The Bank of Nova Scotia (NYSE:BNS) Scotiabank Financials Summit Conference September 9, 2021 8:20 AM ET
Brian Porter - President & Chief Executive Officer
Conference Call Participants
Good morning, everyone and welcome to the 22nd Annual Scotiabank Financial Summit. Today is all about the banks and lifecos. And kicking things off, as we do every year, is Scotiabank’s President and CEO, Brian Porter.
Good morning, Manny [ph]. It's good to be with you.
Q - Unidentified Analyst
Good to see you. I wanted to kick things off, talk about COVID and the recovery, and then hopefully get into some of the key business lines, a little bit more detail there. So, first of all, it's been 16 months since COVID has turned our lives upside down. I was hoping you could kind of reflect and talk about how the bank has managed through this difficult period, and specifically talk about how the recovery is progressing through the footprint. I know, definitely there are different speeds across Scotiabanks footprint when it comes to the recovery.
Sure. Well, obviously, I'm very proud of how the bank’s performed through this difficult period. And, going back to March 2020, we had over 60,000, Scotiabankers working from home. And we did that without a glitch. So all the prior investments we made in technology, we didn't have to ration VPN here, it worked, really, without a glitch. And we're proud of that. So all the funding we did to digitize the bank, enhance banking platforms in our technology and capabilities definitely paid off in a period of stress.
But we kept 90% of our branches open throughout our footprint. We made sure everybody was safe, our customers and our employees were safe, and that worked out very well for us, because our customers needed to reach out, they needed advice during a difficult period. So I'm really proud of how the bank performed.
And I think also, if you go back to 2019 versus today, we divested a lot of different properties, we took $647 million of earnings out of the bank. And we've definitely reduced volatility by doing that. But it shows the earnings power of the bank, because that's those divestitures.
Because today, as the earnings power of the bank’s up 17%, so it assures of the quality of the assets, and how we've diversified the bank. So GBM and our Wealth business performed very well through this period and we're very proud of those businesses. So the power of diversification is an important one.
So, coming through Q3, Canadian bank earnings, we're very pleased with the results out of the Canadian bank, and we continue to have momentum in that business. And we see that continuing, good commercial loan growth, good mortgage growth, the auto business is coming back and we'll talk about -- more about that during the course of our discussion today.
The GBM business, third quarter in a row of $500-million-plus in earnings, and very strong contribution from LatAm. And on top of that -- and our wealth business continues to perform exceedingly well. And international banking is coming back and we see further strength in our business there and we can talk more about that, I'm sure.
I want to pick up on something, you talk a lot about, Scotiabank being a well diversified bank. So I just wanted to -- just delve into that a little bit more and talk about that diversification and how does that make Scotiabank more resilient for pandemics and other types of events?
Yes. Well, we've got four very strong business lines that are contributing to the bank's overall profitability. And, we've always -- it's part of the DNA of this institution is diversification. We've had businesses outside this country for well over 100 years. So the power of diversification, as it's something we think about. And the optionality of diversification is really important.
But clearly, we made some acquisitions in our Global Wealth business, those have paid off handsomely, during this period. The GBM business, as we've repositioned the earnings power of that business and shareholders are seeing that, the Canadian bank business is, as we talked about, is performing exceedingly well and more to come there. And IB is coming back.
The economic recovery, isn't even around the globe, as we all know. And clearly the U.S. is leading the pack. Canada is not far behind. But, in terms of our IB business, in Mexico and Chile are back at, above pre-COVID level of where we are in and proves on the common, we see that. And economic growth is coming back from those countries.
So, from the beginning, to where we are today, COVID -- the impact of COVID hit Europe and North America, before it did Latin America. So there's always been a one or two quarter lag, in terms of the beginning of the pandemic and the economic impact of the pandemic. And so our international business is coming back. And it's good to see.
So it sounds like, you know, you're confident in that recovery? And what you see in Q3, only gives you further confidence.
Oh, no question about it. You know, if you look at the, again, the earnings power of the bank, very proud of what we've done. And what we've delivered for our shareholders here. I don't think that's recognized by the market in terms of today's valuation.
But that'll straighten, itself out in subsequent quarters. But, there's no question about it is if you look at the international business, asset growth is starting to come back. And it's been the same as Canada is that, as we were working our way through this pandemic, mortgage growth is up quite significantly, internationally as it is here in Canada, obviously, commercial loan growth is up. And we can start to see the consumer coming back.
And we see that in our bookings, in our credit card business internationally. Service is on the come.
I wanted to talk more about IB. But first, you mentioned wealth. And sometimes, I don't think we talked enough about the global wealth management business at Scotia. If you could just talk about the strategy there, how does differentiate it from peers? And how the strategy looks in Canada versus outside of Canada?
Yeah. We're really proud of our business. And Glen Gowland's leadership and the team, as the Canadian piece of that business has set 10 quarters of subsequent double-digit earnings growth. So that business is running exceedingly well. The international business is growing nicely.
And, in terms of our strategy, we're there. Its one size doesn't fit all, but we've got a number of discrete businesses, whether it's our trust business, or pick business, private investment council business. And all the business is that, that make-up our global business are performing very well in a very good environment.
The one piece of the business we'd like to add overtime is more a bigger U.S. presence in terms of our Wealth Business. We'll do that thoughtfully, like we built our business here in Canada. So, a bigger piece of U.S. dollar management is important to us. It's important to our customers, particularly in LATAM.
So, that's something that we'll think about overtime. But again, the business is performing exceedingly well. Number one in terms of revenue growth, number two, in of our peer group and in mutual fund sales.
So, we've got a really the base of the business is exceedingly solid. We've got a great team. And we'll continue to build it organically and thoughtfully through an acquisition.
And can I ask about the U.S. and you talked about it, in terms of the strategy there is that, do you need to buy something from US, or can you build it?
Well, there's one of two options. And we're looking at both possibilities, that it won't be a sizable acquisition in terms of $1 amount. But, you can either buy teams of people or you can buy an existing business. We're looking at both. And I think it's too early to come to a definitive decision on that other than, you know, we're talking about an internally, we talked to our board about it, and the US dollar management capabilities important to us, it's important to our customers, and you'll hear more from us.
One other business that we don't talk a lot about is GBM. And I'm hoping you can elaborate on the changes you've made there over the years to make it more resilient to boost the run rate of the earnings power there?
Yeah, well, certainly very pleased with the earnings power of how we structurally repositioned the earnings power of the GBM. And as I said earlier, three consecutive quarters of $500 million plus scenario, it's a very well diversified business. I don't think that that's broadly appreciated.
But if you look at the business, and you – just I'll start with LatAm, since LatAm GBM business last quarter made $182 million. It's rated number one in terms of lead arranger for Latin America in terms of corporate loans. The bulk of those are investment grade, and that business continues to build and grow in Latin America.
So under Jake Lawrence's and James Neate’s leadership, this business is a very good one. We're building out our DCM capability in LatAm. We'd be top five ECM top 10. And our M&A capability is building there too. So we see lots of growth potential for our GBM LatAm business.
The US is also very important to us. Our GBM business in the US, our corporate loan book would be $35 billion plus there, and we're building out – we've made significant investments in people and products there, building out our technology business, our healthcare business, our diversified business. So lots of room to grow in the US fill, lots of room to grow and LatAm.
And then in Canada, we've made in terms of league tables, you can see the terms of DCM, ECM and M&A. We've got great pipelines of business here to do in Canada. Number one in corporate lending, by any measure here in Canada, so we like how we're positioned in the business and important business for us and lots of growth potential.
So we talked about wealth, we talked about GBM, Canadian Banking is next on the list, very strong results for a number of quarters now, including the most recent quarter, commercial loan growth in particular very strong. So, if you don't want to dig into it, what is Canadian Banking doing different than the peers? How would you articulate as…
Well, it's – we're really executing on our strategy and under Dan Rees's leadership, Dan's got a great team and really focused on. We thought we were under index in commercial banking. You and I have talked about that a number of times under index in Quebec for instance, under indexed in British Columbia, if you look at the geographies, so we've added people and continue to build our salesforce, and our network.
So we made good headway in commercial lending, we like that business, equal weight of deposits and loans. That's always a good mix in banking, and there's more room for us to grow there for sure.
Our rental business, our mortgage business is growing nicely and thoughtfully within our risk appetite. Our auto business is back. And we're definitely seeing that in our bookings. And you saw our last quarter numbers. So the Canadian Bank, certainly there's a lot more runway in terms of earnings there.
We like the business very much. We're investing in salesforce, we’re investing in technology. We're investing in our people. So I think we're really well positioned in the Canadian Bank. We've got in November, we put -- we'll put, seen and our Scotia rewards program together, and loyalty programs are very important for our customer base. We'll have more to talk to in the future in terms of loyalty programs. So Canadian bank, a lot of time, a lot of investment and we're starting to see the results in the numbers.
Just to follow-up on that, if we think about the quarters ahead, where is growth going to come from in that Canadian banking business? And specifically, I think, a lot investors focus on fee income in particular.
Yes. And that's a good point. You've seen an increase in fee income. And one thing we're very proud of in the Canadian bank is the partnership between Canadian Bank and Wealth. And our mutual fund sales in the Canadian Bank network in the first three quarters of this year are just under $4 billion. And that's a big number. But it shows you that showing up in the fee income line. And that's shows you the power of partnership, as I mentioned.
And so look, we like the runway of earnings potential in Canadian bank. Right now it's doing very well. Mutual fund sales will continue. Commercial loan growth, lots of room to grow. We're under indexed in some components of that, not just from a geography standpoint, but from an industry standpoint. So lots of room to grow in commercial lending. And then in terms of reso, we're more than holding our own in terms of profitable market share there.
And then now – maybe coming back full circle, we talked a little bit about international talking about it. Again, it was probably most impacted by repositioning. And the question is, what should we look through? What should we look for, through the recovery for the international banking segment?
Well, you know, we're proud of the resilience of our business. It's come back nicely in terms of earnings, and we stated we'd get to $500 million of earnings and we were at 493. So we're essentially there. Keep in mind that FX has cost us about $15 million throughout that timeframe, too. So lots of volatility in FX markets.
But -- our base businesses coming back. Mortgages are strong. Commercial lending is strong. Corporate lending is strong. And the day-to-day retail consumer is coming back. And you know, we've as I said earlier, our earnings in Chile and Mexico are through pre-COVID levels proves on its way back and GDP numbers forecasts continue to get upgraded in each of these countries and rates are rising.
You know, Chile's raise rates 75 basis points last week. Peru will probably go today, somewhere around 50 basis points, I suspect. So that helps our business obviously in terms of earnings power. So internationals coming back and we've got lots of runway in terms of earnings potential in our international business.
You talked about that 500 million targets hitting it. And, you know, just, I know, you talked about -- you'd like to talk about guidance on the Q4 call. But since we're technically -- we're in Q4 here, so I thought maybe we're sitting across from each other, maybe give us a little bit of, sort of, an outlook in terms of what to expect from IB from that perspective, beyond that 500 million target?
Yes, you know, it's -- well, I really talked about that is that -- look its, we're not near our, our earnings potential in International Bank. And, you know, when it hits and runs on a cylinders, shareholders will definitely see that. You'll see that incrementally in Q4, Q1, Q2, Q3, Q4. So, you know, this is a business that can definitely earn $600 million, a quarter, and in a short period of time, and we're well on our way back. And so we feel good about our business. It shouldn't be – a surprise of the Caribbean's lagged a bit here. The Caribbean at least lags a US recovery. And it's – it's really leveraged to the tourism market. Bookings are up. Caribbean’s on its way back. We don't have any significant corporate or commercial loans that we're worried about that we haven't taken care of in terms of our provisioning.
So, it's all about the revenue line. And – and with running our business within our risk appetite. So, we haven't de risked the business. But we've – I like to say, we re-risk the business. And that's by re-risk, I mean, you're running it in terms of what the economic reality today is, and tomorrow, and that consumer went through a very difficult COVID. And, you have to adjust your business accordingly. But as I said, improve we can see credit card bookings coming back, and strong commercial loan growth, corporate loan growth. So, things are coming back.
I want to follow-up on that, re-risking comments that you made. But before that, I know you've talked to a number of times about IB trends mirroring Canada, albeit with a lag. And I was hoping you could go into that a little more in terms of how you see that?
Sure. So that's the same thing we've seen here is that, as we worked our way through the pandemic, mortgage growth was fairly strong, and is building quarter-by-quarter, commercial loan growth was fairly good for the last three or four quarters, as we discussed in the Canadian bank. We've seen the same thing in the International Bank, albeit delayed a quarter or two. So, in Canada, that credit card spend is back and we see the revolving component of that building. You'll see the same thing in subsequent quarters in the international business, albeit delayed one quarter, two quarter, three quarters, depending on what country you're in.
But, you know, Chile and Mexico businesses is very good and Peru is coming back. And that's a function of all the things we've talked about before copper prices have doubled, other commodity prices have doubled. And this has a big impact on – on a smaller economy and we're seeing that.
And like – how you put it in terms of re-risking not de-risking. And just to get a little bit more into that. I don't know, if it's as well understood as maybe it needs to be in terms of the kind of the steps you've taken to re-risk the business session in international business and hoping you could go into a little bit of that through the academic, but even I mean, this is the process that you've initiated even before. So maybe just kind of talk about some of the key – the key highlights and what you want to call?
Well, I know, we're speaking largely to an audience of equity holders. But, the first question I got asked in a – in a – in a ratings review meeting by one of the rating agencies was, what would the bank look like if you still own Thailand, El Salvador, Puerto Rico, and the countries that you saw in the Caribbean. So, those countries would have been dramatically impacted by the pandemic. So whether it was good management or good luck, we're – we're happy we had those repositioning efforts done, and those transactions closed before the pandemic.
So, it's been part of a long term program here to reposition the bank. Focus on our core countries. So Canada, the US, Mexico, Peru, Chile, Colombia and the Caribbean account for over 95% of the earnings of the bank. And that's important to us, in terms of focus, and we think important to – to our equity holders. So in terms of – anybody had to make adjustments throughout the pandemic, countries -- banks here in Canada might have adjusted their credit card. How they adjudicate a credit card during the pandemic. That's what banks do. So when situations are fluid, like you go through a pandemic, there's a bit of re-risking that goes on.
And that's what we did in some countries from time-to-time. But we had to focus to the economic reality. And the economic reality is our consumers were focused because of where the rate structure was, they were focused on possibly buying a new home, just like Canadians were or Americans were, businesses -- commercial businesses needed capital to see them through the other end. And we were there for.
We're running up on time. I thought I could maybe speaking, one question, maybe two. On the Q2 call, the subject of ALM specifically, how you manage rate risk came up. And the question is, how do you gain confidence that the dynamic risk hedging is being done in the right way, in a risk controlled way?
Well, we have lots of controls in place. And, I've had experience in terms of Treasury reporting to me at one time during my career here, and we're very active in terms of how we position the bank, and with all the appropriate controls in place, and pre-pandemic we were fortunate enough.
And we took the view here that the economy globally wasn't as strong as people thought. And we adjusted the position in the bank for declining rates. And that worked out very well for us. Today we're positioned for increasing rates. As I mentioned, that's happening in Chile, it's happening in Mexico, it's going to happen in Peru, and gradually, it will happen in the developed world.
Timing is always difficult to predict. But, we do this with a lot of thought. And GRM is very active in terms of how we position the balance sheets. So it’s done in a very risk controlled fashion. But we're in the risk business. We're paid to have a view and our view on interest rates and how we structure our balance sheet, and our balance sheet, touchwood, we've been on the right side.
Just as a follow-up on that. Do you expect the corporate segment to be an active, contributing -- contributor to Scotiabank earnings on a quarter-to-quarter basis?
Yes. And, it's -- we want all our segments to contribute positively, of course. The other bucket is always more susceptible to swings in terms of, again, as we talked about how you position the balance sheet, investments at the bank, they have from time-to-time, securities gains. Those all have an impact on the other segments. But generally, for sure, we try to run it to produce a profit for our shareholders every quarter.
Maybe that's a good place to stop, Brian. Thank you very much as always and look forward to speaking to you again very soon.
It's been a pleasure. Thank you, Manny.