Good morning, and welcome to Scotiabank's 2021 second quarter results presentation. My name is Philip Smith, and I'm Head of Investor Relations here 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 today are the following Scotiabank executives: Dan Rees from Canadian Banking, Glen Gowland from Global Wealth Management, Ignacio Deschamps from International Banking, and Jake Lawrence and James Neate from Global Banking and Markets. Before we begin, on behalf of those speaking today, I will 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 Porter.
Thank you, Philip, and good morning, everyone. I wanted to make a few comments on the quarter before turning the call over to Raj Viswanathan, who will discuss the results in detail. The bank's second quarter results, announced earlier this morning, reflect the steady improvement in our financial performance, along with stronger economic conditions and a more positive outlook across our footprint. Our diversified business platform produced good earnings growth, positive year-to-date operating leverage of 3.4%, and a higher ROE on both a quarter-over-quarter and a year-over-year basis. Canadian Banking showed solid mortgage and commercial loan growth. Global Wealth Management produced double-digit growth in earnings and AUM. GBM reported another strong quarterly earnings contribution, and International Banking continued its steady progress toward its run rate earnings target.
We continue to see good operating momentum across the bank, and I am encouraged by the steady month-to-month improvement in both business conditions and our results. Many of our businesses have yet to return to pre-pandemic level of earnings, but we see a clear path to achieving this over the near term. In addition to the stronger financial performance, the bank's strength in customer service and our commitment to ESG also stood out in the second quarter. Our commitment to excellent customer service across all channels was recognized in the J.D. Power 2021 Canada Retail Banking Satisfaction Study, where the bank rose to number two among large banks, while Tangerine recognized as number one for the 10th consecutive year among mid-size retail banks.
Our focus on environmental and social policy has also been recognized with a rating of AAA in the MSCI ESG ratings assessment, a rating held by only 2% of banks globally. We remain committed to the global efforts to reach net zero by 2050, and we are establishing bank-wide quantitative time-bound targets for reducing greenhouse gas emissions. I will now turn the call over to Raj to discuss the quarter in more detail.
Thank you, Brian, and 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 a quarter, I will refer to quarter-over-quarter performance in many areas, given the economic impact of 2020, while reflecting that Q2 was a shorter quarter when assessing performance. I will begin with a review of all bank performance for the quarter on slide five. The bank reported strong performance across key metrics of EPS growth, ROE, operating leverage, and capital. Total earnings were CAD 2.5 billion and diluted EPS was CAD 1.90 for the quarter, an increase in EPS of 83% year-over-year and growing quarter-over-quarter, despite a shorter quarter. All operating segments delivered strong results this quarter.
Return on equity continues to improve, rising to 14.9% from 14.4% last quarter, above the bank's medium-term objective. Pre-tax pre-provision earnings improved 2% year-over-year, driven by strong expense management. Revenue declined 3% year-over-year or in line with last year, excluding the negative impact of foreign currency translation as the Canadian dollar strengthened against most currencies. Net interest income was down 3%, excluding the impact of FX, as the core banking margin declined nine basis points year-over-year. The year-over-year decline in margin was due to several bank rate cuts and changes to business mix to more secure retail and higher commercial profit loan growth. Quarter-over-quarter, margin was down only 1 basis point in line with our expectations. Non-interest income increased 1%, with strong 11% growth in management income, offset by lower trading revenues and lower investment gains.
Credit risk falling to 33 basis for the quarter. This represents a meaningful decline of 15 basis points quarter-over-quarter and 86 basis points year-over-year. Daniel will discuss credit metrics in more detail in our risk discussion later in the call. We continue to manage expenses prudently. On a year-over-year basis, expenses declined 7%, or 1% excluding the metals business charges taken in 2020 and divestiture. This decrease was due to lower personal costs, foreign exchange translation, and lower advertising, business development and professional fees, with some offset from higher performance-based compensation costs. Year-to-date, expenses are down 5%. The productivity ratio continued to decline, falling to 51.9% compared to 54% a year ago, and the bank generated a strong positive year-to-date operating leverage of 3.4%. On slide six, we provide an evolution of our common equity Tier 1 capital ratio over the quarter.
The bank reported a strong CET1 ratio of 12.3%, improving 10 basis points from Q1 and 140 basis points from a year ago. This was due primarily to strong internal capital generation offset by good growth in risk-weighted assets. Excluding the impact of FX, risk-weighted assets grew CAD 6 billion, mainly from growth in business banking and retail mortgages in both Canadian Banking and International Banking. We also had additional benefits from pension remeasurement in the quarter, driven by higher discount rates. In the next quarter, our capital ratio will be impacted by approximately 25 basis points due to the increase in the CVA multiplier and the closing of the transaction to acquire 7% of the minority interest in Chile. We expect the CET1 ratio to remain around the 12.2% level for the rest of the year, driven by strong internal capital generation.
Turning now to the business line results beginning on slide seven. Canadian Banking had another strong quarter as the rebound in earnings continued with net income of CAD 931 million, up 94% year-over-year and 2% quarter-over-quarter. The year-over-year increase was driven primarily by lower PCLs and higher revenues. Pre-tax pre-provision earnings grew a strong 7% year-over-year as solid loan and deposit growth, higher fee income and disciplined expense management were partially offset by margin compression. Revenue was up 4%, driven by higher non-interest revenue, partially offset by lower net interest income. Compared to the prior year, non-interest revenue increased a significant 20%, while net interest income declined a modest 1%, driven by lower margins. Higher non-interest revenue was driven by higher banking fees, mutual fund distribution fees and income from associated corporations.
Residential mortgages grew a strong 8% and business lending grew 4% year-over-year in line with the strategic priorities of the business. The net interest margin was stable to the prior quarter at 2.26% and in line with our expectations. Year-over-year margin compression was mainly due to changes in business mix and deposit margin compression, but was partly offset by higher margins in residential mortgages and commercial lending, as well as higher deposit balances. Expenses increased a modest 1%, primarily driven by higher technology costs to support business development. Good revenue growth and prudent management of expenses resulted in a strong year-to-date positive operating leverage of 1.6%. The PCL ratio decreased 216 basis points, which is 61 basis points lower year-over-year and seven basis points lower than Q1. We expect the Canadian Banking business earnings to continue to grow for the rest of the year with stable PCLs.
Turning now to Global Wealth Management on slide eight. Earnings of CAD 378 million were up a strong 21% year-over-year, driven by strong mutual fund fees and brokerage revenues, offset by higher volume-related expenses. Revenue grew a strong 16%, while non-interest expenses grew 14%, contributing to a positive operating leverage of 2.5% for the quarter and 5.4% year-to-date. Global Wealth Management has generated positive operating leverage in six consecutive quarters. Canadian Wealth Management grew a strong 25% year-over-year and 4% excluding the performance fee benefit last quarter. All eight of our Canadian businesses reported earnings growth year-over-year. Assets under management increased 19% to CAD 332 billion, while AUA increased 20% to CAD 571 billion from the prior year, driven by positive net sales and market appreciation. Sales activity was strong in the quarter.
We ranked number two for the quarter in retail mutual fund net sales in Canada, with record net sales of CAD 4.3 billion. We expect the Global Wealth Management business to continue to perform strongly for the rest of the year with improving contributions from our international wealth operations. Moving to slide nine, Global Banking and Markets. The business generated strong earnings of CAD 517 million, demonstrating consistent earnings from the benefits of a diversified business model. Net income was down slightly year-over-year as the business benefited from very strong capital markets and lending activities at the onset of the pandemic last year.
Revenue growth was impacted by moderating fixed income trading revenues and the negative impact of foreign exchange that was partly offset by higher equity trading revenues and underwriting fees. The business is well positioned to grow as we expect good corporate loan growth in the H2 of the year and our advisory business pipelines remain strong. Expenses increased 3% year-over-year as we continue to invest in technology and incur higher volume related expenses. The productivity ratio was 50.3% for the quarter, in line with our Investor Day target. Turning to the next slide on International Banking. My comments that follow are on an adjusted and constant dollar basis. International Banking reported a net income of CAD 429 million, up 165% year-over-year and 11% quarter-over-quarter.
Improving economic and business conditions, higher loan growth in the H2 of the year, and prudent expense management support our continued optimism for the division under the expectation of achieving CAD 500 million of earnings in this business segment by Q4 2021. Pretax pre-provision earnings declined 8% year-over-year and 4% from the prior quarter but was up 1% excluding the impact of the shorter quarter. Strong performance in Mexico was more than offset by a decline in Peru, driven by lower credit cards and personal loans. Revenue declined 2% quarter-over-quarter, adjusting for the impact of the shorter quarter, primarily due to lower credit card and personal loan balances, while fee and commission income improved 4%.
Total loans declined 2% year-over-year as a strong 6% growth in mortgages was offset by 11% reduction in credit cards and personal loans and a decline of 2% in commercial loan balances. However, loans grew 1% quarter-over-quarter. Retail was flat as mortgage growth of 1% was offset by a decline in credit cards and personal loans of approximately 3%, while commercial loans grew 1%. We expect continued growth in mortgages and commercial lending in the H2 of the year. Net interest margin of 3.95% declined eight basis points compared to Q1, driven by the lower interest rate environment, changes in business mix, with continued increase in credit cards and personal loans, and growth in lower margin commercial loans.
Non-interest income declined 5% quarter- over- quarter and year- over- year, reflecting lower insurance income from associated corporations and card fees, though offset partially by higher banking fees. The provisions for credit loss ratio declined quarter- over- quarter by 31 basis points to 118 basis points. Expenses continued to decline 4% year- over- year and 5% compared to Q1, driven by lower personal costs, digital progress, and other efficiency initiatives. Now turning to the other segment. We reported earnings of CAD 130 million. The increase year- over-y ear from a net loss of CAD 166 million in 2020 relates primarily to charges related to the metals business in 2020. Strong contribution from asset liability management activities driven by prudent management of wholesale funding and interest rate risk resulted in higher net interest income in this segment. I'll now turn the call over to Daniel to discuss this.
Thank you, Raj. Good morning, everyone. I'll begin my remarks on slide 12. Turning first to credit quality. Our credit quality continues to be high and the trends are positive as economic growth accelerates across our footprint. Our GIL ratio of 81 basis points was down three basis points from last quarter and has remained stable for the past four quarters. Retail gross impaired loans net of FX declined a modest CAD 91 million as new formations were offset by write-offs, primarily in International Retail. GILs in Business Banking net of FX increased CAD 109 million as we saw new formations in two accounts for which we have reserved appropriately. On the bottom of slide 13, you can see the all-bank net write-off ratio increased to 76 basis points. The increase was primarily driven by International Banking, specifically retail.
Last quarter, we spoke to the higher levels of late-stage delinquencies in Peru and Colombia, which have higher levels of unsecured exposures. As expected, these rolled forward and resulted in elevated write-offs this quarter, for which we were comfortably provided. Given the strong performance of our remaining portfolio, we expect the write-offs in International Retail to decline next quarter, trending towards our pre-pandemic levels by the end of the year. Meanwhile, write-offs in Canadian Banking are below pre-pandemic levels, and GBM remains stable. Turning to slide 14. The bank ended the quarter with total allowances of CAD 6.9 billion. That's a reduction of over CAD 9 in the prior quarter, driven by elevated write-offs. Consequently, the ACL ratio declined to 109 basis points from 125 basis points last quarter.
Performing loan allowances declined about CAD 700 million to CAD 4.8 billion, excluding the impact of FX. Approximately CAD 200 million of this was released due to improving credit quality and the better macroeconomic outlook. The remaining decline in performing loan allowances was primarily related to allowances from impaired loans to support elevated write-offs. Impaired loans ACL remained in line last quarter. The transfer of allowances on performing loans offset the higher level of write-offs from loan losses.
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 below 100 basis points by the end of the year. Let me now turn to the income statement and provisions for credit loss on Slide 15. Our total PCL declined to CAD 496 million. The total PCL ratio was 33 basis points, down 16 basis points from the prior quarter.
Beginning with our impaired PCLs, we reported CAD 1.19 billion in Q2, up CAD 430 million from last quarter. This represents an impaired PCL ratio of 80 basis points, an increase of 31 basis points quarter-over-quarter. The increase was primarily driven by International Banking as the expiry of deferrals resulted in higher delinquencies, mainly in Peru and Colombia. In contrast, impaired PCLs for GBM and Canadian Banking were stable. Turning to performing PCLs, we had a net reversal of CAD 696 million in Q2, down from positive CAD 2 million in Q1. Approximately CAD 200 million of the reversal represents a release of allowances built in prior periods that's no longer required. This reflects better credit quality and the improved macroeconomic outlook. We expect similar levels of releases in future quarters. Let me conclude with a few comments. First, our asset quality remains high and the credit trends are favorable.
Secondly, our PCL outlook is positive for the remainder of 2021, with net write-offs and impaired provisions having peaked this quarter. Third, we expect to see additional releases from our performing allowances for the balance of the year. Finally, we expect the all-bank PCL ratio to be in the mid-30 basis point range for the remainder of financial year 2021, with the PCL ratio in International Banking continuing to improve sequentially for the rest of the year. These trends are in line with the repositioning and de-risking of the bank, which have taken place in recent years. With improving economic growth across our footprint, we expect strong credit performance in the future. I will now turn the call over to Brian for closing remarks.
Thank you, Daniel. I'd like to close our presentation today with a few comments and observations before turning it over to Q&A. Firstly, as I reflect on our results, I am encouraged by the steadily improving operating environment and the more optimistic economic outlook as vaccine deployment accelerates across our footprint. We are seeing continual improvement in customer activity as the economic recovery takes hold. At the same time, the forecast for GDP growth this year in our six core markets has improved to 6.5% on average, up from 5.8% just last quarter. That, combined with a booming market for commodities, makes us increasingly optimistic in our outlook. Secondly, we are seeing similar business trends across all our core markets, be they developed markets such as Canada or growth markets in the Pacific Alliance.
These trends include strong growth in secured lending such as mortgages, a recovery in automotive lending, where we are the market leader, and subdued growth in cards. As the economic recovery gains speed, we expect a recovery to more normal growth rates and to pre-pandemic levels of revenue in businesses that have been most affected. For example, annual revenue in autos, cards, and insurance in Canadian Banking is approximately CAD 400 million below pre-pandemic levels. In International Banking, fee and commission revenue is about CAD 200 million lower. We expect a gradual recovery of these revenue lines in the coming quarters. Thirdly, we continue to see strong progress in digital banking with double-digit growth of active mobile users in both Canada and the Pacific Alliance.
Over the past 12 months, we have added close to 1 million mobile banking customers who are attracted by the convenience and high quality of our mobile banking offering. This reflects the growing digital dividend, which will help to drive our productivity ratio lower over time. Turning to International Banking, with elections this year, there's considerable focus on political events in Peru and Mexico. While there is much focus on the risks associated with potential changes in governments, our experience over many decades in the region has taught us that these risks are often overstated. Invariably, it is economic growth, the strength of a country's institutions and demographic trends that matter most. Simply stated, the economic backdrop trumps politics. When we consider the situation of Pacific Alliance countries today, we are encouraged by a number of positive factors. Firstly, economic growth is accelerating as internal consumption and international trade increases.
The strength in commodity prices, which have increased roughly 50% in the past 12 months, has created a significant export windfall and surging current account surpluses, which provide economic tailwinds. Secondly, policymakers have considerable latitude to manage the economic recovery, given strong balance sheets and a low dependency on foreign capital. In closing, we are optimistic in our outlook for the remainder of the year, driven by continued strong growth in our Canadian Banking, Global Wealth Management, and Global Banking and Markets businesses, and our confidence in a recovery in International Banking. With that, I'll turn it over to Philip 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 have the first question on the phone, please?
Thank you. Our first question is from Ebrahim Poonawala with the Bank of America Securities. Please go ahead.
Good morning. Thanks, Brian, for that overview on LatAm and just the update there. I guess just sticking with International Banking, one, the CAD 400 million in Canada and CAD 200 million in International Banking revenue numbers that you cited, do you see, based on how you see the world today, the revenue recovery in International Banking lagging? Remind us in terms of just how you see the revenue contribution from IB in the back half of the year and the loan growth. I think you mentioned 6% growth last quarter, how you see that playing out? Thank you.
Thank you. I think Raj is going to start with it, and then I think Nacho has a supplementary.
Ebrahim, I'll start with your revenue question. The recovery of CAD 200 million, you can split it fairly simply. There's insurance revenue that we are missing, there's credit card revenues that we are missing in that business line, which equates to roughly about CAD 60 million a quarter. We've used the approximate number of CAD 200 million. Not to suggest all of that is going to come back in Q3, for example, we see the gradual recovery as retail spending starts coming back and retail asset growth happens. Our insurance revenues are actually tied to the retail lending, particularly in the International Banking space. On your question about the revenue recovery that we expect to see in International Banking, we think you'll see sequential recovery, it'll be tied to the retail asset growth.
In IB, we expect to have mid-single digit asset growth for the rest of the year compared to our balances in Q2. That's going to be skewed obviously towards secured mortgages lending that you've seen even in the H1 of the year, and you continue to see. You're seeing good commercial growth starting this quarter, and we expect that to continue for the rest of the year. Unsecured lending or the personal credit card lending, we expect to be slower coming, but certainly influence the start in Q3, but accelerate perhaps in Q4. Maybe Nacho you want to add some more to that.
No, I think that's a good summary. Maybe I will also highlight that the retail bookings in the quarter were the best since COVID started, improving more than 20% quarter-over-quarter in retail. Basically, I really need one engine to go stronger, which is credit card personal loans, similar to what's happening in U.S. banks, and that will happen in the H2 of the year. Also, I think it's important to see the recovery in fees and commissions, which increased 4% quarter-over-quarter or CAD 20 million. As Brian mentioned, we still have CAD 60 million quarterly gap compared to pre-COVID that we will gradually recover. Overall, I think it's loan growth and fee recovery that will allow us to have a stronger growth in revenue in the H2 of the year.
Just on that, Nacho, quick follow-up. Is the retail lending or loan growth in LatAm also impacted by the excess liquidity we are seeing in U.S. or Canada, or is it more to do with vaccinations and political uncertainty?
No, I would say it's similar to what we're seeing in other countries. Our credit card billings are still 20% below pre-COVID levels, so a lot of consumers have liquidity. There's been CAD 35 billion disbursements of early pension funds in Peru, and particularly that is the case when we look at Chile, Ebrahim. We see also lower consumer lending demand because of high liquidity. What we expect one positive aspect in the region, particularly for Mexico, for the Caribbean, Central America, is tourism coming back. Restaurants, travel, entertainment, all of these activities are going to allow consumers to increase spending.
Got it. Thank you.
Operator, can we have the next question, please?
Thank you. Our next question is from Scott Chan with Canaccord Genuity. Please go ahead.
Good morning. Just following up on international briefly. If I look at the vaccine rollout in a lot of the regions in the Pacific Alliance, it seems like it's fairly modest relative to North America. Maybe you can comment on vaccine rollout going forward and how that's going to affect the recovery, I guess, in terms of your portfolio book.
Thank you for your question. Infection rates of COVID, there's some volatility like everywhere in the world, but we're seeing infection rates going in the right direction. These countries are managing COVID basically to ensure hospital capacity is available. In terms of vaccination, Chile is a success story worldwide. More than 50% of the population already got at least one shot. Chile is doing very well because of vaccination and because of the commodity cycle, we expect a very strong recovery of the economy in Chile. The rest of the countries are accelerating vaccination. Rates of vaccination are between 8% and 15%, we expect that they would reach around 50% of vaccination by the end of the summer. COVID, however, is not impacting the economic recovery of the Pacific Alliance countries. All of them reported higher GDP growth in the first quarter of 2021 than estimations.
Overall, the economies of the Pacific Alliance countries should grow around 6.5% during 2021.
Thanks. I just lastly, just on our Global Wealth Management, sales results for Canadian wealth, being exceptionally strong. I think we can kind of see the data in Canada. Perhaps can you give us an update on international wealth management? Guys tracking a bit lower. Just anything that you can share would be helpful.
Sure. Thanks. It's Glen here. As you mentioned, I think the strength of our Canadian Banking business is really its breadth. We're seeing strong growth, revenue growth, market share gains across all the businesses, but that's also starting to happen in International Banking as well. We've been working very closely with Nacho and his team. We've made very good inroads, in terms of our institutional ultra-high net worth business there as well, with Jarislowsky Fraser. We expect that to continue. We saw actually quarter-over-quarter growth within our Global Wealth Management business in International Banking. We're seeing that uptick. We would expect that momentum to continue.
Okay, thank you very much.
Operator, can we have the next question, please?
Thank you. As a reminder, you may press star one anytime for any questions. Our next question is from Paul Holden with CIBC. Please go ahead.
Thank you. Good morning. One of the key topics I think has been discussed over the last week is around interest rate sensitivity with increasing probability that central banks have to move sooner than later. Wondering if you, Raj, with a quick update on what a 25 basis point rate increase might mean for overall earnings, and if you can, what that might mean for International Banking in particular, given that rates might increase in that part of the world sooner than U.S. and Canada.
Thank you, Paul. It's Raj. Thanks for your question. I'll address the International Banking one first, and then I'll get to the whole bank and how we think about interest rate risk and how we manage it. International Banking, simply put, a 25 basis point change in the rates, and you're absolutely right, it's be expected to be earlier compared to, say, Canada or the United States for that matter, will be roughly about CAD 30 million per annum for the interest income line. It's almost like it's a little over one basis point, for more than CAD 1 million. Easy way to think about it. The Pacific Alliance will be about CAD 25 million, and the Caribbean banking, a 25 basis point annualize will be roughly CAD 30 million. If you do the math, it's a little over CAD 30 million for the business finance as a whole.
Coming back to the impact of the bank as a whole. We all disclosed the 100 basis point impact in the tables. In our case, it's over CAD 300 million for 100 basis points increase, that's just simple math. As you probably know, it's a modeled outcome based on a number of assumptions. It reflects 100 basis points, you know, half of rate shock effect based on a calm balance sheet makes no assumptions for management actions. As you know from our previous conversations, we take a lot of management action to manage interest rate risk on the balance sheet of the bank, that generally does not get reflected. Case in point, last year in Q1 2020, we were the only Canadian bank which was positioned to benefit from rate declines. That's what happened is Q2 2020, we monetized a lot of the swaps.
It continues to benefit us and will continue to benefit us right through to 2024 because of the way hedge accounting works and so on. For example, that benefit is not included in these sensitivity tables. Right now we position the bank again for rising rates across the footprint, frankly, through our balance sheet. Those numbers which you see, and if you equate to 25 basis point all bank, you come to a math of about CAD 75 million for the bank, but that will be significantly higher than the CAD 75 million as rates increase, how our hedges play out, and at what time we take off those hedges and monetize it. A bit of a long-winded answer.
You start with the table, but the table is kind of a blunt instrument, but there's lots of actions we take in the bank which help enhance the rates impact on our interest income for the bank as a whole.
If I can have a follow-up on that, if I may, just because I'm using the 75 and recognizing it could be something higher than that. I mean, what are kind of the bands that might be around that? Could it be as high as 50% higher? Are we talking more 25% higher? Just any kind of help there would be great.
I'll try, Paul. I think I'll give you a case in point. If you went back to the Q1 2020 disclosure, a rate decline for us would have been CAD 197 million in that disclosure. I can tell you the benefit that we had because of the way our swaps trade out is about four times that. It's a little hard to predict how it will be because it depends on future interest rate increases, what the markets do, and so on, based on the positions we have taken to enhance the return. I think it's safe to assume that it'll be a minimum 50% higher, likely it will be significantly higher.
Got it. That's helpful. Thank you.
You're welcome.
Operator, can we have the next question, please?
Thank you. Our next question is from Gabriel Dechaine with National Bank Financial. Please go ahead.
Hi, good morning. I'd like to talk about the write-offs in International Banking. I appreciate the comment that we've hit a peak here. The way I look at it is we've, over the past couple of quarters anyway, nearly CAD 2 billion of these loans have been written off. How important is it to replace those loans for the segment to get back to its pre-COVID revenue run rate? Is there any possible change? I heard something about de-risking the bank. Are you changing the way you approach these originations going forward? Did I misunderstand that?
Let me take that question, Gabe. Well, first, I think that we have been growing in mortgages, in commercial. That's where the recovery has started. We expect, as I mentioned earlier, that retail is coming back, will come back during the H2 of the year. Basically, we are seeing, we expect to resume retail loan growth in the third quarter and accelerate, particularly in the fourth quarter of the year. Basically, it's around consumer spending and credit cards. That's where we see the most significant gap compared to pre-COVID levels. However, I would say that it's important for us to replace these balances as long as we can do it with good credit quality. This has been a trend in the market. The market, we've seen a decline in unsecured.
We see this gradually flattening, and it will come back, and it will help us to grow our loan book, I would expect by the end of the year, at similar pace, both in commercial and retail.
When you say retail rebound, are you talking about mortgages in the second half, not these cards and other personal loans?
I'm saying especially mortgages. We are doing very well in mortgages. We have had very strong growth, but we expect also unsecured to accelerate, especially in the last quarter of the year.
Okay. Quickly on the other segment, asset liability management activities, that NII line hitting a pretty big number there. What are you doing, ALM-wise?
Thanks, Gabe. It's Raj. I'll try to help you with that. The NII line benefits from two different things. I talked about the swap monetization that we did, that's going to help the NII line right through to 2024. The second component I call out is volumes. Our wholesale funding volumes have been lower as our deposits have been very strong across the BNS footprint, and we're also being very diligent in managing the volume of our issuances compared to the asset growth that we expect, taking into account the deposit windfall we've been having for some time. The third one I call out is rates. We're able to finance these expensive wholesale funding coming off our books on maturity. We're able to do it at lower rates. Final thing I would call out is we manage the interest rate risk very closely on the balance sheet.
You'll see a lot of benefits attached to it, and our intention is that that should continue to support the other segments through future quarters as well.
Great. Thanks.
Operator, can we have the next question, please?
Thank you. Our next question is from Lemar Persaud with Cormark Securities. Please go ahead.
Thanks. My first question is for Daniel. Dan, just a point of clarification. I think I heard you suggest that impaired losses have peaked and similar levels of performing releases that we saw this quarter. If I add those two up, I would think that total PCL guidance for the back half of the year would be below the mid-30s range, considering that you're at 33 basis points this quarter. I'm wondering, did I hear that incorrectly? Maybe you could just clarify that.
No, Lemar, I think you heard that correctly. We're definitely guiding towards mid-30s on the impaired PCLs, on the total PCLs, with a trending downward but remain slightly above pre-COVID on the stage three or impaired PCLs. We get our confidence on that looking at the overall macro picture, the performance of our book, and the credit quality of our book. All three are performing very well, reflecting on the quality side, the shift to secured on the customer front. On the performing side, the very good results of our early-stage delinquency. As we put all the numbers together, Lemar, that's how we look at it, and those are our forecast the remainder of the year.
Okay. You're at 33 this quarter, and if I assume a lower level of impaired, then similar releases, I just don't get how you get to the mid-30s.
Of course, there's growth in there as well, Lemar, and that goes into the overall PCL calculation as well.
Okay. Now my next question is for Dan Rees. If I look at your business and government loan growth, it was actually quite strong this quarter. I'm wondering if you could talk to what drove this growth and the sustainability going forward.
Sure. Morning. Thanks, Lemar. I think our investments in the business bank, which started some six or seven quarters ago, continued to pay off last quarter and again this quarter. You're seeing that in the province. Apologies, can't explain that. I'll just keep going, Lemar. Hope it's not just the two of us on the line. First of all, to repeat, in case you missed the opening, our investments in the business banks kind of continue to pay fruit, whether that's in our priority provinces or some of the industries where we have notable expertise. That would include real estate and agriculture in particular. You're also seeing good growth in the marketplace. This quarter, again, we think on both deposits and loans.
Balance sheet combined, we're number one in Q2, and that's an impressive result given that we had said just two short years ago that this is a priority area for us. In Q2, we reached the number three spot in terms of total deposits in the sector. There's nothing unusual happening on the government side. This is all business growth in the business bank.
Got you. Thank you.
Operator, could we have the next question, please?
Thank you. Our next question is from Doug Young with Desjardins Capital Markets. Please go ahead.
Hi, good morning. Just going back to International Banking quickly, just based on my calculation, pre-tax, pre-provision earnings, it looks like it's down 31% in Peru, but 22% in the Caribbean. Chile, Mexico, Colombia, it's roughly flat. I kind of get the Caribbean, so I want more focus on Peru. I guess specifically, what you're seeing in that market, and I would imagine most of the credit card comments relate to that market. Really, and specific to Peru, what are the drivers that are going to turn that around? Just the second part of the question, Raj, can you remind us how you are hedged in terms of currency for the International Banking? If you can kind of talk a bit about it by region, that would be helpful. Thank you.
Yes. Let me take the first part of the question. Yes, definitely it's Peru where we have the biggest opportunity upside in terms of credit card personal loans growth. The unsecured portfolio has declined more. Also we expect an acceleration of commercial growth that was muted this quarter. However, in Peru, we have grown significantly in mortgages. We expect to continue to do that 10% year-over-year. Similar to the rest of the country, the positive signal I can share with you is retail bookings, not only in mortgages, but also in credit card personal loans had a 20% increase Q2Q. We are seeing definitely a better trend. On the other hand, while revenues have been soft, we have had very good expense management in Peru with an 11% reduction year-over-year.
We're trying to offset as much as we can until revenues come back. Also, like Daniel mentioned, credit quality is a very good story in terms of PCL. We have declined 35% year-over-year, and we've had very good payment behavior on the back of the early disbursement of pension funds and funding recovery in the economy and our collections and digital capacity supporting collections. I would say credit and expenses are a very good story. We are really waiting for the economy that we expect a strong recovery starting in the H2 of the year with GDP growth of 9%, potentially even more, to help us grow revenues with unsecured lending coming back.
Doug, it's Brian. I just want to add a little something there is that you're pointing to the recovery in the Pacific Alliance is lumpy, and that's the nature of our footprint and the maturity of the banking markets in the individual countries. I'd highlight our return on equity in our Mexican business was 15% this quarter. Mexico and Chile have returned to pre-COVID level of earnings. Peru is the laggard, and that's just a function of it had a very, very difficult COVID. The nature of the banking market is more unsecured than secured there. The mortgage market is in its nascent stage, so it's going to take time to come back. We're showing signs of that. Regardless of the election or the outcome, the GDP or the growth rate in Peru this year will be 9%, and we'll see how it does next year.
We expect a strong recovery in Peru, but it'll work out sequentially quarter- by- quarter.
Just on currency, Doug, it's Raj. I'll tell you the philosophy we hedge as appropriate to reduce the volatility to the bank's quarterly earnings. That's the principle. To give you a little bit of context, including the International Banking, our exposure to US dollar earnings actually significantly is higher than our exposure to the Pacific Alliance countries. US dollar, Jake's business, and GBM, we have other businesses which are part of International Banking, which are offshore books. We hedge, we consider several factors, expected currency volatility, reasons for the volatility. Is it structural, short-term, macroeconomics, and of course, the ease and cost of hedging? One example I'll give you is the Jamaican dollar. It's not possible to hedge it.
We think about it as a basket of currencies and how do we want to manage the hedged relationship to ensure the volatility is reduced from an earnings perspective. We disclose the impact of FX, as you know in our tables in the quarterly report. This quarter was slightly elevated at about CAD 0.06 impact to EPS, about CAD 70 million or so. Slightly higher than what you would expect. That's because the Canadian dollar strengthened against pretty much every currency other than the Chilean peso.
Most of that impact, just to give you context of the CAD 74 million or the CAD 97 million we have year to date, almost 90% of it relates to the US dollar. The US dollar strengthened almost what, 9.2%, I think, year-over-year. That has an impact to us. The US dollar is one currency we know will move around and helps us. It's a little bit outside the impact this quarter, but generally, our hedging philosophy is to reduce the volatility, and we try to hedge. It could be 50% one quarter, it could be 100% another quarter. It depends on the various factors that we consider.
Thank you.
Okay, operator, can we have the next question on the line?
Thank you. Our next question is from Mario Mendonca with TD Securities. Please go ahead.
Good morning. Raj, probably for you. When I listen to the bank talk about results, and there seems to be a greater emphasis on ALM and what you do to hedge interest rate risk, a greater emphasis from Scotia than what we hear from your peers. Sometimes I struggle to understand whether this is just emphasis or whether Scotia is actually doing something, being more active than the peer group. When I look at the results and I drill down, it does seem like there's something more meaningful going on here because the margin for the bank outside of your domestic and international P&C businesses, that margin, if you will, is performing a lot better than what we see for your peers.
I guess what I’m getting at now is, if the bank was able to have a successful ALM as interest rates decline, how do you then position yourself for rising rates without some cost? How do you just flip that from one quarter to the next without there being some cost from changing the hedges? How does that work?
Thanks for your question, Mario. That's a very detailed question, and I'd be happy to talk to you offline more than what I will speak on the call here. Your point is valid. I'd use the term that we do hedge the interest rate risk on our balance sheet, what I would call dynamically. Not to exaggerate, we look at it every day. We look at the asset profile changes, we look at the liability profile changes. We look at what the markets tell us, and then we look at saying, "Okay, how should we position the bank?" There's a natural positioning that the bank has. Interest rate risk, as you know, is just inherent to the business that we do. How well we manage will reflect in the results. That's not to say we get it right all the time.
Our expectation is we either have to reduce the volatility of interest rates on our earnings. If we can enhance it, even better. Some of the examples I quoted was how we position the bank Q1 2020 and how we benefited. Right now we're positioning it primarily through derivatives, that report, and I'll use a simple example of interest rate swaps. How do you use it? To position the balance sheet appropriately, depending on the tenure of the balance sheet, either on the asset side or on the liability side, and the interest rate curve. Your point is valid on net interest margin compression. Just look across, Q1 2020, our margin was 2.45% at the all-bank level is 226. That's about an 8% decline. That's significantly lower than all our peers. Some of it is because of our asset mix, granted.
We're more secured than some of our peers, but some of it is more to your point of how we manage the interest rate risk. We'd like to keep it flat, we'd like to keep it stable, and we'd like to enhance it in an increasing interest rate environment. Like right now, we position the bank not just through the balance sheet, how it's positioned, but also some of these hedging activities, which will help us enhance those results. Like I mentioned, happy to talk offline to give you more color and any further questions that you might have on that as a follow-up.
Sure. Just as a follow-up then, is it fair to say that when rates go down, Scotiabank wins, when rates go up, Scotiabank wins, that Scotiabank just gets this right? Is that the right way to look at it?
Yeah. If we get our hedging right, yes. Absolutely. The past, yes. Future, I hope so.
Thank you.
Thanks.
Okay, operator, can we have the next question, please?
Thank you. Our next question is from Sohrab Movahedi with BMO Capital Markets. Please go ahead.
Of course, if I can, Raj, obviously, a tough operating environment in the Pacific Alliance region in particular over the last year, and I think you have done quite a bit of work, certainly around expenses. We're seeing the recoveries come through now. I'm just curious to know what else is left for you to do besides waiting for that economic tailwind or the high tide that's going to hopefully raise all boats. I'm trying to understand what other levers are at Scotia's behest here to help push this forward and whether or not you can paint a picture of what your loan book may look like, for example, from a secured/unsecured, retail versus commercial, 18-24 months from now, and how that would compare to a pre-pandemic level.
I'm just trying to kind of get a feel for what is happening to the risk appetite, if anything, between now and when we get through it.
Thank you for your question, Sohrab. Look, I would put it this way. Big picture, there's a delay where it's taking a little bit longer in the Pacific Alliance countries for the economies to boom like it's happening in North America. I think this will happen. I'm very optimistic about the economic recovery, and thinking in 12- 18 months, I think it's very likely we will see the Pacific Alliance countries loan growth of double digits, 10% growth as economies recovery. Let's think about, again, the demographics
The relatively low level of lending to GDP. Once the economy starts reactivating, financial services will have a very significant opportunity. Even today, Sohrab, I expect that between Q2 numbers and the balance of the year, our loan book will grow around mid-single digits. This will continue to be driven by commercial, by mortgage, that continues to be strong, but retail will come back gradually, including on secure lending. As I mentioned, we will see an important fee recovery. There is a CAD 60 million gap, and I am glad you mentioned expenses because we have, I think, a very strong performance in expenses where we reduced another CAD 70 million in the last quarter, 5% reduction in expenses. It is because there is a great digital growth that is helping us to improve. NPS scores improved in all Pacific Alliance countries, in all channels.
Retail sales are around 50% of all sales in units, and this is driving tremendous productivity in branches as we deploy digital onboarding that allow us to adjust our sales force capacity in branches. I see opportunities across the board, but you're right, I think loan growth is going to be the key driver, and I expect retail to start to resume growth in Q3. In commercial, we already grew 1.5% this quarter. I expect commercial will accelerate in future quarters with the economic recovery.
But Nacho-
Sohrab-
Yeah, go ahead. Sorry.
Brian, I just want to add too, just to reemphasize, that we increased our stake in Scotiabank Chile, too, 7% to 82%. That's an asset we know very well, a country we're very comfortable operating in. Those type of opportunities, after a period of time like this, come up occasionally, and we're obviously in a position to capitalize on them. Sorry, you go ahead, Sohrab.
Sorry. I appreciate that, Brian. Thank you very much for that reminder. I just wanted to get from Nacho, there is no change in risk appetite. Is that the right way to think about this?
Absolutely. There is no change of risk appetite, Sohrab. What we have done is to grow within our strategies. We are gradually reopening our lending activity in retail following the economic recovery. That's really following the market opportunities. We expect to have strong loan growth in the last part of the year and accelerating into 2022, which I expect International Banking will experience strong growth, deep driven by loan demand, driven by double-digit growth in loans and deposits, and strong economic activity.
Okay, thank you.
Thank you all for participating in our call today. On behalf of the entire management team, I want to thank everyone for participating in our call. We look forward to speaking with you again at our Q3 2021 call in August. This concludes our second quarter results call. Have a great day.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.