BNS Bank Of Nova Scotia

John McCartney Head of Investor Relations
Brian Porter President & Chief Executive Officer
Raj Viswanathan Chief Financial Officer
Daniel Moore Chief Risk Officer
Nacho Deschamps Group Head-International Banking
Dan Rees Group Head-Canadian Banking
Glen Gowland Group Head-Global Wealth Management
Jake Lawrence Group Head & CEO
Ebrahim Poonawala Bank of America Securities
Gabriel Dechaine National Bank Financial
Scott Chan Canaccord Genuity
Paul Holden CIBC
Doug Young Desjardins Capital Markets
Nigel D'Souza Veritas Investment
Mario Mendonca TD Securities
Lemar Persaud Cormark Securities
Darko Mihelic RBC Capital Markets
Sohrab Movahedi BMO Capital Markets
Call transcript
John McCartney

Good morning and welcome to Scotia Bank's 2021 Third Quarter Results Presentation. My name is John McCartney, Head of Investor Relations at Scotia Bank. Presenting to you this morning is Brian Porter, Scotia Bank's President and Chief Executive Officer; Raj Viswanathan, our Chief Financial Officer; and Daniel Moore, our Chief Risk Officer.

Following our comments, we'll be glad to take your questions. Also present to take questions are the following Scotiabank executives: Dan Rees from Canadian Banking; Glen Gowland from Global Wealth Management; Nacho Deschamps from International Banking; and Jake Lawrence and James Neate from Global Banking and Markets.

Before we start and on behalf of those speaking today, I will refer you to Slide 2 of our presentation which contains Scotiabank's caution regarding forward-looking statements. With that, I will now turn the call over to Brian.

Brian Porter

Thank you, John and good morning, everyone. The bank's third quarter results announced earlier this morning reflect an acceleration of growth led by our Canadian P&C and Global Wealth businesses supported by strong earnings progression in our international business against improving economic conditions and a more positive outlook across our footprint. Canadian Banking posted double-digit top line revenue growth backed by strong mortgage and commercial lending activity, favorable credit quality trends and generated positive operating leverage. Global Wealth Management delivered another strong quarter, driven by broad-based growth across our businesses and geographic footprint. Canadian Wealth Management earnings grew 20%, delivered double-digit revenue growth with strong contributions from all channels across our advisory and asset management businesses. Global Banking & Markets delivered it's third consecutive quarter of earnings in excess of $500 million in the face of a more normalized market environment. International Banking earnings continued to improve with earnings approaching pre-pandemic levels. Earnings in Mexico and Chile are ahead of pre-COVID levels with good secured retail and corporate and commercial asset growth. In summary, our diversified business platform produced good earnings growth, positive operating leverage year-to-date and an improving all bank return of equity. Capital levels remain strong.

Our common equity ratio of 12.2% is 80 basis points higher than it was entering the pandemic. That amounts to over $3.2 billion of additional capital compared to Q1 2020.

Our results this quarter reflect the benefits from our continued investments in our businesses and our commitment to our customers has positioned us well to respond to and capitalize on the economic rebounds in the markets in which we do business. Investments in the future of our bank and the communities we serve gain notable recognition again this past quarter, particularly as it relates to our efforts to digitize the bank. Scotiabank was recognized as the most innovative in data by The Banker's Global Innovation and Digital Banking Awards in 2021, highlighting our use of data analytics to identify and support our most vulnerable customers in challenging times. Autonomous Research also recently moved Scotiabank to the top quadrant standing in it's annual digital leaders and laggards in global banking study, recognizing banks that have progressed above peers in digitization.

We have remained committed to our growth initiatives throughout the pandemic period.

Our sustained investment in our people and technology have clearly positioned us well to benefit from the resurgence of activity as economies and specific business segments recover.

Lastly, the bank remains committed to our sustainability initiatives. Recently, Scotiabank was awarded four recognitions from Global Finance Magazine for sustainability including a global award for outstanding global leadership and sustainability transparency. With that, I'll turn the call over to Raj to discuss the quarter in more detail.

Raj Viswanathan

Thank you, Brian and good morning, everyone.

Before I begin, I'd like to note that all my comments are on an adjusted basis for the bank and our business lines.

As I did in the past few quarters, I will refer to quarter-over-quarter performance in many areas, given the economic impact of the pandemic in 2020. I will also report the numbers excluding FX in many areas as this has an important impact to the year-over-year comparables. We've added Slide 37 which discloses the impact of FX to key income lines. I will begin with a review of all bank performance for the quarter on Slide 5. The bank reported another strong quarter of earnings growth. Year-to-date, the bank has exceeded all it's medium-term objectives of ROE, EPS growth and operating leverage while maintaining strong capital levels. Total earnings were $2.6 billion and diluted EPS was $2.01 for the quarter, an increase in EPS of 93% year-over-year and 6% quarter-over-quarter. All operating segments reported strong results against this quarter, reinforcing the strength of our diversified platform. Return on equity improved to 15.1% from 14.9% last quarter and year-to-date, our return on equity is 14.8%. Pretax pre-provision earnings declined a modest 1% year-over-year. Quarter-over-quarter, all four business lines reported pretax pre-provision growth. Revenue increased 1% year-over-year or up 5% excluding the impact of foreign currency translation. Revenue was in line with last quarter as strong performance from operating segments was offset by lower investment gains in the other segment. Non-interest income increased 3% or up 7%, excluding the impact of foreign currency translation driven by higher banking fees and wealth management revenues. Quarter-over-quarter, non-interest income was flat as higher wealth management revenues were partly offset by lower investment gains, trading revenues and income from associated corporations. Net interest income was down 1% or up 3%, excluding the impact of foreign currency translation, driven by strong loan growth. Core banking margin has remained relatively stable for the past four quarters and is up 13 basis points year-over-year. The margin declined a modest three basis points this quarter, driven by business mix changes with continued strong secured retail and business lending growth. The PCL ratio continued to decrease, falling to 24 basis points for the quarter, representing a decline of 112 basis points year-over-year and 9 basis points quarter-over-quarter. This improvement reflects the more favorable credit quality and macroeconomic outlook across the footprint.

We continue to manage expenses prudently, while investing in our businesses to support future growth.

Excluding the benefits from foreign currency translation, expenses increased 3% quarter-over-quarter, reflecting higher personnel and technology costs that support business growth, professional fees and the impact of three additional days in the quarter. Year-to-date expenses are in line with last year, excluding the benefit from foreign currency translation. On an adjusted basis, the productivity ratio was 52.5% this quarter compared to 51.4% a year ago, while operating leverage was a positive 1.6% year-to-date. Quarter-over-quarter loan growth was strong with mortgages growing at 4%, business loans at 2%, while personal and credit cards were flat, adjusting for the impact of foreign currency. On Slide 6 we provide an evolution of our CET1 capital ratio over the quarter. The bank reported a strong common equity Tier 1 ratio of 12.2%, a modest decrease of 10 basis points from Q2 but an increase of 90 basis points from 1 year ago. Internal capital generation of 21 basis points was driven by strong earnings, offset by increased risk-weighted assets from solid secured retail and business lending growth across the businesses.

This quarter, the capital ratio was also impacted by the increase in the SVaR multiplier and the closing of the transaction that increased our stake in our Chilean business by 7% or 22 basis points.

Turning now to the business line results beginning on Slide 7; Canadian banking reported very strong earnings of $1.1 billion, up significantly year-over-year and 16% quarter-over-quarter. The earnings were underpinned by a continued rebound in revenue growth, favorable credit quality trends and operating leverage about 3% for the second consecutive quarter. Pretax pre-provision earnings grew 15% year-over-year and 9% quarter-over-quarter to over $1.5 billion.

Solid volume growth across assets and deposits and higher fee income were partly offset by modest margin compression. Revenue increased 12% year-over-year and 7% quarter-over-quarter from strong growth in non-interest revenue that grew 11% quarter-over-quarter, driven by higher deposit and mutual fund fees and an increase in card fee revenues. Net interest income grew 5% quarter-over-quarter as a strong growth in mortgage and deposit volumes more than offset the modest margin compression. Residential mortgages grew 10% and business lending grew 7% year-over-year, in line with the strategic priorities of the business. The net interest margin declined three basis points since Q2 to 2.23% from strong growth in mortgages and commercial loans, while higher-margin unsecured lending balances were flat. Expenses increased 8% year-over-year and 3% quarter-over-quarter in line with higher revenues in both periods, primarily driven by higher personnel costs associated with the growing sales force and technology cost to support business development. The year-to-date operating leverage remains strong at 2.3%. The PCL ratio decreased to 7 basis points which is 78 basis points lower year-over-year and 9 basis points lower than Q2.

Turning now to Global Wealth Management on Slide 8; earnings of $397 million were up a strong 19% year-over-year and 5% quarter-over-quarter as the strength of strong fee-based asset growth and brokerage revenues continue, though this was partially offset by higher volume-related expenses. Revenue grow was 19% with non-interest expenses growing 17%. Global Wealth Management delivered it's seventh consecutive quarter of positive operating leverage. The year-to-date operating leverage is a positive 3.7%. Canadian Wealth Management continued it's strong growth once again, up 20% year-over-year with broad-based growth across all business lines. This was the tenth consecutive quarter of double-digit earnings growth for this business. International Wealth also grew a strong 25% year-over-year on a constant dollar basis. AUM and AUA both increased 17% to $344 billion and $587 billion, respectively, driven by positive net sales and market appreciation. Of note, year-to-date, we continue to hold the number two position amongst the banks in retail mutual fund sales in Canada.

Moving to Slide 9; Global Banking and Markets. Global Banking and Markets generated strong earnings of $513 million this quarter, down a modest 1% from Q2. This is the third consecutive quarter for GBM with earnings in excess of $500 million. Revenue was in line with last quarter, with strong contributions from capital markets and M&A which had it's best quarter since 2014. Year-over-year earnings and revenue were down 14% and 19%, respectively, from a record $600 million earnings in Q3 2020. Year-to-date expenses were in line with the prior year and declined 2% compared to the prior quarter, resulting in a productivity ratio of 49.5%. GBM's operations in Latin America that is reported as part of International Banking, generated earnings of $182 million this quarter which is up 8% quarter-over-quarter and 18% year-over-year, driven by strong performance in capital market businesses in the region.

Turning to the next slide on International Banking; my comments that follow are on an adjusted and constant dollar basis. International Banking reported net income of $493 million, up significantly over the same quarter last year and improving 17% quarter-over-quarter. The business has achieved it's target earnings a quarter ahead of our previous expectations.

While there has been some volatility in the pace of improvement in the economic and business conditions, sentiment remains positive and the forecasted GDP growth for the region has improved over the last quarter. Pretax pre-provision earnings for the business line increased 1% from the prior quarter with revenues up 2%. Pretax pre-provision earnings in the Pacific Alliance were up 4% year-over-year and a strong 8% from Q2. Notably, Chile and Mexico are about pre-COVID pretax pre-provision earnings. Revenue increased by 2% quarter-over-quarter driven by strong growth in non-interest income, benefiting from higher capital markets revenues, insurance services and a longer quarter. Quarter-over-quarter, loan balances were flat with commercial up 1%, mortgages up 2%, while personal and credit cards were down 3%. And in the Pacific Alliance, loans were up 1% quarter-over-quarter. Net interest income declined, primarily, due to net interest margin declining 23 basis points compared to Q2, two-third of which was due to changes in business mix. Mortgages and commercial volumes grew, while unsecured lending balances decreased. Provisions for credit losses ratio declined quarter-over-quarter by 18 basis points to 100 basis points. Expenses increased 3% year-over-year and 4% compared to Q2 as we incurred higher personnel and technology costs. We would note that year-to-date expenses are down 3% compared to last year.

Now turning to the other segment; we reported a modest loss of $7 million. The year-over-year improvement was primarily driven by strong asset liability management activities, lower COVID-related costs that was offset by lower investment gains. Quarter-over-quarter, the earnings were substantially lower due primarily to lower investment gains and income from associated operations. I'll now turn the call over to Daniel to discuss risk.

Daniel Moore

Thank you, Raj and good morning, everyone. I will begin my remarks on Slide 13. I'd like to comment on the credit quality and our lower PCL ratio. The onset of the pandemic, we took an intentionally conservative view as we built allowances in an uncertain environment.

Looking back, we were appropriately conservative, especially given subsequent speed with which the business mix has shifted to secured, the high levels of liquidity driven by government support programs and how rapidly customers have paid down their higher interest revolving unsecured loans. The credit quality of new bookings and the collections performance of the existing book are both improving at a faster rate than we had previously estimated. This has resulted in better credit metrics in recent quarters and moving forward will result in a lower ACL ratio, lower write-offs and sustainably lower TCL ratio.

Our current high allowance levels position us well to be appropriately provided for and to continue to release allowances as we expect credit quality to continue to be strong.

Additionally, our business mix has shifted, driven by market demand, resulting in the Canadian banking retail portfolio increasing to 94% secured and international banking portfolio growing to 73% secured from 66% pre-pandemic and our GBM portfolio remains high quality at 85% investment grade. Delinquencies are also down quarter-over-quarter in all products in both the Canadian Banking and International Banking and Retail portfolios and below pre-COVID levels in both business lines.

Our new organization quality is very high, with new originations in both CB and 5B showing early stage delinquency on low pre-COVID levels.

As you can see on the slide, our GIL and their write-off ratios are declining, impaired loan ratio improved 8 basis points to 73 basis points, reflecting the high quality of our loan books with both Retail and Business Banking contributing to the improvement.

So while GILs have reduced from elevated write-offs, more importantly, net write-offs are also decreasing. The all net-net write-off ratio decreased 62 basis points, driven primarily by lower write-offs in International Banking and Retail.

While write-offs have declined significantly this quarter, write-offs in International Banking remain elevated compared to historical averages as the last of the deferrals age.

This quarter, we saw higher write-offs in Colombia, primarily driven by the expected late-stage delinquencies where the deferral programs expired last December. But overall, the results are trending positively.

As economies recover and customer liquidity remains high and with the strong credit performance across the footprint, we continue to expect write-offs in International Retail to decline to prepandemic levels by next quarter. Meanwhile, writeoffs in Canadian Banking are below pre-pandemic levels largely driven by lower write-offs in our auto and revolving portfolios as the credit quality of our customers remains high and payment trends remain strong. At the all bank level, therefore, we expect the net write-offs to decline to below pre-pandemic levels.

Turning to credit performance on Slide 14 and starting with the balance sheet. The bank ended the quarter with total allowances of $6.2 billion, that's a reduction of over $660 million in the prior quarter and our second quarter of reduction. This was driven by both elevated write-offs reducing our impaired loan allowances and improved credit quality, reducing our performing loan allowances. Consequently, the ACL ratio declined to 96 basis points from 109 basis points last quarter. It's worth noting that if these expected write-offs occur, the overall credit quality of the remaining portfolio improves and we expect the ACL ratio to trend lower next quarter as well. Performing loan allowances declined approximately $450 million. Approximately two-third or $270 million of performing all losses were transferred due to credit migration to impair, while approximately $180 million was released this quarter due to an improving credit performance and a better macroeconomic outlook. Impaired loan allowances declined $179 million from last quarter, primarily due to higher write-offs in International Banking.

Let me now turn to the income statement and provisions for credit loss on Slide 15.

Our total PCLs declined to $380 million. The total PCL ratio was 24 basis points, down 9 basis points from the prior quarter. Impaired provisions were $841 million in Q3, down $351 million from last quarter. The decrease was mainly driven by international retail as credit migration continues to improve. Similarly, impaired provisions for Canadian Retail Banking and Business Banking both declined sequentially.

Turning to performing provisions; we had a net reversal of $461 million in Q3. And as we previously discussed, $270 million of this was driven by credit migration to Stage 3, while $180 million of the reversal represents a release allowance built in prior periods that's no longer required. This reflects better credit quality and the improved macroeconomic outlook. And this represents an improvement in performance versus our prior expectations, driven by several factors that I mentioned previously.

So, let me conclude with a few comments.

Our asset quality remains high and the credit metrics are trending positively.

Our credit performance in the quarter exceeds our prior expectation and we expect this strong performance to continue. The PCL outlook continues to be positive with net write-offs and impaired provisions improving from last quarter's peak and we expect to see further performing ACL releases. These trends are in line with improving economic growth forecasts across our footprint, high levels of liquidity and better credit performance than estimated earlier. I will now turn the call back to Brian for closing remarks.

Brian Porter

Thank you, Daniel. In closing, I'd like to make a few comments and observations before turning it over to Q&A. Reflecting on our results; I am encouraged by the consistency of the progress we have witnessed in each of our business lines to date in fiscal 2021. At the beginning of the year, we stated our anticipation that 2021 would be a transition year towards a return to the full earnings power of the bank, supported by a return to normal PCL levels consistent with the economic recovery. This expectation has played out. Year-to-date earnings for the bank are not only above 2020 levels but are 17% above the same period in 2019, excluding divestitures. To date, in 2021, Canadian Banking has delivered earnings progression at the high end of our expectations. Global Wealth continues to deliver double-digit growth in Canada and internationally with strong performance across all of it's businesses.

Our well-diversified GBM businesses continue to produce growing and stable earnings, capitalizing well on market opportunities. International Banking has recovered to pre-pandemic earnings a quarter ahead of previous expectations. Economic activity in major markets in which we operate continue to strengthen. Fundamentals remain solid with high household liquidity and pent-up demand for a range of goods and services. Low interest rates and a highly stimulative fiscal stance in the U.S. and Canada has resulted in high levels of both individual and corporate liquidity. Incoming economic data continues to meet or beat expectations as the removal of COVID restrictions leads to stronger economic activity. In summary, I am very proud not only of the business results to date in 2021 but continued progress on the growth and efficiency initiatives in each of our businesses that position us well for long-term growth against an always variable economic background. With strong capital levels, the bank is well positioned to both invest and return capital as appropriate in the pursuit of our strategic objectives to generate long-term sustainable earnings growth in the future. That concludes my formal remarks and I'll pass it over to John McCartney for the Q&A.

John McCartney

Thank you, Brian.

We will now be taking your questions. [Operator Instructions] Operator, can we please have the first question?


[Operator Instructions] And your first question is from Ebrahim Poonawala from Bank of America.

Ebrahim Poonawala

I guess just on International Banking. I don't know if Raj or Nacho, who wants to handle this. But if you could talk to us about your revenue growth outlook from here -- from this point on as we look into the fourth quarter and beyond. And if you can talk to us about your assumptions around loan growth in International Banking as well as the margin outlook, Raj, as we are seeing some of the central banks raise interest rates? If you could remind us of the sensitivity of the margin and a little, too, interest rates in that region?

Raj Viswanathan

Yes, sure, Ebrahim. It's Raj, so I'll talk on your margin question and then i'll pass it on to Nacho to talk about asset growth and revenue growth.

So as we look forward, international margins -- international banking's margin was compared to the previous quarters, simply because of business mix, 2/3 of the 23 basis points quarter-over-quarter relates to business mix and the other 8 basis points relates to previous rate cuts that happened through the pandemic.

So, as rate increases start coming back and we expect it to come back and you've seen evidence of it in Mexico, you've seen it in Chile and you've seen it in Brazil, we have seen it in other markets as well in our region. And as expected, they're coming in early. 25 basis points will give us roughly $20 million of earnings in the International Banking business segment. That's going to help both with revenue, obviously but also fall to the bottom line. I'm going to pass the floor to Nacho to talk about asset growth.

Nacho Deschamps

Well, let me talk about revenue and asset growth. I would say it's very important to see the dynamic that is quite different in the Pacific Alliance countries that are rebounding strongly compared to the Caribbean and Central America that is still lagging. Revenues in the Pacific Alliance increased 5% Q-over-Q and PTPP increased 8% Q-over-Q. Even for overall international banking, the increase was 1% in PTPP. Mexico and Chile, as Brian mentioned are well above pre-COVID PTPP and earning levels with very good dynamics and Peru had a significant improvement this quarter, offsetting the lower results in the Caribbean that we expect will improve in the winter as tourism rebound strongly.

In terms of loan growth, we are seeing a strong mortgage and commercial growth, 2% and 1% Q-over-Q, respectively. And in the case of commercial, in particular, spot balances grew 2% in the quarter and we anticipate a solid Q4; what is lagging is unsecured loan balances that declined and this is mainly driven like in Canada by very high liquidity in the markets, particularly in Chile and Peru.

You have information there in our deck. The level of support in Chile in terms of fiscal and early pension disbursements is 35% of GDP.

So there's a lot of liquidity in consumers and that is the delaying the recovery of the unsecured loan.

However, bookings have improved significantly in all retail products and we expect a retail loan growth to resume in Q4.

So these trends, I believe -- I hope answer your question, Ebrahim which I believe the momentum is coming, it's going to be gradual but it's going in the right direction, both in loan growth and in revenue growth, strong in the Pacific Alliance countries and it will come gradually in the Caribbean.

Finally, the economic outlook continues to improve. Since last quarter, GDP for the Pacific Alliance countries now is expected to reach 7.5% compared to 6% last quarter and vaccinations also are accelerating across the region.


The next question is from Gabriel Dechaine from National Bank Financial.

Gabriel Dechaine

Just a clarification, Raj, you said $20 million of earnings from the 25 basis point rate hike that's like -- that's a quarterly figure across the region kind of comment?

Raj Viswanathan

No, that's an annualized number, Gabe, just to be clearer.

Gabriel Dechaine

Okay, sorry. My other question is for Daniel Moore, just a numbers question for me today. Stage 2 classifications.

So the higher risk of the performing portfolio, I guess, that moved up, what is it, 6% or so quarter-over-quarter -- or 12%, sorry? Mostly in the mortgage book, can you -- how much of that was model driven? Is there anything regional or otherwise, that explains that increase?

Daniel Moore

Yes, Gabriel. Thank you for your question. That was really 100% model-driven recalibration of the model. And as you can anticipate because that was mortgage driven, there was really no impact on allowances as results.

Gabriel Dechaine

So by model driven, what was -- is it international? Is it Canada? Is it -- what's the characteristic of the portfolio that caused the increase?

Daniel Moore

It was a recalibration in our Canadian mortgage portfolio but again, no impact on balances.


The next question is from Scott Chan from Canaccord Genuity.

Scott Chan

So on the International Banking side, you kind of reached your fiscal Q4 net income target. And Raj, maybe looking into fiscal 2022 at a high level, what kind of factors would have to be in place for that to be sustainable or even higher?

Raj Viswanathan

Yes. Thank you, Scott.

I think it's a little early to talk about '22 but I'll try to give you a very high-level perspective. International Banking, as you have seen, growing quarter-over-quarter, both assets, earnings and more importantly, including their non-interest revenue across our footprint. That should continue and not to talk a little bit about the asset growth expectations we had, the GDP growth that we're expecting to see, particularly in the Pacific Alliance region.

So the comp for '22 will be fairly easy compared to our Investor Day target of 9% that we talked about for International Banking, simply because of the progression of the earnings that has happened in 2021. And well, the PCM ratio is expected to be positive to previous estimates that we have had, I believe that we should see good earnings growth in 2022 and we'll be more specific in the November call certainly.


The next question is from Paul Holden from CIBC.

Paul Holden

So last quarter, we talked a little bit about the positioning of the treasury book in order to benefit from higher rates broadly. Maybe a quick update there just in terms of if there's been any changes to the gearing?

Raj Viswanathan

Paul, it's Raj. I don't think there's any substantial changes, Paul.

Our view is still that the balance sheet is naturally positioned to benefit from interest rate increases. It continues to show that I think some of the disclosures that we put out in -- consistent with other banks which is 100 basis points.

In fact, you see there's a slight uptick in that based on balance sheet changes and none of which I would call material.


The next question is from Doug Young from Desjardins Capital Markets.

Doug Young

Just on Canadian Banking. I noticed non-interest income was up.

I think it's around 10% quarter-over-quarter. And just trying to get a sense if there's anything unusual in there? What was the key drivers of this? And what's the outlook for that line? Because I know there's a lot of different things in there, like including the Canadian Tire partnership and their contribution and whatnot.

So just hoping to get a little bit of color of what drove it this quarter? And is this sustainable and what's the outlook?

Raj Viswanathan

Sure. I'll start, Doug, it's Raj and then I'll pass it over to Dan, if he's got some comments to add to what I have. Yes, absolutely.

I think Canadian Tire has been quite successful as far as we are concerned. And we're seeing the same trends that you're seeing with Scotiabank. Their portfolio quality is better; we're seeing their loan loss provisions being lower and therefore, our pickup from the Canadian Tire partnership that we have or the 20% ownership we have is positive. Definitely a contributor and I suspect it will be a contributor for a few quarters to come, if they have the same trends that we expect to see in the bank. But I think more importantly, when you look at banking revenues, you look at the Wealth Management revenue that is part of Canadian Bank with the partnership they have with Glen Gowland and his wealth business through the distribution network in the branches. That's a big contributor to the Canadian Banking's revenue as well as we look forward -- as well as we look back in the quarter that has passed.

So, all of it to suggest that when credit card revenues start coming back with the activity continuing to increase and Dan can be more specific on what he's seeing so far. We should expect to see continuous growth in non-interest revenue line next quarter and beyond that as well. Dan?

Daniel Moore

Yes. Thanks, Raj. I'd just add that we made some choices a couple of years ago to grow the commercial business at a faster rate because we are optimistic about the opportunity in the marketplace.

And so you'll see the progression in the NII line also a function of commercial growing at a faster rate. And the final piece I would make is our progress, as Raj mentioned, at working with wealth management has been substantial and we expect that to continue on the investment sales side.


The next question is from Nigel D'Souza from Veritas.

Nigel D'Souza

I just had a quick clarification first. On Slide 15, you noted that your performing PCLs declined to $461 million due to loan migration to Stage 3. I'm assuming you're referring to migration of Stage 2 loans to Stage 1. Is that correct?

Brian Porter

That's lower migrations from performing to non-performing from Phase I, II to III, yes.

Nigel D'Souza

Okay. And if I could build on your expectations for PCLs going forward.

With the low level of impairments you're currently seeing across your portfolio, do you have a sense of how much you would attribute that to fiscal support and ongoing fiscal support versus the reopening and rebound in the economy that we're currently seeing as restrictions are lifted. And could you touch on your expectations for that going forward? How much of the credit environment you see developing from recovery in the economy versus continued fiscal support from governments?

Brian Porter

Thanks for that question. I'll start out and maybe Dan can provide additional context.

I think a number of things have been in play and a lot has changed in the last 18 months. But whether it's through government stimulus or through changing consumer preferences and changing consumer behavior, we've seen a remarkable increase in our deposit balances and that's across our footprint of both Canadian Banking and International Banking. That's led to remarkable consumer liquidity, as we talked about.

So those changes in our provisions are very strongly driven by that changing consumer behavior which has resulted in lower delinquency, lower earning, we see better recovery which has driven improvement on the provisions basis and business mix. That's been a very, very strong driver in that outcome and ultimately, of course, translating through it on a cash basis to those lower write-offs.

So that we think is with us for quite some time. If we look at the excess deposit balances in Canada, they've built up through a mixture of measures over the course of pandemic. And if we see spending go back to pre-COVID levels, the Canadian consumer on our balance sheet has two years of additional liquidity. That gives us a lot of content in our outlook from here. Dan, any additional comments?

Daniel Moore

Just two quick adds. It's Daniel.

First, the reopening was important for getting consumers out and shopping again. Even though the summer is sometimes a slower period in purchase volume. We saw units and dollars grow both on the credit side and the debit side through every month of this quarter which is really encouraging across travel, grocery, in particular, in home improvements.

The other piece I wanted to mention is as we sat here a quarter ago, we were interested in seeing how the automotive book would play out through the summer notwithstanding supply constraints go into the chip shortage, we saw bookings, so new account openings in Q3, up 30% year-over-year in auto.

And so the reopening and the engagement of dealers has been like remarkably dynamic and we're encouraged for the outlook of that book in the next 12 months.


The next question is from Mario Mendonca from TD Securities.

Mario Mendonca

Perhaps we could just follow up on that question around credit card spending. There are a few external sources that would suggest that credit card spending has recovered to 2019 level. And in your credit card revenue number, I'm not seeing that play out. Is that really just a function of the domestic side recovering but international being slow to recover. Could you talk about the difference in that and the difference in those two rules in terms of credit card spending? And if I've got it right, that's what we're seeing here, a really big disparity in performance.

Dan Rees

Thanks, Mario. It's Dan Rees here. I'll start and then pass it to Nacho. In the Canadian-based card book, we've seen fee income, so transaction-driven revenues, rise much faster than I think some of us had expected and we're pleased with that trend and the outlook. The reason revenues in cards aren't where we yet want them to be is consumers have deleveraged that card book.

I think that's true across the street and we don't expect that to resume quite as fast.

So given that the revolving nature of that portfolio is important to generating yield, the revenue mix is heavily impacted by the fact that lending as the source or the use of that card is not yet back to pre-COVID levels. And I'll pass it to Nacho for comments in international.

Nacho Deschamps

Really it's not too different.

We have seen a recovery of billings of credit cards but due to the high level of the liquidity, payments are also higher and revolving balances are lower.

So that's what is delaying the growth in revenue; so that's an offset we see for coming quarters.

Mario Mendonca

You know, what I was referring to there was not so much the balances but just in the other income, the fee line itself, I would have expected to see a better recovery there as spending has been.

So, is spending not really as menacing [ph] the fee line yet?

Raj Viswanathan

Let me see if I can help you, Mario.

I think the card revenues you're referring to is quarter-over-quarter, it's down by about $4 million, what you would have thought would be higher.

I think that's what you're getting to, right, the $181 million to $177 million. Part of it is FX too, Mario but I do think that the spending levels in IB -- and not that it's almost back to where it should be, is just short of where it used to be, so your point is valid on that also.


The next question is from Lemar Persaud from Cormark Securities.

Lemar Persaud

Apologies if this question has already been asked, I had to hop on a bit late here. But my question is for Nacho.

Just on International Banking margins, would it be fair to suggest that this quarter marks the trough for [indiscernible] or is it possible that we could see another decline order from moving forward?

Raj Viswanathan

Lemar, it's Raj. I'll start and Nacho can complement as he sees fit. Yes, I think the right term is trough. The decline to 3.72% give you a little bit of perspective from 3.95%, the 23 basis points quarter-over-quarter, about 15 basis points relates to business mix, Lemar. We've seen growth in commercial and in secured retail and we have seen the 3% decline in the unsecured lending book.

So that's going to contribute to a margin compression, as you can expect.

The other 8 basis points is really the lag effect of rate cuts that happened last year that is assets reprice. And that's the track coming back as interest rates have started increasing in the region. And, we think that with the asset growth answer that Nacho talked about earlier, where he expected to see retail growth start to happen in Q4, we should see the backing of the trend of the reduction in the net interest margin, likely in line with this quarter might be marginally higher, a basis point or so. But we believe that this might be the low point in the net interest margin for international. Anything to add, Nacho?

Nacho Deschamps

No, I think it's because we expect now more balanced growth between commercial secured, unsecured.

So it's going to be relatively stable and there's upside potential to rising interest rates in the markets.

Lemar Persaud

Okay. If I could just squeeze in another follow-up. Would it be possible to see margins in international reflect or return back to the 4.5%-ish range we used to talk about pre-pandemic? Or is there something structural in nature that would prevent that from happening?

Nacho Deschamps


I think there's a structural adjustment in our balance sheet.

Our balance sheet is now much more secured as Daniel mentioned. It has gone secured from 66% to 72% in retail.

So that would -- reduces earning. But it also has a positive offset in our PCLs.

Our PCL ratio is 100 bps which is 35 bps below recovery levels.


The next question is from Darko Mihelic from RBC Capital Markets.

Darko Mihelic

Quick catch to provision earnings is sort of down year-to-date. Question is for Brian. How important is that in your decision with respect to a dividend increase once the regulator sort of removes that restriction. The way I think of it is all banks probably want to give some token increase and that's what I'm expecting. But is it really the predominant consideration pretax pre-provision earnings and therefore, token increase from Scotia? Or is there something else that will help drive the decision and create a bigger increase in your dividend?

Brian Porter

Okay. Darko, thank you for the question. PTPP is the way to look at it. And obviously, good solid asset growth drives good solid earnings growth over time for any bank. But I just -- move back here and reflect on what's happened over the course of the last two years is remember, we took $670 million of NIAT out of the bank in terms of divestitures. We've earned through that in a very short period of time and we're proud of that.

So look, we think that the bank is well positioned for growth across all four businesses.

If you look at the Canadian bank this quarter, great numbers. We've been investing in all of our businesses in terms of organic growth opportunities.

So you're going to see consistent growth out of the Canadian Bank. Wealth Management has demonstrated great earnings growth, number two in mutual fund sales, number two in terms of earnings growth this year and we expect that trend to continue. GBM is a repositioned business.

And sometimes people forget about the scale of the business. But if you take GBM and GBM LatAm, that's the number two capital markets division of our peer group here in Canada.

So a big business that stays within it's risk appetite and is delivering consistent and good earnings. And International Banking, as we've talked about this morning, is coming back, Mexico and Chile are through pre-COVID level of earnings. Peru is coming back and the Caribbean and Central America, as it always happens, lags because there's always a lag between U.S. GDP growth and economic recovery and what happens in the Caribbean because it's so skewed towards tourism.

So kind of a long-winded answer but PTPP is the way to look at in terms of dividend growth. And we feel very positive about the growth rate of the bank going forward, Darko.


The next question is from Sohrab Movahedi from BMO Capital Markets.

Sohrab Movahedi

I wanted to clarify 1 answer and then ask a question [indiscernible] Raj, the 25 basis point rate sensitivity that you gave for the international banking net income after tax, I mean is that basically assuming all of Colombia, Chile, Mexico, Peru were going to bump by 25 basis points. Is that the way to think about it?

Raj Viswanathan

Absolutely. It's a very blunt instrument answer. Yes, exactly, 25 basis points across the footprint.

So you're right.

Sohrab Movahedi

Okay. And that was about $20 million of earnings after tax?

Raj Viswanathan

That's correct.

Sohrab Movahedi

Okay. Glen, I mean, obviously, another good quarter here in the wealth business. Maybe a bit of a tough question to answer but is there any way for you to try and attribute how much of the success that you're enjoying right now? You could tag back to the acquisitions that the bank made a couple of years ago in this space.

Glen Gowland

Yes, I think it's a fair question, Sohrab. I would say that these were great additions. And at the time, we really talked about the cultural fit and how they would become part of our business than they are.

So we're three years down the road, completely integrated. But I think the real story behind the numbers, we're certainly seeing record assets in both those businesses and they're continuing to grow on their own behalf. But the organic growth across our businesses, if I look -- both those businesses are primarily in Canada. If I look across our Canadian businesses, we're seeing a little bit of moderation in trading in the self-directed industry with the nitrate. Outside of that business, every single business, whether it's private banking, investment counsel, ScotiaMcLeod record revenues, asset management businesses are north of 20% year-over-year.

So, I think the real story here is the breadth and that's what's really setting us up for continued growth. And you can continue to reinvest in the business. We're adding more people, mobile apps for iTRADE, all those kinds of things and that's the flexibility that, that P&L gives you to invest for future quarters.

Brian Porter

Sohrab, it's Brian. I just wanted to add to this is that we're obviously extremely proud of our Wealth Management business, if you go down memory lane a bit here, 12 or 13 years ago, it consisted of 1 business and that was ScotiaMcLeod which we're very proud of.

So, we've acquired through acquisition, we've built organically and now we have a business that produces profit in excess of $1.5 billion a year above all bank ROE and we like the business and the business has a lot of growth potential in our international business, more to do here in Canada than the U.S.

So we think Glen and his team have done a great job with the business. It's going to be a growth engine for the bank going forward and really doesn't get the exposure that it's due.


And the next question is from Ebrahim Poonawala from Bank of America.

Ebrahim Poonawala

Just wanted to follow up on International Banking on the expense side. Maybe Nacho, we've thought of IB as having an expense lever as you get some efficiencies from digital investments you made.

Just talk to us around the absolute level of expenses. Do you think that goes down from here? Or is the positive operating leverage going to be a function of just revenue growth rebounding and being coming in at a faster clip versus expenses as we look forward.

Nacho Deschamps

Thank you for your question, Ebrahim. I would look at this expense growth as expected because revenue growth on loans and commercial activity, in general, has significantly rebounded. And as Raj mentioned, this is really stepping up personnel, technology expenses, operational and variable expenses.

So that's why we have an increase this quarter. But as Raj mentioned, year-to-date, our expenses are down 3%. Digital -- the digital dividend we have collected is very significant and I continue to see significant opportunities in the future to continue reducing our expense base as we leverage technology and digital that is really -- adoption is continues to improve at a very high pace, Ebrahim.

Ebrahim Poonawala

Got it.

So expenses net-net should still go lower absent any revenue-driven expense growth. Is that fair?

Nacho Deschamps


We expect the trend to continue going lower.


The next question is from Gabriel Dechaine from National Bank Financial.

Gabriel Dechaine

Another question for Daniel.

You made an interesting comment there to one of the questions about consumer spending, returning to pre-COVID levels and the people have two years of excess liquidity to burn through something along those lines, if you can maybe clarify that statement a little bit. But when I hear that, that doesn't make me think -- well, it sounds good, don't get me wrong but it doesn't -- it raises a question about the rebound in consumer lending that we're -- in international sense like it's going to come back starting Q4, it's going to slowly materializing in Canada but it seems like a big impediment to that outcome. Maybe you can shed some light on this issue?

Daniel Moore

Yes. I'll start and then for our outlook on the I'll pass over to Dan. But yes, indeed, you've seen this in the Bank of Canada disclosures and elsewhere, Gabriel, incredible increases across our footprint and liquidity translated really on the retail consumer side of things.

So demand deposits, checking balances in Canadian retail, up 53% versus pre-pandemic levels. And that's really gone to the people that need it the most.

So you've seen that longtime reductions in our balance overall accounts is about 20%, that's disproportionately to the lower FICO score customers. That's really driving the PCL outlook that we have from here.

So that's been a disproportionate allocation, that's been a good result for the country and for the bank as well. Similarly, in IB, we've had that reduction -- that increase in deposits. Those deposits are up about 20% in net deposits. And that's really been driven by those pension releases in Chile and Peru larger, that's across our footprint.

So, I'll turn it down on the lending outlook. But I think the notable thing there is, well, that increase in deposits has gone to the lower FICO customers.

Gabriel Dechaine


So the demand and notice is going -- is up 53% in Canada, 20% in international and is disproportionately skewed to the lower end of the credit spectrum?

Daniel Moore


Dan Rees

Yes, that's -- Gabe, it's Dan here. That is correct.

I think the main message on liquidity is consumers have options, point one and it's great from a risk standpoint. What we saw through the quarter was consumer lending was strong in every single 1 of our product lines. That's why I took a moment to highlight automotive which clearly matters to our top line. We see the mortgage book continuing to grow from here. Credit card interest earning receivables did grow on a spot basis through the quarter.

So consumers are activating. And I think it will be an interesting year next year when we look at the role that home improvements will play given that the mortgage market will continue to roll on the secured line portfolio.

So, I wouldn't take the kind of deposit position to give you pause for consumer lending returning, quite the opposite. And more to the point and that's why I called out the relationship that we have with wealth management, we are seeing deposit balances move into stickier mutual fund products as well which is clearly great on the fee side and good for consumers.

So thank you.


The next question is from Sohrab Movahedi from BMO Capital Markets.

Sohrab Movahedi

I just wanted to ask 1 of Jake here as well. Jake, another obviously, strong quarter here also in your business.

I think once up on the time, we had talked about maybe GBM having about 75% of it's kind of earnings more stable and durable. But that's when we were talking about $400 million to $450 million of kind of earnings contribution quarterly.

You've been above $500 million. Any updated thoughts as to what the kind of durability of your earnings is and how much of it right now is due to constructive markets? And how much of it is just sustainable going forward?

Jake Lawrence

Yes. Thanks, Sohrab, for the question. We do think this is a $500 million business, plus or minus probably 2025.

We have seen constructive market conditions fade away a little bit as we move through Q3 but we do have a diverse business and we've talked about that before. We've got a very strong lending book. We've made that clear. And we've been focused on growing that outside of Canada. I believe Brian mentioned earlier the great results out of GBM LatAm, as did Raj. And we're continuing to grow that Americas footprint, including in the U.S. If we look at this quarter, the fee line was very strong, buoyed by 1 of our best quarters in M&A since 2014. And as we look out, the stability won't only come from accrual income but it will come from better use of our intellectual capital.

So stronger advisory businesses, ECM, DCM, better cross-sell of that balance sheet into cash management products.

So, we're quite optimistic that this business is repositioned and a great stat that I want to get out there to show the repositioning, our year-to-date earnings are actually higher than pre-pandemic levels in 2019.

So three quarters into this year, we've already surpassed our total earnings in 2019.

So a much more durable business, a much larger earnings contribution from the business, not only within GBM but also in the IB segment and we're quite pleased about the outlook as we move into 2022.


There are no more questions.

Brian Porter

Thank you, everyone.

Raj Viswanathan

Yes. Thank you, everyone, for participating in our call today. On behalf of the entire management team, I want to thank everyone for participating. We look forward to speaking with you again at our fourth quarter results call, where we will also provide our outlook for fiscal 2022. This concludes our third quarter results call. Have a great day.