The Bank of Nova Scotia Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Deposit Growth: Personal and commercial deposit growth, with P&C deposits up 7% year-over-year. Canadian Banking has seen $43 billion increase in deposits over 18 months.
• Capital Discipline: Deploying incremental capital to priority businesses. Canadian Banking and Wealth showing strong revenue and earnings growth, while GBM and International Banking focus on returns.
• Cost and Process Efficiencies: Positive operating leverage driven by cost discipline in Canadian and international banking. Productivity ratio improved in international and Canadian retail businesses.
• Business Segment Performances:
  • Canadian Banking: Focus on primary client growth, sequential residential mortgage growth (82% of Q3 originations were mortgage plus offerings), mortgage portfolio retention rates improved to over 90%.
  • Global Wealth: Strong contribution with $415 million, led by Canadian wealth business growth and international wealth double-digit growth. Assets managed in advisory channels reached record levels.
  • Global Banking and Markets: Impacted by capital markets decline but business banking revenues growing. Fee businesses like underwriting and advisory fees up over 30% year-over-year.
  • International Banking: Earnings up 6%, deposit growth, loan-to-deposit ratio improved, and productivity efforts showing progress.
• Investment in KeyCorp: Agreement to purchase ~14.9% interest in KeyCorp, seen as financially attractive and providing optionality for U.S. platform growth.

Segment Performance

• Canadian Banking: Reported earnings of $1.1 billion in the quarter, up 6% year-over-year. Pretax pre-provision earnings grew 11% year-over-year. Deposits in Canadian Banking business are up $43 billion since 18 months ago. Loan-to-deposit ratio improved to 120% compared to 129% in Q3 2023.
• Global Wealth Management: Generated earnings of $415 million, up 11% year-over-year. Driven by growth in Canadian wealth business, including advice channels and international wealth. Spot AUM increased 10% year-over-year to $364 billion.
• Global Banking and Markets: Earnings of $418 million, down 4% year-over-year. Impacted by lower fixed income revenues in capital markets, but business banking revenues grew 8% year-over-year.
• International Banking: Delivered earnings of $674 million, up 6% year-over-year. Net interest income up 7%, deposits grew 4% year-over-year, loan-to-deposit ratio improved to 126%.
• Other Segment: Reported adjusted net loss of $465 million, compared to a loss of $421 million in the prior quarter.

Guidance

• Net Interest Margin: Expect margin to modestly improve in Q4 and expand beyond Q4 as rate cut benefits are realized.
• Rate Cuts Impact: Policy rate cuts in Canada and U.S. expected to benefit earnings in 2025. NII and NIM benefits expected to start showing in Q4 and accelerate through 2025.
• Segment Performances: Continued focus on disciplined capital deployment to priority client segments, with expectations of sustained growth in key areas like Canadian Banking and Global Wealth.

Risks

• Credit Costs: Credit costs at high end of range due to sustained higher rates on retail portfolios. International markets may face challenges with credit conditions.
• Macroeconomic Uncertainties: Interest rate increases impacting consumers and potential economic slowdowns in key operating geographies.
• International Market Challenges: Volatility in Latin American markets and challenges in repositioning capital within international footprint.

Q: Good morning. I guess maybe Raj for you, just around the net interest margin outlook. If we get a series of rate cuts from the Bank of Canada, give us a sense of the trajectory of where you see both the Canadian NIM playing out, over the next four to six quarters and the consolidated NIM.

A: Yes, good morning. Every 25 basis points is about $100 million of benefit in the NII over a full fiscal year. We'll see some benefits in Q4, with full quarter benefit starting from fiscal first quarter and 2025. Canadian Bank's division NIM will continue to show decline due to deposit margins, but will pick up as asset repricing occurs. International banking NIM expected to be around current quarter levels.

Q: Good morning. On the International segment, I think you were saying that the margin is going to be, kind of in and around this level for the foreseeable future. I don't know if you said anything similar about the loan loss ratio?

A: Gabe, it's Phil. We are encouraged by what we're seeing in IB, GILS flat, net write-offs flat. We'll give more clear guidance into '25, but generally seeing things in line with this quarter.

Q: Thank you. A couple questions. Maybe just continuing with international. I think if you look at the macro backdrop, particularly in Chile and Peru, seems to be improving. And then, also there's a focus on the client primacy. So what I'm trying to figure out, is - as the demand environment improves for loans. But put that against sort of your strategy. How should we think about balance sheet growth for international in 2025?

A: Well, thank you for the question. This is Francisco here. 2025 will be a transitional year. We'll see a refocusing on existing relationships and client de-selection, leading to a flattish balance sheet year as we reprofile the portfolio for right clients and returns.

Q: Good morning. Thanks so much for taking the question. For Raj, I appreciate all the color on the margin dynamics. And just hoping to follow-up on the Corporate segment, more specifically, you had the adjusted bottom line results coming at the negative $465 million this quarter, which was in line with the guidance that you had laid out previously. Just wondering if you could put a finer point on how to think about bottom line results as we move forward and get policy rate cuts.

A: Yes. Thanks, Jill. The Corporate segment is expected to improve significantly next year due to NII improvements from rate cuts and wholesale funding benefits. Near term, next quarter likely around current range, with transfer pricing movements and mark-to-market gains being hard to predict.