The Bank of Nova Scotia's CEO Presents at Scotiabank Financials Summit Conference (Transcript)

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The Bank of Nova Scotia (NYSE:BNS) Scotiabank Financials Summit Conference Call September 4, 2013 9:25 AM ET


Rick E. Waugh – Chief Executive Officer


Kevin R. Choquette – Scotia Capital Markets

Kevin R. Choquette – Scotia Capital Markets

Our next speaker this morning is Rick Waugh, President and CEO of Bank of Nova Scotia. Mr. Waugh began his career with Scotiabank in Winnipeg in 1970 and has been with the bank for over 40 years. Rick has been the CEO since 2003 and as many of you know Rick is stepping down as CEO, November 1 of this year. So Rick’s tenure at the CEO level has seen many positive shifts at the Bank. Scotia has increased significantly its presence in retail banking and wealth management and developed a meaningful presence in new emerging market – countries such as Peru and Colombia and at even Thailand.

In retail banking, market share in residential mortgages for Scotiabank has increased nearly 5% to 22.6% from 17.9%. Mutual fund market share has gone up to 17.1% from 7.8%, and personal deposits has also increased to 20.8% from 16.6%.

So Scotia is now number three in Peru, number six in Columbia, number five in Thailand and number three in the Bangkok region, which complements the Caribbean and the Mexican franchises.

Despite the acquisitions and growth, Scotia share price has outperformed increasing at a CAGR of 6.5% and that’s versus the bank index of 6.2% and the TSX hit 5.1 and the share price depreciation is obviously through the difficult period of its extended financial crisis.

Dividends over the period have also increased at a CAGR of 11.5%. Also Scotia’s valuation has increased from PE multiple versus the group at an average 6% premium today since Rick has been the CEO versus 7% discount from 1967 to 2003. So all-in-all a very good decade for Scotia under Mr. Waugh’s leadership.

With that, I’d like to turn it over to Rick.

Rick E. Waugh

Thanks Kevin and thanks for those numbers. As he mentioned, I am giving up my role as CEO, but I am staying on in a – sort of a transition period as the Executive Chairman till January and that gets me involved not only in the financial statements that goes off, but dealing with the compensation and bonuses for all our staff. So, Kevin, also really good numbers you gave. Thanks very much.

So, I am going to go through a short presentation. This is probably my ninth or 10 time here, and then it will be opened to questions. I can obviously talk about strong 2013 year-to-date results and there are few slides on the longer-term and really emphasizing what has been our key priority sustainable growth. Scotiabank has become more diversified, [indiscernible], more internationally focused, yet at the same time and most importantly has been giving sustainable, unpredictable growth as well as these results will show in our last quarter.

So, before I start, caution regarding the forward-looking statements and now for the first chart. Year-to-date revenue and earnings growth has been strong. As you can see, three out of four business lines had double-digit revenue growth. Korean banking performed exceptionally well and experienced broad-based revenue growth. All these were driven by the successful acquisition of ING Direct and by growth in loans and mortgages and deposit growth also drove the performance.

Our international banking results were driven by strong growth in the personal and commercial banking businesses particularly in Latin America. Acquisitions and a higher underlying contribution of the associated companies also contributed, but it’s noteworthy on that chart, you can see revenue is growing at 12% consistently.

Global Wealth Management also performed exceptionally well and benefited from improved equity markets, higher assets under management and assets under administration, coming from our net mutual fund sales, particularly in our branch channel and our totally upgraded iTRADE platform, and our insurance businesses saw good sales growth.

And finally, for the 9 months of the year, Global Banking and Markets saw good growth in lending and in fixed income. General capital market environment obviously remains challenging. However, we are well positioned with respect to our wholesale businesses and have the necessary capital and necessary talent and no downsizing as seen by those several bank as required.

As I said in our earnings call last week, I’d like to specifically address the two major areas that we are monitoring closely due to external macro factors of concern, Canadian consumer debt and the volatility in emerging markets with respect to exchange and growth rates.

As our results clearly demonstrate, our customers in Canada are behaving as expected. Growth is moderating, and all credit metrics, delinquency, formations and loan losses are essentially flat to down. Canadian retail loan losses were just over 100 million in the third quarter and in the context of our portfolio this is a very modest amount. All this is consistent with the soft lending we have been forecasting for housing, which included modest increases in interest rates.

Regarding emerging markets, growth rates have moderated somewhat, but we expect to achieve a better average and increasing growth for the next year, including the Caribbean which has now stabilized and is expected to improve going forward.

It’s worth noting that our primary exposures are in select non-BRIC countries, which are expected to outperform the BRIC’s in the next few years. And we do expect volatility in foreign exchange markets, as short-term global flows will need to adjust to the tapering and the changes in official reserves.

However, for us, our earnings are largely influenced by local, personal and commercial banking and onshore wealth management businesses and these are driven by local spreads and demands for mortgages, autos, credit cards, and insurance and these products with on strong demand and will continue to show above average earning growth as evidenced in our 12% revenue growth this quarter, year-to-date.

However slide 4, shows our up-to-date performance versus our targets, which we set at the beginning of the year. Scotiabank’s diversified platform continues to drive the growth and the high profitability and as we said, we insist on achieving our full year 2000 financial objective and are well positioned for a good performance next year. Our goals over the years have not changed, no liability to execute and achieve these results, as you see in that 10 year average.

This slide now portraits some of the medium term targets for our business and geographical mix. We expect that each of our four business platforms will contribute between 20% to 30% of Scotiabank’s net income over a cycle. We will continually focus on personal and commercial banking and wealth and insurance, and we expect both businesses to account for about 70% of our total earnings. We’ve also aimed to balance our business equally between Canada and our international operations.

And lastly, we will continue to seek our bigger [ph] presence in higher growth markets. Our footprint include some of the most attractive emerging markets and a great demographics and demand for financial services. We are very familiar with these markets and we see our increased presence in them as an evolution of our strategy.

Most of all, diversification of our overall platform create stability that provides very strong returns to our shareholders at acceptable risk levels and that has been a key focus of other strategy over the last seven years. Risk management is a consolidated advantage.

I’d like now to illustrate how Scotiabank has evolved to improve this diversification and enhance growth opportunities. We have completed 70 acquisitions totaling approximately $17 billion, but have done so in a very capital efficient and shareholder friendly way. We were the only large Canadian bank that did not do a public offering and our common shares have the debts of the financial crisis and uniquely we continued to own our own head office, building us through the crisis before realizing large gains last year at a much better price.

In 2010, we acquired our initial stake DundeeWealth, each via [ph] Canada, a significant minority interest in CI and being well fluctuated on a global wealth management group which comprises our domestic and international wealth and insurance business.

Prior to this, as one of our great structural weaknesses was that wealth management was less than 5% of our total earnings and that’s not just vulnerable, first of all in servicing on customers and against demographics that we are certainly having in Canada and of course benefiting from both times with markets improved.

So a great change in the percentage of our sustainable earnings and now benefiting in this market as you can see with our earnings in wealth management.

And you can see by doing this, we now have four unique and diversified growth platforms, which we target to contribute between 20% to 30% of net income and that is what our business model is producing.

As you can see a significant change over the last decade is that we’ve become somewhat less dependent on our domestic retail businesses, while we are less dependent nevertheless, we are now clearly the third player in Canada, achieved both organic growth as well as through acquisitions such as Maple Trust and ING.

Over the last 10 years, we have continued to focus on lowering our risk; less volatile personal commercial banking, wealth management and insurance business. We have lowered our risk appetite, but even our wholesale businesses is diversified across product lines and geographies.

So the focus on the relationship driven products in important niche markets where we can bring that special and focus expertise that we have; this favorable and diversified client driven platform complements our continued focus on lower risk, PC banking wealth management and insurance businesses and we are committed to maintain at least 70% of our business in personal and commercial.

In slide 8, you can see our geographical earnings mix has become considerably more balanced over the last number of years with the international business growing from 31% of our earnings to 48% of our earnings.

They are contributing over $7 billion of acquisitions internationally during this time and build up our international footprint across multiple products to create a strong program of future growth.

Having said this, we are still committed to growing domestically here in Canada and you saw with our $3 billion acquisition of ING DIRECT Canada last year and this truly can be a game changer for us in our Canadian business.

We have also become the leader in the mortgage product, which is a low risk product that provides great opportunities for cross sell, great opportunities for relationships and we are getting much better at this and have more to do.

We firmly believe there are great opportunities for growth in Canada despite the headlines as you see about Canadian consumer debt. Even at the sizable increase in the proportion of earnings coming from our outside of Canada, diversification has remained and will remain a key theme in our effort to build our footprint internationally.

The acquisitions we have made in recent years particularly in Chile, Peru, Thailand, most recently in Colombia have enabled us to diversify our earnings away from the Caribbean and Mexico, which dominated our international earnings over a decade ago and as these pie charts dramatically show.

We have been very selective in choosing the geographies in which we want to operate. With respect to Europe, particularly in Eastern Europe, we did not see in any competitive advantage in this region. We felt that the Americas, as well as Asia were a better fit and a better opportunity. Hence we actually did the retail banking space in both Greece and Ireland several years ago as well as consolidating and shrunk most of our European operations.

Given the ongoing turmoil in New York, over the last few years these were timely decisions. In Asia, we reduced our footprint from approximately 17 to 12 countries. Yet, we have seen a significant increase in revenue and profit contribution from this region. We also during this time significantly consolidated our U.S. operations.

As I touched on earlier, there has been some moderation in economic growth rates and increased Forex volatility in some markets that we operated. But we believe our long-term investment strategy of geographical diversification and the onshore business mix will mitigate these headwinds and in fact give us even more opportunities to increase our market share and presence in these local markets.

Now, as you heard me mention many times before, sustainable and profitable revenue growth is a top priority, and this slide shows how much diversification over the last decades produce sustainable and profitable revenue growth, a little busy slide that shows the revenue growth. While acquisitions continue to be an important part of the strategy, we always remained optimistic and we are reluctantly focusing on maximizing return to our [indiscernible] growth.

Now there in the slide, you see in the early periods, the revenue was largely flat, which reflected this downsizing in Europe, the U.S. and parts of Asia. Yet, as you will see on the coming slides, our earnings and dividends still grew through this period.

So, this is what the outcome is spread, so what is the outcome of the – strategic priorities I’ve just discussed. Well, first Nova Scotia bank has delivered a consistent and sustainable record of solid earnings and dividend growth. Earnings and dividends have shown an average rate of 11% and 12% respectively over these last 10 years.

Last week we announced our second dividend increase. This year bringing the annual dividend growth to over 9% and we are very proud that Scotiabank has paid dividends continuously for more than 175 years and increased dividends in 47 of the last 50.

And lastly, my favorite chart, we also had a very high return on equity. And over the last 10 years, we led the Peer Group with an average of 19.4%. Regulatory changes have had an impact on our return on equity and they are coming down, but we still expect Scotiabank to deliver top ten returns on equities in the year ahead along with above average growth.

So as Kevin announced, I have announced my intention to retiring my role as CEO effective November 1, after 10 years in a row and retire at the end of the first quarter after 43 years in the bank.

Scotiabank's President Brian Porter is been appointed to assume the role of President and CEO. Brian has a tremendous range of over 30 years experience with the bank, including the critical role of Chief Risk Officer and senior roles in three of our four business lines. He and the strong ongoing management team have been an integral part of developing the banks strategy over the last decade, and I am confident they will build on a very straightforward and a very prudent business model that has worked so well.

Profession in our bank has always been an evolution, not a revolution but changes will come, but the bank continues it’s three big focus on maintaining trust, value and service to our customers in doing jobs and careers for employees and above average returns for our shareholders will not change. So that concludes my remarks and I look forward to any questions.

Question-and-Answer Session

Kevin R. Choquette – Scotia Capital Markets

Questions? Maybe I will start it up direct with provident [ph], the toughest one is on international and earnings growth even if we exit the volatility that we’re seeing in some of your countries, just the general growth platform and it’s been relatively weak in the last year or so. So what’s going to happen and is it a scale issue, is it a credit issue?

Rick E. Waugh

Obviously, we want global growth and that has had impact. Mexico was particularly hard hit. I think we underestimated the effect and reminisces that come in from the United States into Mexico that had you, but there has been a huge amount of development on the Mexican side of what they are doing, the geopolitical. So far, it has been expensive and we haven’t had the tailwinds that we expected and that was an issue and we did make some acquisitions and emerging markets with a lot of churn and of course the premiums were there and you know what, we don’t like paying premiums.

So those are little bit of that, but the fundamental operation as you saw in the 12% growth rate year-to-date on cars and houses, the middle class is growing, the demographics are undeniable, the geopolitical risk in those countries are as good as they are.

The excellent volatility and exchange rate and so that will have some of our customers to probably go up too much in the U.S. dollars, we might have some stress, but we don’t see it yet, but there is still because of the demographics, the average Latin American is 10 years, younger than the American and the Canadian, they need cars, they need houses and they got the large numbers and we are well positioned.

So I see us hitting our goals this year despite that volatility, I see it’s hitting our goals next year despite that volatility and in fact it gives us opportunity, because there it is going to be something and we are ready believe the bank, as we have so many times in our acquisition strategies. I love buying cheap and I think that will give us more opportunities, but if it doesn’t, spreads utilizing, in this kind of environment and both the spreads will widen and will do quite well.

Kevin R. Choquette – Scotia Capital Markets

Thank you. Question here?

Unidentified Analyst

Some of your peers have expressed optimism about the Caribbean, but no one has used the word stabilize as you have, what’s given you the confidence that the Caribbean is stabilized and what is it that you see driving it going forward?

Rick E. Waugh

We’ve yet to release six cycles of this. This is the nowhere cycle. We always say that while our delinquencies go up, we always get paid off, because you can’t hide your car on an island, location, location goes away.

So as traditionally delinquency as it did and it did more than we thought where we want to grow. We very seldom take large losses on resorts. We’ve cut one or two this cycle, but we are seeing – again as always it’s very focused on the winter season, but all those times are good and we are seeing resorts that were in trouble, all getting started and get cleaned up.

So all the times are good and our earnings which again with a local bank and we don’t make a lot of money on resorts and tourists, I mean it sounds nice and we will make what we can. It’s that local business and that is turning around as jobs in economies are increasing, not so dramatic increases, statistically analyzed. So we are very confident and we have been at it a long time and everyone of those countries we are local and have been through up to 115 years, so it’s good for us and stabilizing the growth. I think a little bit optimistic, but it’s been dragging for three or four years.

Kevin R. Choquette – Scotia Capital Markets

Another question here at the time?

Unidentified Analyst

More recently the Mexican governments released, pushing a lot of deregulation within the economy and what specifically in the energy sector, do you see an opportunity there for commercial line of businesses as you start to see a lot of private sector investment increased in Mexico?

Rick E. Waugh

Yeah, more optimistic. We were optimistic [indiscernible] came in and he tried, but then he got little bit more on the – he tried to take care of business on the security and the drugs. From what we see from the free and also get the free was the party for many years and is still very deepen infrastructure. It’s early days, but I really think from everything I am hearing at multiple levels that they are seriously on making structural changes on the energy front and other areas and what Mexico have been busy doing in the last five years, the number of free trade agreements that Mexico have signed are been enormous and that gives access thereafter.

So there is a lot of the FDI’s, Foreign Direct Investment coming in. It’s not only because the great local market which we purchased that paid in is that U.S. market and so Mexico is going to win based on that. One, the FDI going north and you can see the trade balances and they are then just coming in. As America goes, Mexico will go and so they were pretty confident. [indiscernible] is always an issue, but they have moved so much from the political side in Congress with this Mexican pat and they just delivered it on the teachers if you have been watching closely the teachers were on strike and we will get into all the details and guess what Congress approved the educational reform, much needed in that country, what a great signal.

Kevin R. Choquette – Scotia Capital Markets

Another question, maybe just on the follow up on Caribbean, [indiscernible] levels in Jamaica and places like that, if you think a lot about that, how riskier they just confirmed?

Rick E. Waugh

Well Jamaica, we have been there for 120 years. The good news was they have their IMF restructuring last year. And about every 10 years, they’ve had to go through restructuring, all because of what happened about 30 years ago within their local banking system went under, that’s when we ended up with 40% of the market in Jamaica and that’s a long time ago.

So the good news in Jamaica is the restructuring that happened a year ago and hardly had a blip and now as the tourist thing is coming back, it’s going to be okay and they are Jamaican dollars. If you’ve heard anything about Greece, when you don’t have a Central Bank and you don’t have a local currency, you can argue long-term about the efficiencies and what it does, but it reduces crisis and in most of our countries, not only in Jamaica, we have access to the local currency, local central bank with a great collaterals we needed. We know what the formula for success is and so Jamaica doesn’t want it.

Kevin R. Choquette – Scotia Capital Markets

And maybe just a quick comment on share buybacks, your view?

Rick E. Waugh

We are the only bank that hasn’t done it. I am giving a speech at Empire Club, I remember in 2006 and 2007, not Kevin, but many analysts were saying I have got all the capital, Waugh, why don’t you do a share buyback, why don’t you do a special dividend, again not Kevin, but and we didn’t do it and guess what, we spent over 10 years, $17 billion and I think moving us dramatically forward.

So we still see opportunity, we increased our dividend, I loved increasing the dividend. We are keeping our drip open. So regulatory capital, we are fine, but it’s going to be a never ending headache for the world banks and so I like the balance we got, so we will see and Brian and the team will see even more as we go forward.

Kevin R. Choquette – Scotia Capital Markets

Great. And now, I’d like to thank Rick and congratulations on a great tenure.

Rick E. Waugh

Thank you, guys.

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