Earnings Call: Q2 2021

Jun 1, 2021

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 Following Scotiabank executives, Dan Reeves from Canadian Banking Glenn Gallon from Global Wealth Management Nacho Deschamps from International Banking and Jake Lawrence and James Neate from Global Banking and Markets. Before we begin and on behalf of those speaking today, I will refer you to Slide 2 of our presentation, which contains Scotiabank's caution regarding forward looking statements. With that, I will now turn the call over to Brian Port. Thank you, Phil, and good morning, everyone. I wanted to make a few comments on the quarter before turning the call over to Raj, who will discuss the results in detail. The Bank's 2nd 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 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 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 Our commitment to ESG also stood out in the Q2. Our commitment to excellent customer service across all channels It was recognized in the J. D. Power 2021 Canada Retail Banking Satisfaction Study, where the bank rose to number 2 among large banks, while 10th is recognized as number 1 for the 10th consecutive year among midsized retail banks. Our focus on risk 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 0 by 2,050, 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 quarter, I will refer to quarter over quarter performance in many areas given the economic impact of September 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 5. The bank reported strong performance across key metrics of EPS growth, return on equity, operating leverage And Capital. Total earnings were $2,500,000,000 and diluted EPS was $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. Pretax pre provision earnings Improved 2% year over year, driven by strong systems 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 the forced currencies. Net interest income was down 3%, excluding the impact of FX, as the core banking margin declined 9 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 corporate loan growth. Quarter over quarter, margin was down only 1 basis point, in line with our expectations. However, non interest income increased 1% with strong 11% growth in pension income, offset by lower trading revenues and lower investment gains. Ratio to date rate reached falling to 33 basis points for the quarter. This represents a meaningful decline of 16 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 personnel 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 4%. 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 6, 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 Excluding the impact of FX, risk weighted assets grew $6,000,000,000 mainly from growth in Business Banking and Retail Mortgages in both Canadian and International Banking. We also had additional benefits from pension re measurement in the quarter driven by higher discount rates. In the next quarter, our capital ratio will be impacted Approximately 25 basis points due to the increase in the CVA multiplier and the closing of the transaction to acquire 7% a minority interest in Chile. However, 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 7. Canadian Banking had another strong quarter as the rebound in earnings continued with net income of $931,000,000 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, partly 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 noninterest 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, It was partly offset by higher margins at residential mortgages and commercial lending as well as higher deposit balances. Expenses increased from 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 PCM ratio decreased to 16 basis points, which is 61 basis points lower year over year and 7 basis points lower Then Q1. We expect the Canadian Banking business earnings to continue to grow for the rest of the year with stable PCL. Turning now to Global Wealth Management on Slide 8. Earnings of $378,000,000 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 6 consecutive quarters. Canadian Wealth Management grew a strong 25% year over year and 4% Excluding the performance we benefited from quarter, all 8 of our Canadian businesses resulted in earnings year over year. Assets under management increased 19% to $332,000,000,000 while AUA increased 20 percent to $571,000,000,000 from the prior year, driven by positive net sales and market appreciation. Sales activity was strong in the quarter. We ranked number 2 for the quarter in retail mutual fund net sales in Canada with record net sales of $4,300,000,000 We expect the global Wealth Management business to continue to perform strongly for the rest With improving contribution from our international wealth operations. Moving to Slide 9, Global Banking and Markets. The business generated strong earnings of $517,000,000 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 This is 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 second half 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 net income of $429,000,000 up 165% year over year And 11% quarter over quarter. Improving economic and business conditions, higher loan growth In the second half of the year, Insurance expense management support our continued optimism for the division and our expectation of Achieving $500,000,000 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 six percent 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% It 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 second half of the year. Net interest margin of 3.95 percent Declined 8 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% though offset partially by higher bank increase. 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 personnel costs, digital progress and other efficiency initiatives. Now turning to the other segment. We reported earnings of $130,000,000 The increase year over year from a net loss of 160 $6,000,000 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 resulting in higher net interest income in the 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 3 basis points from last quarter and has remained Stable for the past 4 quarters. Retail gross impaired loans net of FX declined a modest $91,000,000 As new formations were offset by write offs, primarily in international retail. Gills and Business Banking net of FX Increased $109,000,000 as we saw new formations in 2 accounts for which we have reserved appropriately. On the bottom of Slide 13, you can see the All Bank's net write off ratio increased to 76 basis points. The increase It was primarily driven by international banking, specifically retail. Last quarter, we spoke to the higher levels of late stage delinquencies in Peru and Columbia, which have resulted in higher levels of which have higher levels of unsecured exposures. I'd 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 $6,900,000,000 That's a reduction of over $9 in the prior quarter driven by elevated Right offs. Consequently, the ACL ratio declined to 109 basis points from 125 basis points last quarter. Performing loan allowances declined about $700,000,000 to $4,800,000 excluding the impact of FX. Approximately $200,000,000 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 for impaired loans to support elevated write offs. Appeared loan ACLs remained in line with last quarter. The transfer of allowances on performing loans That's the higher level of write offs we spoke of. 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 $496,000,000 The total PCL ratio was 33 basis points, down 16 basis points from the prior quarter. Beginning with our impaired PCLs, we reported 1 $190,000,000 in Q2, up $430,000,000 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 retail as the expiry of deferrals resulted in higher delinquencies, mainly in Peru and Colombia. In contrast, impaired TCLs for GBM and Canadian Banking were stable. Turning to performing TCLs, we had a net reversal of $696,000,000 in Q2, Down from positive $2,000,000 in Q1. Approximately $200,000,000 of the reversal represents a release 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. So 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. 3rd, We expect to see additional releases from our performing allowances for the balance of the year. And finally, we expect the all bank PCL ratio To be in the mid-thirty basis point range for the remainder of financial year 2021, but the PCO ratio is National Banking Continue to improve sequentially for the rest of the year. These trends are in line with the repositioning and derisking 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 and 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 6 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 And 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 400,000,000 below pre pandemic levels. In International Banking, fee and commission revenue is about $200,000,000 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 1,000,000 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 is 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 Trump's politics. When we consider the situation in the 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 the recovery in International Banking. With that, I'll turn it over to Phil for the Q and A. Thank you, Brian. We will now be pleased to take your questions. 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 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, 1, The $400,000,000 in Canada and $200,000,000 in International Banking revenue numbers that you cited, do you see based on what you How you see the world today, the revenue recovery in International Banking lagging? And 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. Yes. Ebrahim, I'll start with your revenue question. The recovery of $200,000,000 you can split it fairly simply. There's insurance revenue that we are missing and there's credit card revenues that we are missing in that business line, which equates to roughly about $60,000,000 a quarter. So we've used the approximate number of $200,000,000 Not to suggest all of that is going to come back in Q3, for example, but we see the gradual recovery as retail spending starts coming back and Since our insurance revenues are actually tied to the retail lending, particularly in the international banking space. On your question about the revenue recoveries that we expect to see in International Banking, we think you'll see sequential recoveries, but it will be tied to the retail asset growth. So in IB, we expect to have mid single digit asset growth for the rest of the year compared to our balances in Q2. And that's going to be secured obviously towards secured mortgages lending that you've seen even in the first half of the year and we 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 it's going to start in Q3, but accelerate perhaps in Q4. Maybe Nanshu, 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% Q over Q in retail. So basically, I really miss 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 second half of the year. Also, I think it's important to see The recovery in fees and commissions, which increased 4% Q over Q or $20,000,000 as Brian mentioned, we still have $60,000,000 Quarterly GAAP compared to recovery that we will gradually recover. So overall, I think it's loan growth and fee recovery that will allow us to To have a stronger growth in revenue in the second half of the year. And 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 covered level. So a lot of consumers have liquidity. There's been a $35,000,000,000 disbursements of early pension funds in Peru, and particularly that is the case here. When we look at Chile, Ebrahim, We see also lower consumer lending demand because of high liquidity. But we expect one positive aspect in the region, particularly for Mexico, For the Caribbean and Central America, it's tourism coming back. So 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. So So just following up on international briefly. If I kind of look at the vaccine rollout in a lot of the regions in the Pacific Alliance, it seems like it's Very modest relative to North America. Maybe you can kind of 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. Well, 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 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. So 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. And the rest of the countries are accelerating vaccination. Rates of vaccination are between 8% 15%, But we expect that they would reach around 50% of vaccination by the end of the summer. COVID, However, it's not impacting the economic recovery of the Pacific Alliance countries. All of them reported higher GDP growth In the Q1 of 2021, that's estimations. And overall, the economies of the Pacific Alliance countries should grow around 6.5% during 2021. Thanks. That's helpful. And just lastly, just on Global Wealth Management, solid results, you called the Community Wealth Been exceptionally strong. And if you can kind of see the data in Canada, but perhaps can you give us an update on your international wealth management? Sure. Thanks. It's Glenn here. So as you mentioned, I think the strength of our Canadian business is really its breadth. So we're seeing strong growth, revenue growth, market share gains across all the businesses, but That's also starting to happen in international as well. So I think one of the benefits of a strong Canadian franchise is our ability to invest In our international growth. And so we've been working very closely with Nacho and his team. We've made very good inroads in terms of our institutional ultrahigh net worth business there as well with Jarislowsky Fraser and we expect that to continue. So we saw actually quarter over quarter growth within our Wealth Management business International, and we're seeing that uptick, and we would expect that momentum to continue. Okay. Thank you very much. Operator, can we have the next question please? Thank you. Our next question is from Paul Holden with CIBC. Please go ahead. Thank you. Good morning. So 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. So wondering if you can just provide us 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. This is Raj. So I'll address the International Banking 1 first, and then I'll get to the Alt 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. We expect it to be earlier compared to say Canada or the United States for that matter, Will be roughly about $30,000,000 per annum for their interest income line. So it's almost like a little over one basis point For more than $1,000,000 easy way to think about it. The Pacific Alliance will be about $25,000,000 and the Caribbean, we think, at 25 basis points annualized, will be roughly $30,000,000 So if you do the math, it's a little over $30,000,000 for the business line as a whole. Coming back to the impact of the bank So we all disclosed the 100 basis point impact in the tables. In our case, it's about $300,000,000 for 100 basis points increase. And 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 capital rate shock effect and based On a common balance sheet and makes no assumptions for management actions. As you know from our previous conversations, we take a lot of management action to manage the interest rate risk On the balance sheet of the bank, and that generally does not get reflected. Case in point, last year in Q1 2020, are the only Canadian bank which is positioned to benefit from rate declines. That's what happened in 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 the sensitivity tables. So right now, we have positioned the bank again for rising rates Across the footprint, frankly, through our balance sheet. So those numbers which you see and if you equate the 25 basis point All Bank, you come to math of about $75,000,000 for the bank, but that will be significantly higher than the $75,000,000 as Rates increase, how our hedges play out and at what time we take off those hedges and monetize it. So a bit of a long winded answer. You start with the table, but the table is 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. So if I can have a follow-up on that, if I may. Just if I'm using the $75,000,000 and recognizing it could be something higher than that, I mean, What are kind of the, I don't know, 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 The Q1 2020 disclosure, our rate decline for us would have been $197,000,000 in that disclosure. I can tell you the benefit that we had because of the way our swaps played out is about 4 times that. So 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 Peloton. I think it's safe to assume that it will be a minimum 50% higher, likely 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, and I appreciate The comment that we've hit a peak here, but the way I look at it is we've over the past couple of quarters anyway, Nearly $2,000,000,000 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. And is there any Possible change, I heard something about de risking the bank. Are you changing the way you approach these originations going forward? Or is there or did I misunderstand that? Let me take that question, Gabe. Well, first, I think that we are we have been growing in mortgages, in commercial. That's where the recovery has started. But we expect, as I mentioned earlier, that retail is coming back, will come back during the second half of the year. Basically, we are seeing a retail we expect to resume retail loan growth in the Q3 and accelerate You're in the Q4 of the year. And basically, it's around consumer spending in 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. And this has been a trend in the market, the market we've seen a decline in unsecured. We see this gradually flattening And he will come back and he will help us to grow our loan book, I would say, by the end of the year at Seamidar Page both in commercial and retail. And when you say retail rebounding, you're 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 especially in the last part in the last quarter of the year. Okay. And then 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. So I'll try to help you with that. And the NII line benefits from 2 different things. I talked about The swap monetization that we did, so that's going to help the NII aligns right through to 2024. The second component I'd call out is volumes. So our wholesale funding volumes have been lower as our deposits have been very strong across the P and C 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 deposits, windfall we've been having for some time. The third one I'd call out is rates. We're able to finance these extensive wholesale funding coming off our books of 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. So you'll see a lot of benefits attached to it, and our retention is that, that should Thank you. Our next question is from Lamar Prasad with Cormark Securities. Please go ahead. Thanks. My first question is for Daniel. Daniel, 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. But if I add those 2 up, I would think that total PCL's 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. So I'm wondering like did I hear that incorrectly and maybe you could just clarify that? No, Lamar, I think you heard that correctly. So we're definitely guiding towards mid-30s on the impaired PCLs on the total PCLs with a trending downward, but remains slightly above pre COVID On the Stage 3 or impaired PCLs. And 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, very well, reflecting on the quality side the shift to secured On the customer front and on the performing side, the very good results of our early stage delinquency. So That's as we put all numbers together, Lamar, that's how we look at it, and those are our forecast for the remainder of the year. Okay. But Like you're at 33 this quarter and if I assume a lower level of impaired and similar releases, I just don't get how you get to the mid-30s. Yes. Of course, there's growth in there as well, Lamar, and that goes into the overall piece of calculation as well. Okay. Then my next question is for Dan Reese. Just on if I look at your business and government loan growth, it was actually quite strong this quarter. So I'm wondering if you could Talk to what drove this growth and the sustainability going forward? Sure. Good morning. Thanks, Lamar. I think our investments in the business bank, which started some 6 7 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. Lamar, thanks for your patience. Hope it's not just the 2 of us on the line. First of all, to repeat in case you missed the opening, our investments in the business bank kind of continue to pay for 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. But this quarter, again, we think on both deposits and loans, So balance sheet combined, we're number 1 in Q2. And that's an impressive result given that we had said just 2 short years ago This is a priority area for us. In Q2, we reached the number 3 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, can 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, I mean, pre tax, pre provision earnings, it looks like it's Down 31% in Peru, about 22% in the Caribbean. Chile, Mexico, Colombia, it's roughly flat. So and I kind of get the Caribbean. So I want to more focus on Peru. And I guess specifically what you're seeing in that market and I would imagine most of the credit card comments relate to that market. But really what's and specific to Peru, what are the drivers that are going to turn that around? And then just the second part of the question, Raj, Can you remind us how you are hedged in terms of currency for the international banking? And 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. And also we expect an acceleration of commercial growth that was muted this quarter. However, in Peru, we have grown significantly in mortgages. We continue to we expect to continue to do that 10% year over year. And similar to the rest of the country, the positive signal I can share with you is retail bookings, not only in In mortgages, but also in credit card personal loans, had a 20% increase in Q over Q. So 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. So we're trying to offset as much as We can, until revenues come back. And 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 a very good payment Behavior on the back of the early disbursement of pension funds, employment recovery in the economy and our collections and digital capacity Supporting collections. So I would say credit and expenses are a very good story. We are really Waiting for the economy that we expect a strong recovery, sorry, on the second half of the year with GDP growth of 9%, potentially even more To help us grow revenues, we don't secure 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 and proved 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 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. So and we're showing signs of that. So regardless of the election of the outcome, the GDP or the growth rate in Peru this year will be 9%, and we'll see how it does next year. But we expect a strong recovery in Peru, but It'll work out sequentially quarter by quarter. And just on currency, Doug, it's Raj. I'll tell you the philosophy we hedge is appropriate to reduce the volatility of the bank's quarterly earnings. That's the principle. And to give you a little bit of context, including the International Bank, our exposure to the U. S. Dollar earnings actually significantly is higher than our exposure to the Pacific Alliance So U. S. Dollar, Jake's Business and GBM, we have other businesses which are part of International Banking, which have offshore books. When we hedge, we consider several factors, expected currency volatility, reason for the volatility is the structural short term macroeconomics And of course, the ease and cost of hedging. So one example I'll give you is the Jamaican dollar. It's not possible to hedge it. So we think about it as a basket of currencies And how do we want to manage the hedge relationships, make sure the volatility is reduced from an earnings perspective? So we disclosed the impact of FX, as you know, in our tables in the quarterly report. This quarter was slightly elevated at about $0.06 impact of the EPS About $17,000,000 or so slightly higher than what we would expect, but that's because the Canadian dollar Against pretty much every currency other than the Chilean peso. Most of that impact, Doug, to give you context of the $74,000,000 or the $97,000,000 we have Year to date, almost 90% of it relates to the U. S. Dollar. With the U. S. Dollar strengthened almost worth 9.2%, I think, year over year, That has an impact to us. And the U. S. Dollar is one currency we know will move around and helps us. And It's a little bit outsized impact this quarter, but generally our hedging philosophy is to reduce the volatility. And we try to hedge, it could be 50% 1 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. And sometimes I struggle to understand whether this is just emphasis Or whether Philip is actually doing something being more active than the peer group. So 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 U. S. I'm sorry, Demelis was an international P and C businesses. That margin, if you will, is performing a lot better than what Keith, are your peers. So I guess what I'm getting at now is, if the bank was able to have the successful ALM as interest rates declined, How do you then position yourself for rising rates without some cost? Like 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 would speak on the call here. But 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. We look at it 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? So there's a natural positioning that the bank has. Interest rate risk, as you know, is just inherent to the business that 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 You know how we positioned the bank Q1 2020 and how we benefited. Right now, we are positioning it primarily through derivatives that I'll use a simple example of interest rate swaps. How do you use it to position the balance sheet appropriately depending The tenure of the balance sheet as a whole in 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 percent at the Allbank level, it's 2.26%. 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 are more secure than some of our peers, Some of it is what you point on 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 targets position, but also some of these hedging activities, To help us enhance those returns. 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. Suraj, just as a follow-up then, is it fair to say that when rates go down, Scotia wins, when rates go up, Scotia wins, that Scotia Just guess is right. Is that the right way to look at it? Yes. If we get our hedging right, yes, absolutely. And in the past, yes. Future, I hope so. Okay. Thank you. Thanks. Okay. Operator, can we have the next question, please? Thank you. Our next question is from Srauve Movahedi with BMO Capital Markets. Please go ahead. Of course, if I can. Nacho, obviously, it's a tough operating environment in the Pacific Alliance region, in particular, over the And I think you have done quite a bit of work certainly around expenses. We're seeing the recoveries come through now. But I'm just curious to know what else is left for you to do besides waiting for that economic tailwind For 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. So 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, Saurabh. Look, I would put it this way. Big picture, there's a delay. It's going it's taking a little bit longer in the Pacific Alliance countries to move toward the economies to move and it's happening in North America. But 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 digit, 10% growth as economies recovery. Let's think about again the demographics, Relatively low lending low level of lending to GDP. So once the economy starts reactivating financial services, we'll have A very significant opportunity. Now even today, Saurabh, I expect that between Q2 numbers and the balance of the year, Our loan book will grow around mid single digits and it will continue to be driven by commercial, by mortgage that continues to be strong, But retail will come back gradually including unsecured lending. Also as I mentioned, we will see an important fee recovery. There's a $60,000,000 gap. And I'm glad you mentioned expenses because we have I think a very strong performance in expenses. We reduced another $70,000,000 in the last quarter, 5% reduction in expenses and it's because there's 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 branches as we A deployed EBIT and onboarding that allows us to adjust our sales force capacity in branches. So I see opportunities across the board, but you are right, I think Loan growth is going to be the key driver and I expect retail to start to resume growth in Q3. And in Commercial, we already grew 1.5% this quarter. I expect commercial will accelerate in future quarters with the economic recovery. It's Brian. I just want to add to that just to reemphasize that we increased our stake in Scotiabank Chile, too, 7% to 82%, and that's An asset we know very well, a country we're very comfortable operating in and 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. Sorry. I just wanted to I appreciate that, Brian. Thank you very much for that reminder. I just wanted to get from but not sure there is no change in risk Is that the right way to think about this? Absolutely. There is no change of risk appetite. So, Raph, what we have done is to grow within our strategy. We are gradually reopening our lending activity in retail following the economic recovery. That's really following the market opportunities, and we expect to have a 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 Ensign 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 Q2 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.