learned the importance of relationships, importance of advice, and then most recently in a customer-facing organization, with Finning. You know, we spent a lot of time on that over that nine years, thinking about the customer, developing solutions and insights for that customer to get obviously a great outcome for the customer, but also a great outcome for the company and for the shareholders.
Lastly, from a customer lens, I've also been a customer, so I have a good sense of what my expectations are from a customer's perspective. You know, why do I think, you know, I'm the right person for this job at the right time? I guess a couple things.
One is I've got a track record of success leading teams, building, retaining, developing, attracting talent, in a collaborative fashion and an inclusive fashion to deliver a great outcome. Two, capital allocation. It's been a forefront of how I think about running businesses, and I think we have an opportunity here from a capital allocation perspective to really make a difference.
Three would be operational excellence. I've seen the power of operational excellence around execution and, you know, building good businesses and seeing the returns that come with building those businesses. And then lastly, I've been a CEO of a global organization with an emphasis in Latin America, and obviously not only through my Finning experience, but also the Talisman experience. I've been in these markets for 15 years, and I know them well.
Okay. That's a lot for me to work with. You've been there for a month. What have you seen?
I guess first, you know, it's been a little bit more than a month. The announcement was in September, and I've spent a lot of time around the bank since then. The focus has primarily been internal and primarily been with employees.
And what I would say is I've been really impressed with the passion, the enthusiasm, and the openness with which the employee base, 90,000 Scotiabankers have accepted me. That would be the first and foremost.
Two, I think there is a lot of competitive strengths with this platform, and Brian deserves a lot of credit for it. The strengthening of the earnings quality across the platform has been very successful. The strengthening of the core, the functions that allow the business to be successful has been a real achievement.
Addressing the technology deficit has been an achievement as well and places us well for success going forward. I do believe we're a leader in ESG, and I think that will become increasingly important going forward.
I think there's a lot of checks along the way that Brian should be really pleased with. As I look at, you know, two areas or I guess three areas that I'm, you know, digging into and I think there's opportunities for, one is on this, you know, deposit and funding franchise. I do think we have an opportunity. You know, our loans to deposit ratio is high. We have an opportunity to continue to build out the deposit franchise for this business, and I think that helps from two perspectives.
One, obviously funding, you know, less reliant on high-cost wholesale funding, and that helps in the short term obviously. I think if you take a longer term North Star view, you know, that importance of the deposit, importance of that customer relationship is extremely important as you move from a product orientation to a relationship orientation.
That would be one first impression. The two first impression would be around business mix. Business mix would be both at the enterprise level in terms of geographies and then within the business lines. From an enterprise perspective, you know, deployed a lot of capital into the international markets over the last 10 years, and that, the returns on that capital have not been commensurate with the risk that we've taken.
There's a lot of reasons for that, and we'll come back. I know you're gonna wanna talk about the international business. A lot of geopolitical reasons, a lot of macro reasons, a lot of, you know, execution reasons, but that's something that we need to be really thoughtful about going forward. Within the business lines, I think there's a business mix opportunity as well.
You know, I think we're evolving from a product to a customer orientation. We've got a heavy emphasis, for example, in our Canadian Business on mortgages and autos, relative to our peers. Even in the corporate business, a heavy orientation to, you know, loans rather than ancillary businesses. As I think forward, the great opportunity here is the team that's around me gets it.
You know, as I think about what Dan Rees is doing in Canada, he's been in that role now for two years, building out the Scene+ platform, which thinks about getting a more holistic relationship with the customer. Thinking about cross-sell, wealth, and our Canadian core franchise.
Thinking about the under-penetration we have in c-commercial and small business with comes with great deposits. Then also thinking about the under-penetration we have in Quebec and BC. That's all leading us to, you know, a better business mix outcome with a less focus on the product and more focus on the customer.
Similarly, as I think about Jake and what he's doing in the GBM business, we're making great progress, not just leading with the loan, but also tying up that ancillary revenue around that loan, so moving less from the product and more to the customer focus.
Those evolutions were early in stage, right? I mean, both of those leaders, as an example, have been in the roles for two years. We're early in that evolution, and there's a lot more to go. The great thing is the team's on it and understands the opportunity.
Okay, more stuff to work with there. Thank you for that for that answer. In your previous answer, you mentioned that one of the things, one of your strengths is really about capital allocation. Here we are today in a world where the regulator has increased the domestic stability buffer, widened the range.
When I look at Scotiabank, your capital ratio relative to the other companies that I cover is on the low end. Maybe a three-part question. First, you know, as I, as I think about it, at 11.5%, how do you see your capital evolve? You know, maybe what Dave McKay gave is a bit of a waterfall.
Yeah.
Not necessarily saying pinning you to a waterfall, but how do you see it sort of evolving this year? Are you at risk of potentially raising equity? What levers are available to you to prevent an equity raise?
Obviously, capital is very important, topic of the day. As I think about our capital and how I wanna run this business, you know, optionality is important, right? You wanna have enough buffer so that you can execute on not only organic, but if anything, you know, outside of the organic came up, you'd be able to have that optionality.
That's not gonna be the focus necessarily, but it is trying to give you a sense that I do believe optionality on capital is important. We ended the year at 11.5%. As I look forward, you know, we're gonna build to 12% by the end of the year.
We feel comfortable that we're going to get there through a combination of slowing our RWA growth, internal capital generation, and then we have the same Basel reform benefit that all the other financial institutions, I assume, will have into the second quarter, and that's going to be meaningful. We feel very comfortable on internally getting to that 12% type level by the end of the year.
I don't see the need to issue equity. And as I think right now, there's two banks out there that don't have a DRIP in place. We're one of them. From what I see today, we don't. That's always available to us, but that's not a tool that we need to use right now from what I see today.
I mean, Darko, I feel pretty comfortable of getting that 12 type percent. Level by the end of the year, and I think that's appropriate for the environment we find ourselves in.
What if the regulator increases the DSB all the way up to four?
Yeah. You start to think about, you know, higher buffers and whether you need a higher buffer or lower buffer. You know, my expectation is that will take some time, but that will result in getting to that kind of 12+ range, which I feel comfortable in us getting to.
I also share the view that Dave McKay had highlighted before, is that if you are in a scenario where we have a recession that's a little bit more problematic than I think we're all forecasting right now, then I think what you hear from Peter today at lunch is that he'll be open to actually reducing the capital requirements because that's actually makes sense, right, in terms of how you wanna run the economy.
The 12, you know, slightly higher, is the right place to be from our perspective, and that's what we're gonna shoot for by the end of the year.
Maybe just switching from capital to credit, but sort of building on it, I guess.
Yeah.
in a way. I mean, one of the things that we can worry about is what if there's a mistake along the way? You know, what if credit costs...
Yeah.
-spike on you? you know, how do you think about the balance sheet? Similar for me when I look at Scotiabank's reserves, your stage one and two performing allowances, they look about the same to pre-pandemic. It doesn't look as though the balance sheet's actually positioned for a worse environment. Maybe you can talk a little bit about some of these things.
Sure. I should have mentioned this in my opening impressions. You know, I've sat on the risk management committee of the board. You know, watched Brian manage the company over the last nine years through a risk lens.
Now, you know, in the guts of the business, that's been one of the areas I've gone to first, given some of the risks on the horizon. The credit quality of this bank is strong. You know, full stop. You know, I think it's a great credit to Brian on how he's run this bank. But we do have great credit quality. If you think about the Canadian book, 95% of the book is secured.
If you think about the international book, you know, we had some challenges in the unsecured international portion through COVID, and that has been adjusted. The security of that book has now gone up, you know, 70%, 72%, 73%. A lot of the dispositions along the way have been, you know, Brian's view of de-risking that area of the bank.
As you look at the corporate side and, you know, the PD bands where we play, you know, we play at a very high corporate investment grade credit. I do think the credit quality of the bank is strong. Now that being said, you know, there's different views on where we're heading from a recessionary perspective, and we're gonna be very thoughtful about our pessimistic scenario, the options and the emphasis that we put into that.
I think what you'll see is, or what the guidance was kind of mid-30s PCLs for next year. That seems to make sense, a normalization of the PCLs, and probably more emphasis on performing as opposed to non-performing loans. That's the type of framework that we're thinking about for next year, Darko.
By the way, ACLs have gone up as you think relative to pre-pandemic to where we are today. ACLs have gone up. I think there's been a business mix issue, but less secured to more secured, plus an ACL build, which gives us comfortable about our provisions.
What about the vulnerabilities that are facing?
Yeah.
I mean, the Canadian consumer, your mortgage book, how should we think about that if we enter a recessionary scenario? What comfort can you give us that your mortgage book is well positioned?
It was interesting as I listened to Dave. I mean, I would share the same view on that Dave has around the vulnerability of the consumer. I mean, right now we have a lot of liquidity in the system with our consumers. 40% of our book is variable, and I think they have about 30% more deposits than they did going into the pandemic. As you know, our variable book resets. Unlike the deferred AM or amortization of some of our peers, ours is continually resetting, which I think is helpful to continue along the journey with your customers. 60% of our book is fixed, with 8% renewing in next year and another 8% in 2024.
We're really looking at the 2025 issue where a lot of our customers see the impact of that. We also look at the vulnerable customers, so those customers that have higher LTV, lower FICO, lower deposits in their checking accounts, and then also house prices that are seen vulnerable. We have about 20,000 of those. As you think about the tail risk, we have about 20,000 vulnerable customers, which would be 2.5%. I think Dave mentioned low single digits. We'd be about the same. 2.5% of our mortgage book would be vulnerable. That is a manageable type situation for us on mortgages. I think the first place this is gonna go, if it does go, is areas like credit cards, right?
That is again, we're not seeing signs of that yet. We're seeing actually people not reduce their or sorry, not build their revolver level. They're actually starting to reduce it. You could argue that that's a kind of a leading indicator. Again, from a, from a The Bank of Nova Scotia perspective, we're underweight in credit cards. For us, I think that's a competitive advantage if you are looking at it solely through a credit lens. Lastly, on the auto book, you're starting to see used prices come down a bit in the U.S. I think that's a, you know, a precursor of potentially being very careful about used. We have a very small CAD 3 billion near-prime book that we're watching very closely.
That's the areas that I think you're going to see it first before the mortgages.
When I sit back and I think about 2023 for Scotiabank, we've got this situation where PCLs are normalizing, earnings per share is declining, and part of that is also a non-expansion of the NIM. Maybe we can talk a little bit about, A, where you see if there's any potential areas where your net interest margin, net interest income, can grow, your current positioning on net interest income, and think about is it just simply in the cards that you're gonna have negative EPS growth this year just because PCLs are normalizing? Is there somewhere something that will help offset and at least create some EPS growth this year? Can it be through the net interest margin or net interest income, line item?
When I think of 2022, we benefited from abnormally low PCLs, and we benefited from a very low IB, international banking tax rate. We benefited from strong loan growth. As we think about 2023, you're gonna see a normalization on all of those accounts. Higher taxes, higher PCLs, and slowing loan growth. As well, you're gonna see the full year impact of inflation come through in 2023, which we had part of that in 2022. I look at the NIM commentary that you've highlighted. You know, we are, as I've mentioned, we're very dependent on wholesale funding. The cost of that funding has increased significantly. That is also gonna be a headwind in 2023.
As I think about 2023 earnings, I am very cautious on the outlook for 2023. As I think a little bit longer term into when rates stabilize, and I think that's an important kind of pivot, rate stabilization, you know, I think we look relatively better in that environment. The combination of rate stabilization with asset repricing, which starts to accelerate in the back half of 2023 and 2024, then I do think we get into a, you know, a better situation. 2023, I'm cautious until those rates stabilize from an earnings perspective.
What if rates fall?
I think rates falling, you know, and that's we probably based on what we're seeing we're gonna be in a little bit of longer term of kind of rates lower or higher or stable for longer and then falling, but that's a great place for us to be relative. I mean, it doesn't take our focus off the North Star vision of the deposits and the importance of getting that from a funding perspective and a customer intimacy perspective. I think given our liability sensitive balance sheet right now, in rates falling, you know, we will perform relatively better than some of the other banks that are positioned for the rate rise scenario.
Is there anything you'd change with respect to that? I mean, the one thing that we've noticed with Scotia is maybe a slightly more active treasury department, maybe actively positioning the balance sheet for rising or falling interest rates. Is that something that might change now under new management?
Yeah. No, listen, I think, there has been an approach to extend duration. You heard Dave McKay talking about it from a Royal Bank perspective. You know, I think we did some of that as well.
Maybe a quarter or two early. You know, from my perspective, I think we need to be really careful on hedging. You know, I think hedging to protect downside risk, that's important part of, you know, overall, you know, banking 101. I do think going forward, you know, focusing on the fundamentals, the, you know, how you run a bank with strong deposits, some great customer relationships, which then leads to, you know, profitable NII and NIR growth, that's gonna be an important facet of what we're gonna do going forward.
Okay. I may have messed up in the last, so apologies to the audience because there may have been questions to Royal, and I was just staring at the wrong screen. Apologies to everybody if you asked a question on Royal. I'll see what I can do. I do have some questions here from the audience at Scotia. The first question is, does the opportunity to build the deposit franchise require upfront investment?
Listen, I think the, as you think about building out the deposit franchise, in my view, this doesn't happen in a quarter or in a year. It happens with a North Star view of this is really important and pivoting the organization to doing that. It's again this move from a product orientation to a customer orientation. What I like so much about what Dan Rees and his team are doing in Canada is trying to do that organically, right? I mean, the Scene+ program which you've heard the team talk about, is an attempt to actually create a deeper relationship with our customer and get multi-product relationships. More relationships with more of our customers, which builds, you know, a very healthy, customer interaction.
We can do more for our customers, we can create value for our customers, and as a result, we'll actually create value for our shareholders as well. you know, that work is in process, but it takes time, and you definitely don't want to shift the pendulum too far too quickly, because then you actually have, you know, too high deposits and, you want this to be sustainable. You want it to be really creating value for your customers and also that will ultimately create value for your shareholders. there's ultimately a, you know, a way to do this, but it's not quarter by quarter. It's, you know, year by year.
it elicited some few questions of my own, on the deposit franchise. First, are there any targets you can share with us? I mean, is there some level of deposit growth that you're looking for or deposit mix? Is there some sort of target that you have in mind?
Yeah. I mean, one of the, one of the things I think a lot about is matching loans to deposits. You know?
Thinking about as you grow your loan book, you know, you should be growing your deposit book in conjunction with that. loan to deposit ratio for us right now is too high, and we're an outlier relative to the other banks. That's something that, you know, you can fix, both by really focusing on profitable growth, profitable, sustainable growth on the loan side, not just growth for growth's sake, and then also focusing on that customer relationship, that intimate customer relationship with the deposits, which will ultimately, you know, result in a great outcome.
You mentioned a couple times the work that Dan Rees is doing. What about international banking? What about the work?
Yeah.
You know, what do you see there first, your first impressions there? Secondarily, does this also extend this discussion of deposits into the IB?
Absolutely.
Okay.
International, one, start with, I'm really supportive and pleased to see what Brian Porter and the team have done over the last 9 years strengthening that portfolio, narrowing that portfolio and building out the earnings quality. It has been a rough, you know, 10-year period from a macro perspective, from a geopolitical perspective. Right now we have strong platforms with 95% of the earnings in those PAC countries or CCAU. However, I'll come back to, you know, the returns there have not been commensurate with the risk, and therefore, there's an opportunity to improve the ROE in those businesses. I take Mexico as a, you know, a shining example of where we should try to get to. You know, you've got a great franchise there, 8% market share, loan-to-deposit ratio of 100.
Loans matching deposits. ROE of greater than 20%. Scale, 8% of the market. Great cross-sell with GBM and our retail franchise and great cross-sell with wealth and our franchise there. There's an example of a great platform that we should aspiring to have. Great connectivity back to the Americas, right? When you think about Canada and the US. That's an example of what we're trying to do. I think Nacho and the team have done a great job coming out of COVID. If you take a look at the ROE improvement in that business over the last 2 years, it has been fantastic, but there's more to do.
There's a gap relative to best in class, and there's also, you know, big enough of a gap relative to our other businesses here where we can allocate capital to. Work in process, but great work to date.
You mentioned Mexico as an example of, you know, what you'd aspire to do. Give us an example of what's needs work in the, in the international banking business.
One of the things that we need to make sure we're clear on is, you know, international. I'll give one example. International unsecured retail. Now to put this in perspective, 25% of the bank is international banking. 40% of that, or 35% of that 25% is retail. Now we're down to 10% of the overall bank's NIAT is retail. Of that, the only really unsecured exposure is in Peru and Colombia. What I'm really talking about here, and it's really important that people focus on this, because our international business gets so much attention for sometimes the wrong reason. 2.5% of the bank's NIAT is in unsecured retail in Peru. Given what we've gone through through COVID, given the, you know, the secured to.
the unsecured to secured mix, we're selling one of the businesses there to reduce the unsecured mix further. We really need to align on how we're going to run that unsecured retail business. I do think there's an opportunity to make that, you know, important in the context of it only being 2.5%. You can get higher rounds in that business if it's done right, if it's focused on the affluent, it's focused on the cross-sell, if you bring the deposits with it. You know, our loan-to-deposit ratio in South America is actually higher, meaningfully higher than our Canadian business. Again, opportunity to make sure you have the deposits along with the loans in that international business.
Okay. I think we have more time for maybe one more question. you know, please so this is the upvoted. please describe your credit quality bias. We do not think you have had much experience underwriting or managing through credit losses. should we expect. And you know, I apologize, the rest of this question is not visible to me. It's already. Oh, should we expect you to be conservative and tell your team to build reserves, or will you sit back and let your team manage reserves, underwriting, and so on? It's more like a tone from the top kind of question.
Yeah, tone from the top. One, I think, as I mentioned, the credit quality of the bank is good. If you look at the bias, we've had a really strong focus on investment grade. I'm talking about the corporate book now, and probably the commercial book as well. Strong focus on investment grade corporates. I think if the, you know, the top two PD bands were at 90% of our books there, where the average for the rest of the banks would be about 70%. The credit quality is strong. Similarly, in our Canadian business, 95% of the book is secured. When you look at, you know, 90% of the business is either mortgages or autos, it's 95% of the business is secured.
What Dan and the team are doing is trying to sell more of our products to more of our customers, right? That's what we're doing in the Canadian business. What Jake and the team are doing in GBM is trying to wrap around that loan, like ancillary businesses, right? If we can do that, we know those customers well, we know those credits well, and if we can sell more products to those customers and create a real customer orientation, I think that's a great way to impact the business mix over time, not impacting credit quality or exposure, and getting to a better outcome on returns for our shareholders and a better outcome, frankly, for our customers in terms of the value we add to our customers.
If you can combine that, creating more value for your customers and better returns for your shareholders, that's a great opportunity for us.
Scott, I really appreciate you coming to our conference, being on the job for just a little over a month. Maybe to get us back on track for time, this is a great opportunity for you to sort of lay out, I think, for everybody here, you know, in the last few minutes here, what your key messages are for investors.
Yeah.
What it is that you want them to take away under what your stewardship will be for Scotiabank for the years to come over to you and to give us a sort of a key breakdown.
Thanks, Darko. I'm gonna start where I started. I'm, you know, I'm really feel honored and privileged to take on this role, and I feel like Brian's left a great legacy on which we can build. That's important comment to start off with. Second, for me, if I could leave you with three messages, it's around culture, capital, and execution. On the culture front, it's about building teams where we're collaborative and inclusive. If we can improve the employee engagement, drive the employee engagement, I'm a big believer in that actually results in a better customer engagement as well. From a customer culture perspective, moving from this product orientation to, you know, the full customer orientation, which allows us again, to build more value for our customers and also build more value for our shareholders.
That would be under the culture bucket. Under the capital budget bucket, we have a great opportunity in front of us around capital allocation. You know, we've done a lot of geographical repositioning. We've had a lot of transactions in and out. We've got good platforms, but now we have an opportunity to take an enterprise-wide view and prioritize where we allocate that capital. Our returns have been lagging relative to our peers on almost every return metric, and that has translated into lower TSR over 1, 3, 5, and 10 years. We're committed to change that, and we can do that through very disciplined capital allocation to address the business mix issues that I just talked about earlier today. Third, from an execution perspective, execution, operational excellence.
You know, I've seen the power of what we can do with operational excellence at Finning. 9 years of operational excellence where you set a North Star, you're disciplined, you're relentless, you focus on, you know, building out the platforms that we can, and you focus on profitable, sustainable growth, not growth for growth's sake. Those three buckets are what I'm focused on right now. As I think about, you know, my management style and what you can expect from me. One, I'm gonna be very transparent. I'm gonna listen. I'm going to listen to all stakeholders, listen to everyone in this room. We're gonna be decisive, but we're not gonna be impulsive. You know, we're gonna base our decisions on facts and data, and we're gonna be accountable. We recognize that our results will be judged by the success we have.
I can guarantee you the team around me understands the challenge in front of us, and we're gonna get after it. Thank you very much for having me today, and look forward to working with you going forward.
Okay, great. Thank you so much, Scott. We'll end the session there.
Thanks.
You're welcome. Cheers.