The Bank of Nova Scotia Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Capital Allocation: Announced return to growth of quarterly dividends, increasing the quarterly dividend by $0.04 to $1.10 per share and launched a share buyback program for 20 million shares.
• Client Primacy and Core Deposits: Added approximately 392,000 new retail primary clients. Loan-to-deposit ratio reached 104%, the tenth consecutive quarter of improvement. Clients are cautious, but deposits increased year-over-year across most business lines.
• Operational Excellence: Achieved positive operating leverage for the fifth straight quarter. Invested in AI, with over 70% of commercial client emails in Canada processed by AI to create structured case files.
• Business Line Highlights:
  • Global Wealth Management: Delivered $405 million earnings, up 17% year-over-year. Expanded private asset solutions and active ETF product suite.
  • Global Banking and Markets: Generated $413 million earnings, with M&A revenue near-record. Capital markets activity strong in first two months of fiscal 2025.
  • Canadian Banking: Deposits up 5% year-over-year. Mortgage+ solution accounted for 88% of originations. Scene+ members growing, with 26% holding Scotiabank payment products.
  • International Banking: Executed on segmentation strategy, productivity ratio 51%, regionalization strategy progressing with significant components complete by fiscal year end.

Segment Performance

• Canadian Banking: Reported earnings of $613 million, down 31% year-over-year. Deposits grew 5% year-over-year. Net interest income increased 2% year-over-year but net interest margin declined. Provision for credit losses (PCL) ratio was 72 basis points, up 32 basis points year-over-year and 25 basis points quarter-over-quarter.
• Global Wealth Management: Earnings of $405 million, up 17% year-over-year. Spot assets under management (AUM) increased 9% year-over-year to $380 billion, and assets under advisement (AUA) grew 6% to over $710 billion.
• Global Banking and Markets: Earnings of $413 million, up 10% year-over-year. Revenue increased 18% year-over-year, driven by strong performance in capital markets and business banking. Maintained #1 league table ranking in debt capital markets in Canada.
• International Banking: Earnings of $681 million, up 2% sequentially. Productivity ratio improved to 51%, and PCLs were down 9 basis points quarter-over-quarter.
• Other Segment: Reported an adjusted net loss of $80 million, an improvement from the prior quarter, driven by higher net interest income.

Guidance

• Expected fiscal 2025 EPS growth of 5% to 7%.
• Committed to achieving 14%-plus return on equity (ROE) over the medium-term.
• Confident in internal capital generation, launched a share buyback program for 20 million shares, expecting to use it as a tool to return capital to shareholders if valuation remains depressed.

Risks

• Significant uncertainty in the global economy and Canada. Forward-looking indicators worsened, leading to an increase in performing provisions.
• Retail PCLs increased due to a weaker macroeconomic outlook, higher delinquencies, and expert credit judgment to reflect trade uncertainty.
• International Banking saw increased allowance for credit losses in Mexico, but other regions showed better credit trends due to diversification.

Question and Answer

• Q: Ebrahim Poonawala on significant performing PCL build and impaired PCLs outlook A: Phil Thomas discussed stable impaired PCLs, focus on collections, and positive credit trends in International Banking, expecting impaired PCL ratio to remain at or slightly above Q2 level for the rest of the year.
• Q: Gabriel Dechaine on condo exposure in mortgage portfolio A: Phil Thomas stated condo exposure is ~20% of the mortgage portfolio, focused on Tier 1 developers, not a top concern as it represents a small portion of the commercial real estate portfolio.
• Q: Mario Mendonca on wholesale and international loan growth A: Francisco Aristeguieta and Travis Machen discussed focus on client primacy, lower demand for debt, but fee growth and relationship strategy, expecting loan growth to resume in 2026 as part of the transition to a total relationship strategy.
• Q: John Aiken on buyback and KeyCorp investment A: Scott Thomson talked about flexibility in share buyback, benefits of KeyCorp investment, and regulatory tailwinds in the U.S. banking sector, expecting positive impact on earnings.
• Q: Matthew Lee on international PCLs and indicators A: Phil Thomas and Francisco Aristeguieta discussed better PCLs in some regions due to less trade uncertainty, diversification in emerging markets, and the power of regionalization strategy in optimizing performance.
• Q: Doug Young on CET1 ratio and expert credit judgment A: Raj Viswanathan explained CET1 ratio dynamics, with LGD parameter updates and operational risk-weighted assets impacting it, and Phil Thomas discussed expert credit judgment's 60% impact on performing provisions build.
• Q: Lemar Persaud on margins outlook A: Raj Viswanathan discussed all bank margin trends, segment margins, and outlook for 2026, noting margin expansion from lower funding costs and expectations of continued margin improvement in segments.
• Q: Darko Mihelic on Canada asset side and deposit strategy A: Aris Bogdaneris and Jacqui Allard talked about mortgage growth, deposit focus, and strategies to improve deposit mix, with focus on frontline incentives, marketing, product investments, and Mortgage+ program.
• Q: Sohrab Movahedi on CET1 ratio and ROE target A: Scott Thomson mentioned confidence in achieving 14%-plus ROE over the medium-term, with Wealth Management and International Banking exceeding expectations, and focus on addressing productivity and collections to reach the target.