The Bank of Nova Scotia (NYSE:BNS) Q1 2024 Earnings Call Transcript
The Bank of Nova Scotia (NYSE:BNS) Q1 2024 Earnings Call Transcript February 27, 2024
The Bank of Nova Scotia beats earnings expectations. Reported EPS is $1.69, expectations were $1.19. The Bank of Nova Scotia isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
John McCartney: Good morning, and welcome to Scotiabank's 2024 First Quarter Results Presentation. My name is John McCartney, and I am Head of Investor Relations here at Scotiabank. Presenting to you this morning are Scott Thomson, Scotiabank's President and Chief Executive Officer; Raj Viswanathan, our Chief Financial Officer; and Phil Thomas, our Chief Risk Officer. Following our comments, we will be glad to take your questions. Also present to take questions are the following Scotiabank Executives: Aris Bogdaneris from Canadian Banking; Jacque Allard, from Global Wealth Management; and Francisco Aristeguieta from International Banking. Before we start, and on behalf of those speaking today, I'll refer you to Slide 2 of our presentation, which contains Scotiabank's caution regarding forward-looking statements. With that, I will turn the call over to Scott.
Scott Thomson: Thank you, John, and good morning, everyone. Welcome to our first call of 2024, and importantly, our first set of results since we shared our refresh strategy at our Investor Day in December. We're off to an encouraging start to the year and our results are consistent with our expectations. It's still early in the execution of our strategy. But we are realizing benefits our enterprise wide efforts by way of discipline capital allocation, focusing on investments that deliver returns, maintaining a strong balance sheet, a focus on deposit growth and building primary client relationships that enhanced profitability and cost efficiency. The bank reported adjusted earnings of $2.2 billion or $1.69 per share in the quarter.
Strong revenue growth coupled with disciplined cost performance across our businesses allowed us to improve profitability quarter-over-quarter despite higher credit provisions. We further strengthened our balance sheet and liquidity profile in keeping with our commitment to build capital over time. Our CET1 ratio at 12.9% reflects our efforts to extend our balance sheet thoughtfully to business segments and clients where we see the opportunity to build holistic and profitable long term relationships. Our liquidity coverage ratio strengthened to 132% year-over-year, lessening our reliance on market source funding with a reduction in our wholesale funding ratio to 20.3%. Assets across the bank were up marginally year-over-year, reflecting our disciplined approach to growth in a more muted Canadian residential mortgage market environment.
The impact of our ongoing portfolio reposition the global banking and markets business was offset by growth and other personal and commercial lines of business. We continue to execute on risk weighted asset optimization opportunities, by reducing our exposure to less profitable relationships, where we don't see the opportunity for acceptable risk adjusted returns on our shareholders capital. Our risk weighted assets have been managed lower by 4% year-over-year as a result of portfolio repositioning and optimization efforts. However, we did see growth sequentially in conjunction with a significant improvement in our return on risk weighted assets, which we believe to be an important metric in driving shareholder value. Our organizational focus on core deposits continues to show progress with deposits up on an all bank basis and strong growth in the P&C businesses with 9% deposit growth in Canadian banking and 5% deposit growth in the International Banking.
The results of our efforts to thoughtfully manage growth on both sides of the balance sheet has resulted in a loan to deposit ratio, which is down over 600 basis points to 110% on a year-over-year basis. Turning to the economic outlook. Although the Canadian economy has shown more resilience in response to the significant monetary policy tightening over the past two years, interest rates are having the desired impact on consumer sentiment and spending, which should allow for rate cuts later this year. This quarter's results reflect an increase in credit provisioning, given the incremental financial strain that sustained higher interest rates are having on our clients. We expect the Canadian economy to underperform both the U.S. and our key Latin American countries early this year, which show some growth reacceleration in response to policy easing and more at the residential real estate markets in the back half of the year.
We're expecting Mexico to show the strongest growth among the larger economies in the Americas in 2024, with some volatility expected leading into this summer's Presidential election. Our official forecasts are no longer calling for recessionary conditions in any of our operated geographies over the next few years. However, we remain well positioned to manage through more difficult economic scenarios should they unfold. A few highlights in terms of performance and strategic progress within each of our business lines. Our Canadian Banking business had a strong start to the year, delivering 7% revenue growth and 3% expense growth resulting in positive operating leverage. Loan growth in our domestic business reflects a less active residential mortgage market as well as our own deliberate actions to focus on primary clients.
Lower growth in mortgages has been offset by continued growth in business banking and strong credit card momentum, which allows us to continue to diversify our business mix. Deposit growth continues to track well at 9% in the period contributing to margin expansion and favorable trends in terms of our loan to deposit ratios. In our retail business, Aris and his team are focused on client primacy, deposit growth, client acquisition and relationship deepening across the portfolio. The continued strength of the Scene+ loyalty program now 15 million members strong provides a significant opportunity to acquire new payment clients, an important step to a longer term primary relationship with the bank. Over 40% of new to bank clients with the Scene+ partnership already have a multiproduct relationship with the bank.
As mentioned, our approach to the mortgage business has evolved. We're having good success with our bundled offerings. Our Mortgage+ product represented 70% of deals done in the quarter resulting in an average of 3.2 additional products per new to bank client. Primary client count was up by 42,000 in the quarter on the back of better cross sell and proactive engagement. We are closely tracking client relationship depth and saw progress as the number of clients with three plus banking products has seen a 50 basis point increase, since the start of the fiscal year. Loan growth in our commercial and small business lines continues in the mid to high single digit range, with our team is focused on balancing loans and deposits, targeting growth and lead bank relationships and expanding returns on risk weighted assets.
Tangerine delivered its highest quarterly earnings ever, of $107 million, up 9% year-over-year. Tangerines differentiated digital offering and expanded product capability continues to be a unique driver of additional primary clients. Tangerine continues to lead the market in mobile adoption, with mobile onboarding up 12 points to 62% of all sign-ups and with overall mobile adoption up 4 points to 73% in the quarter. Global wealth earnings of $374 million reflect the strength of our asset management franchise, the power of our diversified domestic client advisory channels, rebounding market performance in recent months and strong momentum in our international wealth business. In domestic wealth, our well-established advice channels are integrated with our industry-leading private banking business and are designed to deliver the type of complete solutions that defined primary client relationships.
In our Asset Management business, I will reiterate our opportunity to penetrate our own branch network as well as Tangerine more effectively. Only 10% of our Scotiabank retail banking clients have purchased our mutual fund products. This penetration lags peers. Our stronger partnership between our award-winning fund business and our retail networks will deliver meaningful upside to our current results. Jacque and Aris are partnering to actively implement action plans to address this sizable upside opportunity. Our international wealth business contributed $65 million in the quarter, up 18% year-over-year an increasingly meaningful contributor to our wealth results. Mexico specifically represents the largest opportunity as positive mutual fund inflows and strong fund performance are driving highly accretive growth in this business.
Our Global Banking and Markets business reported a solid quarter with earnings of $439 million. The business remains focused on maintaining top-tier status in key Canadian wholesale products and continues to organically build U.S. capabilities. Our U.S. GBM business delivered 13% earnings growth on 3% revenue growth year-over-year, reflecting our focus on return discipline and fee income through a rigorous client selection and profitability evaluation process. In GBM, our upside opportunity is based on return optimization by driving more ancillary fee revenue as a percentage of loan exposure, through deliberate client selection and relationship deepening aligning our capabilities with client needs. It is important to note that our wholesale business in Canada will face a profitability headwind going forward because of a pending change in Canadian tax legislation related to the elimination of the corporate dividend deduction.
Our international banking business delivered exceptionally strong results this quarter with earnings contribution of $752 million. Solid revenue growth across segments, good expense discipline and a particularly strong performance by our GBM LatAm business drove the result. The business delivered a substantial overall improvement in profitability, up 35% from the prior quarter, supported by almost 400 basis points of improvement in the productivity ratio with no increase in capital deployed. We believe we have more than sufficient capital and product capabilities in place to capitalize on the opportunities in these markets when favorable market conditions and client activity allow as evidenced by our results in this past quarter. On the retail side of the business, we remain overly reliant on the secured residential mortgage business, and we are too often a single product provider to the client, which is the opportunity ahead.
We are closely monitoring primacy as a percentage of overall relationships in each of international banking, retail, commercial and wholesale with a focus on product penetration and deposit growth. We have already seen a modest uptick from early actions taken. The retail repositioning will require a sustained effort over the next few years to show meaningful results. The growth agenda in Commercial Banking and our plan to deliver stronger cross-border coverage to multinational clients operating throughout the region, will require further investment in support infrastructure and enhanced cash management capability. I look forward to the evolution of this business under Francisco's leadership as we build a more coordinated regional operating model and orient the business towards the sizable North American corridor opportunity, we believe we are so well positioned to capitalize on.
In summary, the first quarter was an encouraging start to the year. We are now in the early stages of execution against plans to deliver on our key strategic objectives, earning client primacy, growing and scaling and identified priority markets, making it easier to do business with us and winning as one team. We have been through an exhaustive and collaborative exercise to establish the key performance indicators for each business, many of which were shared at our Investor Day, and we will provide progress updates to you on the most impactful KPIs in future financial reporting periods. With that, I will turn it over to Raj for a more detailed financial review of the quarter.
Raj Viswanathan: Thank you, Scott, and good morning, everyone. All my comments that follow will be on an adjusted basis for the usual acquisition-related costs. The 2023 competitive figures have been restated to reflect the adoption of IFRS 17. Moving to Slide 6, for a review of the first quarter results. The bank reported quarterly adjusted earnings of $2.2 billion and diluted earnings per share of $1.69. Return on equity was 11.9% and return on tangible common equity was 14.6%. Revenues were up 6% year-over-year, driven by increases in both net interest income, that was up 5% and non-interest income that was up 8%. All bank net interest margin expanded 8 basis points year-over-year and 4 basis points quarter-over-quarter from higher margins in international and Canadian banking partly offset by lower contribution from asset liability management activities and increased levels of lower-margin high-quality liquid assets.
Non-interest income was $3.7 billion, up 13% quarter-over-quarter, mainly due to higher trading revenues, banking fees and wealth management revenues. Provision for credit losses were $962 million and the PCL ratio was 50 basis points, up 17 basis points year-over-year. Quarter-over-quarter, expenses were flat as seasonally higher share-based compensation and increased employee benefit costs were offset by lower professional fees and other staffing-related costs. Expenses grew 6% year-over-year or 4% excluding the unfavorable impact of foreign currency translation, reflecting higher share-based compensation, technology costs and business access. The productivity ratio was 56% this quarter, a decrease of 370 basis points quarter-over-quarter, while operating leverage was flat.
Moving to Slide 7, that shows the evolution of the common equity Tier 1 ratio and risk-weighted assets during the quarter. The bank's CET1 capital ratio was 12.9% as of January 31, 2024, a decrease of approximately 10 basis points from the prior quarter. The CET1 ratio benefited 45 basis points from earnings, share issuances from the bank's shareholder dividend and share purchase plan and fair value through OCI gains driven by stronger debt and equity markets during the quarter, offset by higher risk-weighted assets of 48 basis points. The RWA increase was primarily driven by the adoption impact of the revised Basel III FRTB market and CVA capital requirements and the 2.5% increase in the capital floor, adding to approximately 70 basis points.
The RWA optimization initiatives taken during the quarter including client selection, reduced the impact to 48 basis points. We expect the RWA optimization efforts to continue during the year in line with our capital allocation strategy, to reduce the impact of the floor. Turning now to the Q1 business line results beginning on Slide 8. Canadian Banking reported earnings of $1,096 million, an increase of 1% year-over-year as a result of higher revenue, partly offset by higher provision for credit losses and expenses. Year-over-year revenues grew a strong 7% while expense growth was a modest 3%, resulting in positive operating leverage of approximately 4%. While average loans and acceptances were down about 1% from the prior year, the portfolio mix has changed.
We saw continued growth in our high-yielding portfolios as business loans grew 9%, credit cards increased 18% and personal loans grew 2%. This was offset by a decline of 5% in residential mortgage balances. We continue to see deposit growth primarily in term products, with average deposits up 2% quarter-over-quarter. Year-over-year deposits grew 9% and the loan-to-deposit ratio improved to 123% from 136% last year. Non-interest income was down 5% year-over-year due to elevated private equity gains in the prior year and loss of income from the sale of our equity interest in Canadian Tire Financial Services. Net interest income increased 11% year-over-year, primarily from solid deposit growth and margin expansion. The net interest margin expanded 30 basis points year-over-year and 9 basis points quarter-over-quarter, benefiting from high loan and deposit margins and changes in business mix.
The PCL ratio was 34 basis points, primarily from impaired loan provisions and risk-adjusted margin was 2.2%, up 15 basis points year-over-year. Expenses increased 3% year-over-year, primarily due to higher technology, personnel costs and cost to support business growth. Quarter-over-quarter expenses declined 1%. Turning now to Global Wealth Management on Slide 9. Earnings of $374 million declined 4% year-over-year as strong 18% growth within International Wealth was offset by Canadian results declining 8%, largely due to higher expenses, lower trading volumes, offset by growth in asset management. However, net income grew a strong 12% quarter-over-quarter, reflecting improving market conditions. Revenue grew 3% year-over-year due primarily to higher mutual fund fees across the international businesses and higher brokerage revenues in Canada.
Expenses were up 8% year-over-year, due primarily to the expansion of the sales force, volume-related expenses and cost to support business growth. Spot AUM increased 5% year-over-year to $340 billion as market appreciation was partly offset by net redemptions. AUA increased 8% over the same period to $655 billion from higher net sales and market appreciation. Investment fund sales in Canada continued to be under pressure with approximately $13 billion in net redemptions this quarter. However, the majority of Scotia Global Asset Management funds remain in the top 2 quartiles over a 5-year period. International Wealth Management generated earnings of $65 million, up 18%, driven by higher mutual fund revenues in Mexico and strong loan and deposit growth across our footprint.
AUA and AUM grew 15% and 18%, respectively, year-over-year. Turning to Slide 10, Global Banking and Markets. Global Banking and Markets generated earnings of $439 million, down 15% year-over-year, but improved 6% quarter-over-quarter. The U.S. business generated strong earnings of $237 million, up 13% year-over-year. Capital markets revenue was down 12% year-over-year as fixed income revenues were down 22%. However, quarter-over-quarter, Capital Markets revenue grew 12% while earning through the one-month impact of the proposed Canadian tax rules change to deny the dividend-received deduction of approximately $40 million, which is also expected to impact future quarters. Business banking revenues declined 5%, both quarter-over-quarter and year-over-year, as loans were down 7% year-over-year.
Non-interest income decreased 2% year-over-year, primarily due to lower fixed income trading related revenue, partly offset by higher underwriting and advisory fees. However, quarter-over-quarter non-interest income grew 7%. Net interest income was down 22% year-over-year and 11% quarter-over-quarter as a result of lower loan and deposit volumes, lower lending margins and higher trading-related funding costs. Expenses were up a modest 3% quarter-over-quarter, mainly due to seasonally higher share-based compensation. On a year-over-year basis, expenses were only up 4% due mainly to higher personnel costs and technology investments to support business growth. The provision for credit losses decreased $34 million quarter-over-quarter to $5 million.
GBM Latin America, which is reported as part of International Banking reported earnings of $372 million, up 24% compared to the prior year as a result of strong revenue growth in capital markets and fee income from business banking across all countries. Moving to Slide 11 for a review of International Banking. My comments that follow are on an adjusted and constant dollar basis. The segment delivered earnings of $752 million, up 35% and $196 million quarter-over-quarter. Revenue was up 9% year-over-year, driven primarily by higher revenues from capital markets. Strong retail revenue growth benefited from margin expansion and 8% higher fees and commissions. Year-over-year, loans were down 2%, primarily in Peru, Chile and Colombia. Retail loans grew 4% with mortgages up 6%, while business banking loans decreased 6%.
Deposits grew a strong 5% year-over-year with personal deposits growing 2% and non-personal deposits growing 7%. The loan-to-deposit ratio improved to 129% from 140% in the prior year. Net interest margin expanded 19 basis points quarter-over-quarter, driven by higher asset yields and higher deposit margins. The provision for credit losses was 135 basis points or $574 million, up 16 basis points quarter-over-quarter. This translated to a risk-adjusted margin of 3.23%, an improvement of 7 basis points year-over-year and quarter-over-quarter. Expenses were up a modest 4% year-over-year driven by business and capital taxes, technology expenses and salaries and benefits. Expenses were up 3% quarter-over-quarter, driven by seasonally higher business taxes in the Caribbean and communication expenses.
Operating leverage was a positive 6%. Turning to Slide 12, the other segment. The other segment reported an adjusted net loss attributable to equity holders of $474 million, a slight improvement of $13 million compared to the prior quarter mainly due to lower expenses. With that, I'll now turn the call over to Phil, to discuss risk.
Phil Thomas: Thank you, Raj. Good morning, everyone. Limited economic growth and higher household expenses persisted through Q1 as a result of sticky inflation. This quarter, all bank PCLs were 50 basis points, driven by the following: One, Canadian commercial exposure in the transportation industry; Stage 3 migration in our Canadian retail portfolio; and persistent challenging market conditions in Peru and Colombia. Higher delinquencies across most of our retail portfolios this quarter reflect the challenging macroeconomic environment. Total PCLs of 50 basis points or $962 million are down $294 million quarter-over-quarter. The performing PCL was $20 million or 1 basis point, reflecting both lower loans quarter-over-quarter and no material change in macroeconomic outlook.
Impaired PCLs were $942 million or 49 basis points, up $140 million quarter-over-quarter, largely driven by deterioration in Canadian Automotive Finance, Colombia and Peru. Additionally, Chile has returned to run rate PCL levels now in line with historic norms. We continue to maintain strong allowances on loans and the ACL coverage ratio increased 1 basis point to 86 basis points for the quarter. In Canadian Banking retail, 90-plus day delinquency levels are up 1 basis point quarter-over-quarter and 8 basis points year-over-year to 26 basis points. This is due to increased household expense pressures and borrowing costs. Delinquency is up across all retail products year-over-year. Despite this, credit quality continues to remain strong average FICO scores remained relatively flat year-over-year at 790.
With the cumulative inflation and interest rate pressures on households, Canadian consumers continue to ease discretionary spending reversing an uptick seen during the holidays. We continue to monitor the number of vulnerable customers in our retail portfolios, which have remained relatively flat quarter-over-quarter. Turning to our mortgage portfolio. We remained confident in the performance of our variable rate mortgage product, which has maintained strong credit performance despite unprecedented increases in borrowing costs. Our variable rate mortgage clients have experienced an average increase in mortgage payments of over 50% since rate increases began. Notably, the year-end multi-product clients have lower delinquency across their household balance sheets versus single service and fixed rate mortgage clients.
Fixed rate mortgage clients have been relatively unimpacted as the majority of renewals occur in 2025 and 2026. Pandemic-driven excess deposits for variable rate mortgage clients have returned to run rate levels with an average of 2 times deposit cushion. We are confident in our credit practices and our variable rate mortgage portfolio serves as a strong indicator of credit quality across our fixed rate portfolio, as the renewal cycle plays out over the next 2 to 3 years. Turning to International Banking. Macroeconomic and geopolitical pressures continue to weigh on our international banking footprint. Having said that, central banks across the region have started to reduce policy rates and expected growth in Mexico remains strong. International Banking's PCLs were $574 million or a PCL ratio of 135 basis points.
The increase in PCLs was primarily attributed to retail portfolios across most markets and in particular, Peru and Colombia. As mentioned earlier, Chile saw an expected increase coming off lower provisions in Q4 2023 as the portfolio normalized this quarter. Mexico, as a highly secured retail portfolio, remains resilient with PCLs down quarter-over-quarter and expected strong persistent growth through 2024. As I mentioned earlier, in business banking, the increase in impaired PCLs and GILS this quarter was primarily driven by a single exposure in Canadian commercial, while GBM experienced a net recovery. Our commercial real estate portfolio continues to perform well, and we continue to monitor the market closely. Heading into 2024, there was optimism that rate cuts in Canada may materialize earlier in the year.
However, it appears that forecasted rate cuts may come later and potentially at a slower pace. In our key international markets, we have seen the central banks take action with rate cuts in Peru, Chile and Colombia. This is starting to provide rate relief to clients. In the near term, specifically in Peru and Colombia, delinquencies are expected to increase, with economic recovery expected to be more challenged. We are actively monitoring the portfolio and proactively managing our exposures. We expect provisions for credit losses to remain within our full year guidance of 45 to 55 basis points on a full year basis. With the cumulative build of $1.1 billion in total allowances for credit losses over the last six quarters, we remain comfortable with our coverage levels, given the secured focus of our retail book and the investment-grade quality of our corporate and commercial risk.
With that, I will pass the call back to John for Q&A.
John McCartney: Great. Thank you, Phil. Operator, please queue up questions from phone line.
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