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The Bank of Nova Scotia (NYSE:BNS) Q4 2022 Earnings Call Transcript

The Bank of Nova Scotia (NYSE:BNS) Q4 2022 Earnings Call Transcript November 29, 2022

The Bank of Nova Scotia beats earnings expectations. Reported EPS is $2.06, expectations were $1.99.

John McCartney: Good morning, and welcome to Scotiabank's 2022 Fourth Quarter Results Presentation. My name is John McCartney. I'm Head of Investor Relations here at the bank. Presenting to you this morning are Brian Porter, Scotiabank's President and Chief Executive Officer; Raj Viswanathan, our Chief Financial Officer; and Phil Thomas, 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 from Global Banking and Markets. Before we start, on behalf of those speaking today, I 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. I will begin with a review of the bank's performance and progress over the course of fiscal 2022, after which Raj will review the financial year in more detail. Phil Thomas, our Chief Risk Officer, will review risk performance. We will be pleased to then take your questions. . Given that this will be my last quarterly call as CEO, I will close off with a few final remarks. The 2022 fiscal year was indeed a year in which the diversification of our businesses by both product and geography allowed us to continue to deliver strong all-bank results. Despite heightened market volatility and rapid monetary response to deal with elevated inflation across our operating geographies, each of our businesses performed well.

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The bank delivered adjusted earnings of $10.8 billion in fiscal 2022 or $8.50 per share, a healthy 8% increase over 2021 and a strong 15.6% all-bank return on equity, both exceeding our medium-term financial targets. Our common equity Tier 1 capital position at 11.5% has us well positioned to continue to support organic growth initiatives while continuing to return capital to our shareholders. Loan growth was robust, up 15% with deposit growth of a commensurate 15%, which is a result of concentrated efforts and strategies to strengthen our core deposit franchise. As Phil will detail, we continue to observe very strong credit metrics across our portfolios despite the inflationary pressures that have been a reality for businesses and households alike over the course of the past year.

Our full year PCL ratio was well within our guidance of 25 basis points provided at this time last year. Strong underlying fundamentals and our higher-quality secured exposures have us confident that we will deliver against our previously provided expectations in the coming year. Specific to Q4 results, adjusted earnings of $2.6 billion or $2.06 per share represented a solid finish to the year. Canadian Banking delivered earnings of $4.8 billion, a very strong 15% increase over the prior year and more notable progress against strategic initiatives in support of future growth. Our Business Bank, which includes our commercial, small business and Roynat franchises, delivered another strong year in 2022. This business has been a key driver of Canadian Bank performance, and we are particularly pleased with the important role that our team has played in helping commercial clients expand their businesses post the pandemic and the strong funding profile that this business provides the bank.

This year's launch of Scene+ is another example of our ongoing efforts to further deliver value to our retail customers. The addition of Empire Company to the partnership and the inclusion of its brands, including Sobeys and IGA to the program, have added flexibility to earn and redeem points on everyday grocery in addition to banking, entertainment, dining and travel. The Scene+ relaunch has resulted in more than 1.2 million new members joining the program, which now totals over 11.2 million Canadians. And we continue to see strong performance at Tangerine, Canada's leading digital bank. Tangerine grew deposits by over $4 billion this year and continues to grow assets through a focused strategy to become an everyday bank of choice for value-oriented Canadian consumers.

Our Global Wealth business showed strong resilience in fiscal 2022, generating earnings of $1.6 billion despite the revenue impact of softer financial markets on fees, in the asset management business. Expenses continue to be well managed. Market share gains and strong investment results in dynamic funds provided some offset to the AUM impact of lower fixed income and equity markets during the course of the year. On the advisory side of our business, double-digit growth led to record results in each of our private banking, ScotiaMcLeod and Private Investment Counsel channels. We continue this year to build and introduce new digital tools and platforms to enhance the customer investment experience, including Scotia Smart Investor and Scotia Smart Money by Advice+, as well as a new generation of our iTRADE mobile app.

Our Global Banking and Markets business had a solid finish to the year in Q4, resulting in earnings of $1.9 billion for the fiscal year, down a respectable 8% year-over-year in a very challenging period of market conditions. Our GBM business in Latin America reported in the International Banking segment continued to show strong momentum, delivering record Q4 and annual earnings contribution of $232 million and $809 million, respectively. And rounding out our GBM strategy, our business in the United States has also grown significantly with earnings up 11% in the fiscal year. Our International business delivered significantly improved fiscal 2022 earnings of $2.4 billion, up 37% from the prior year, a result of stronger loan volumes, expanding margins and impressive expense management, while also benefiting from a lower tax rate.

Our IB retail businesses performed well and continued to benefit from the efficiencies that resulted from our continued efforts to further digitize our platform. Our Caribbean businesses performed well delivering earnings in the quarter of $110 million, up 42% year-over-year and has been -- the Caribbean unit is back to a more normalized level of contribution. Our results this year clearly reflect solid contributions across our businesses and the ability to absorb periods of volatility as evidenced by the challenging conditions faced by our market-sensitive businesses in recent quarters. Turning to our outlook. Global growth prospects have clearly been impacted by the central bank score on inflation, and affected our various operating geographies in different ways and at a different pace.

Central banks in Canada and the United States appear to be nearing the end of their tightening cycles as inflation finally appears to be slowing. In Canada, the economic growth is moderating, but economic levels of activity remained robust. The strength of our labor market and strong balance sheet, along with robust commodity prices, are providing a counterbalance to the impact of a less blunt European and Asian economic environment. In the Pacific Alliance countries, growth is moderating from its recent pace that's seen over the past year. Central banks in our key Latin American economies have responded early and aggressively to inflation with orthodox monetary policy. And despite this, we have not seen any meaningful reduction in capital sources in the region.

We are confident that this decisive action will allow most central banks to hit terminal rates soon and allow others to ease during fiscal 2023. The bank continues to be recognized for industry excellence throughout our footprint. We were again recognized as Bank of the Year in Canada for the third year in a row, and Investment Bank of the Year for the Americas by The Banker and Best Bank in Canada by Euromoney. Fiscal 2022 was also a year of great progress on our commitments to the environment and the communities in which we live and work. We have now mobilized a total of $96 billion of client-related financing, up from $58 billion last year, putting us well on track to achieve targets communicated in our inaugural Net-Zero Pathways Report published earlier this year.

Since launching ScotiaRISE, our $500 million 10-year community investment commitment, we have partnered with more than 200 non-profit organizations and made more than $60 million in community investments globally, creating opportunity for hundreds of thousands of people in communities where we live and work. And our Scotiabank Women's Initiative continues to grow. Our capital deployed to women owned and women-led businesses grew to $5.6 billion, against our target to reach $10 billion by 2025. And finally, one of my proudest moments as CEO. Just last month, we were recognized as one of the top 25 World Best Workplaces by Great Place to Work Institute, the only Canadian headquartered company and the only bank to be recognized in the field. Overall, we are very pleased with our financial results and progress on many strategic growth initiatives over the course of the past year.

And with that, I'll turn the call over to Raj.

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Raj Viswanathan : Thank you, Brian, and good morning, everyone. This quarter's net income was impacted by certain adjusting items of $504 million after tax or $0.43 of EPS at about 2 basis points on our common equity Tier 1 ratio that was recorded in the other segment. This consisted of a $66 million restructuring charge relating to the realignment of certain GBM businesses in Asia and ongoing technology modernization, $98 million of support costs relating to the expansion of our Scene+ loyalty program and a $340 million currency-related loss resulting from the sale of investments in associates in Venezuela and Thailand, as well as the wind down of operations in India and Malaysia. All my comments on the bank and the other segment that will follow will be after adjusting for these items.

So starting on Slide 5 on fiscal 2022 performance. The bank ended the year with adjusted diluted earnings per share of $8.50 and a return on equity of 15.6%, both exceeding our medium-term objectives. Revenue was up 2% and expenses increased 3%, resulting in negative operating leverage for the year. Our business lines, particularly our P&C businesses, had strong performance. Canadian Banking earnings increased 15%, while International Banking earnings increased 37% on constant currency basis. Global Wealth Management earnings of $1.6 billion were down a modest 1% year-over-year as higher net interest income and brokerage revenues were offset by lower mutual fund fees, driven primarily by market conditions and higher volume-related expenses.

Global Banking and Markets reported earnings of $1.9 billion, down 8% compared to fiscal 2021. Solid business banking performance, including strong loan growth momentum, was offset by weaker capital markets performance in which the industry faced challenging market conditions. The bank's earnings in 2023 are expected to benefit from higher interest income and noninterest revenue, but be impacted by higher funding costs, higher expenses, normalizing provisions for credit losses relating to the end of performing along its releases and a higher tax rate in both Canada and certain international countries. Once rates stabilize, the bank is expected to benefit from asset repricing, resulting in net interest margin expansion. The bank's capital and liquidity position is expected to remain strong in 2023.

I'll now review the performance for the quarter on Slide 6. The bank reported solid quarterly adjusted earnings of $2.6 billion and diluted earnings per share of $2.06 and the return on equity was 15%. All-bank pre-tax pre-provision profit increased 2% year-over-year, impacted by the other segment as the pre-tax pre-provision profit of the four business lines in aggregate increased 7% as detailed on Slide 25. Revenues were up 4% year-over-year as an increase in net interest income of 10% more than offset a decline in noninterest revenue of 3%, mainly driven by lower Wealth Management revenues lower unrealized gains on non-trading derivatives and lower income from associated corporations. The net interest margin declined 4 basis points quarter-over-quarter, mainly driven by the increase in funding costs due to the velocity of administrative rate increases.

The impact of the Canadian Banking net interest margin of 3 basis points was partially offset by the 13 basis points expansion in the International Banking, which benefited from asset repricing. The PCL ratio was 28 basis points for the quarter, up 6 basis points from last quarter. Year-over-year adjusted expenses increased by 6%, driven by higher personnel costs and performance-based compensation and spend to support business growth. The productivity ratio was 53.7% this quarter, while the whole year operating leverage was negative 1.1%. Slide 7 provides an evolution of the common equity Tier 1 ratio over the quarter as well as the quantitative changes in risk-weighted assets. The bank reported a common equity Tier 1 ratio of 11.5%, up 10 basis points from last quarter, primarily from strong earnings net of dividends that accreted 21 basis points.

Risk-weighted assets grew $9.6 billion in the quarter, mostly related to foreign exchange. Excluding the impact of FX, loan growth was $6.1 billion. Combined with positive migration, the CET1 ratio benefited 2 basis points. The impact of higher rates on the bond portfolio held for liquidity purposes and fair value through OCI had a 14 basis points impact on the CET1 ratio this quarter. Our priority remains to deploy capital to support organic growth initiatives in each business line while prudently managing capital in the face of a less certain economic outlook. Turning now to the business line results beginning on Slide 8. Canadian Banking reported earnings of $1.2 billion, a decrease of 5% year-over-year, while pre-tax pre-provision profit grew 10% year-over-year, driven by revenue growth of 11%.

Net interest income increased 13%, as loan and deposit growth continued, while the net interest margin declined 3 basis points since Q3 as lower spreads, in particular the prime CDOR compression, the lag on fixed rate asset repricing and lower mortgage prepayments were partially offset by higher deposit spreads. As expected, quarter-over-quarter mortgages grew a modest 1%, but increased 11% compared to the prior year. Business loans grew a strong 25% compared to last year. Deposit growth during the quarter was strong at 7% year-over-year, driven by an 8% increase in personal deposits and a 6% increase in non-personal deposits. Noninterest income increased by 3%, due primarily to higher banking revenue and foreign exchange fees, partially offset by lower mutual funds distribution fees.

Expenses increased 12% year-over-year, driven by higher technology and personnel costs to support business growth. The segment generated positive operating leverage for the year of 1.5%. The PCL ratio was 15 basis points, an increase of 6 basis points compared to the prior quarter or 25 basis points compared to the prior year. Canadian Banking revenue growth is expected to be driven by deposit and loan growth with stable margins while mortgage growth is expected to decelerate. The segment will maintain strong expense discipline to generate positive operating leverage. 2023 earnings are expected to be impacted by normalization in provision for credit losses and a higher tax rate. Turning now to Global Wealth Management on Slide 9. Earnings of $368 million declined 6% year-over-year.

Revenue declined 4% due primarily to lower fee income driven by lower assets under management and iTRADE volumes, partially offset by higher interest income driven by strong loan growth and improved margins. Expenses declined 3%, driven by lower volume-related expenses, while the productivity ratio this quarter was 61.2%. The wealth business line has generated positive operating leverage in 10 of the last 12 quarters; and adjusting for performance fees, generated operating leverage of positive 0.8% for the full fiscal year. Assets under management decreased 10% to $311 billion, while assets under administration decreased 3% to $580 billion, primarily due to market depreciation. Despite a challenging market environment, we continue to be ranked #2 by assets in the Canadian retail mutual fund industry.

Investment returns have been strong across Scotia Global Asset Management with 72% of assets in the top 2 quartiles over a five-year period as of October. Dynamic Funds is ranked #3 among independent asset managers with 87% of assets in the top 2 quartiles over a five-year period. We also saw strong growth in our key international markets with double-digit earnings growth across the Pacific Alliance Wealth Management businesses. Global Wealth Management expects modest revenue growth, and we'll continue to invest in the business while remaining focused on managing expense growth in line with revenue growth. Earnings are expected to remain stable in 2023, reflecting the slowing economic backdrop and a higher statutory tax rate. Turning to Slide 10.

Global Banking and Markets generated earnings of $484 million, down 4% compared to the prior year, but up 28% compared to the prior quarter. Results were driven by strong loan and deposit growth as loans grew 31% year-over-year while deposits grew 12%. Revenue increased 15% as net interest income grew 35%, driven by strong volume growth and expanding margins. Noninterest income grew 6%, as higher banking revenues was partially offset by weaker primary and secondary markets. Capital Markets revenue was down 9% from last year. However, it rebounded 19% from the prior quarter. Expenses were up 18% year-over-year, due mainly to personnel costs and technology costs to support business development and the negative impact of foreign currency translation.

GBM and Latin America, which is reported as part of International Banking, reported record earnings of $232 million, up 29% year-over-year with particularly strong results from Chile and Brazil. Global Banking and Markets are expected to deliver earnings growth in 2023. Through the Americas strategy, the segment continues to deepen client relationships while also adding new clients. Capital Markets results are expected to improve, driven by more favorable market conditions and increased levels of client activity. The segment plans to deliver on disciplined expense management that is expected to result in positive operating leverage to more than offset any increase in provision for credit losses. Slide 11 highlights this quarter's strong International Banking results.

My comments that follow are on an adjusted and constant dollar basis. The segment reported net income of $650 million, up 25% year-over-year. Pre-tax pre-provision profit grew 9% year-over-year with the Pacific Alliance growing 6% and Caribbean and Central America up 18%. Year-over-year, loans grew 12%, with commercial loans also up 12% and mortgages up 16%, while personal loans and credit cards grew 9%. Revenue was up 8% year-over-year, driven by higher net interest margin, strong Capital Markets and Banking fees and partially offset by lower gains in investment securities. Quarter-over-quarter, the net interest margin improved a strong 13 basis points. Assets repriced faster to offset the increase in funding costs and impact from changes in deposit mix.

Provision for credit office ratio decreased year-over-year by 2 basis points to 89 basis points. Noninterest expenses increased 7% year-over-year, driven by business growth and inflationary impacts, partially offset by the benefit from efficiency initiatives executed last year. The tax rate of 13.6% for the quarter and 18.9% for the year benefited primarily from higher inflation benefits in Mexico and Chile. With lower inflation expectations in 2023, the tax rate is expected to return to more normal levels starting in Q1 2023. The segment generated positive operating leverage of 1.8% for the whole year. Revenues in the International Bank are expected to benefit from loan growth and modest net interest margin expansion as a result of the expected stabilization of interest rates and potential rate reductions in the second half of 2023.

Expenses are expected to grow in line with revenue, supported by strong digital progress to deliver positive operating leverage. Earnings are expected to be impacted by normalizing provision for credit losses and a higher tax rate. Now turning to the other segment. We reported an adjusted net loss of $100 million compared to a loss of $35 million in the prior year. Year-over-year, the change was a result of higher funding costs resulting from higher interest rates and asset liability management activities. With that, I'll turn the call to Phil to discuss risk.

Phil Thomas : Thank you, Raj. Good morning, everyone. For fiscal 2022, the bank reported an all-bank PCL of 19 basis points, well within our guidance of 25 basis points. As we look to 2023, we remain confident that our PCL ratio will be in the mid-30s basis point range. This is driven by three key factors: a higher quality customer mix; a more stable and predictable portfolio driven by a higher level of secured lending; and our strong credit and underwriting fundamentals, which position us well for macroeconomic uncertainty. I will now highlight some of the trends we are seeing for the quarter across our portfolios. Despite higher interest rates and inflation, our customers' financial health remains resilient. Canadian retail deposits, on average, are 13% higher than they were in February 2020.

And delinquency of 90-plus days for Canadian retail has been stable at 15 basis points for the last three quarters and roughly half of the pre-pandemic ratio. We remain confident in our Canadian mortgage portfolio. After six rate hikes by the Bank of Canada this year, our Canadian variable mortgage customers continue to maintain high liquidity with approximately 36% higher balances in their deposit accounts compared to fixed rate customers. Our uninsured mortgage portfolio has an average LTV of 49% and average FICO scores of 799. In International Banking, our retail portfolio remains 72% secured versus 65% pre-pandemic. High-quality rated customers also remain at 96% of originations. Portfolio delinquency of 90-plus days increased marginally this quarter by 8 basis points, in line with slowing economic growth but remain well below pre-pandemic levels.

Finally, in Business Banking, we have observed upgrades across the portfolio due to customer performance. Credit quality and liquidity levels remain strong. While Business Banking gross impaired loans are up slightly quarter-over-quarter, they are primarily driven by foreign exchange fluctuations and One Accounts in International Banking. Now turning to PCL on Slide 15. PCLs this quarter were $529 million. This increase in our PCL ratio this quarter to 28 basis points reflects normalizing trends and forward-looking indicators. The increase from last quarter was mainly driven by Stage 3 PCLs up $105 million as delinquency levels rose modestly, primarily in International retail and GBM, though remaining well within our expectations and well below pre-pandemic levels.

Year-over-year, performing PCLs were up, driven by a less favorable macroeconomic forecast and strong portfolio growth. We continue to be focused on high-quality credit originations and diversification across markets as we look to fiscal year '23. Our current allowances for credit losses this quarter were $5.5 billion, up $204 million quarter-over-quarter or an ACL ratio of 71 basis points. Nonperforming ACL increased slightly this quarter as we saw small increases in yield formations and net write-offs primarily driven by International retail and commercial. Total ACL coverage represents about 12 quarters of net write-offs, almost double our pre-pandemic levels. While current macroeconomic environment continues to be uncertain, we remain prudent in building allowances in response to these changing conditions.

Our coverage reflects the quality of our portfolio, strong credit practices and changes to mix. Looking ahead to fiscal 2023, we expect strong credit performance to continue. While pressure from inflation and interest rates will continue to be a factor, we believe our efforts to derisk our portfolio have positioned us well to manage economic uncertainties. For these reasons, our earlier outlook of PCL ratios in the mid-30s basis point range remains unchanged. And finally, I would like to congratulate Brian and thank Brian on behalf of all Scotiabankers globally for his 41 years of service and leadership. Thank you, Brian.

Brian Porter: Thank you. I will now turn the call over to John for Q&A.

John McCartney: Thanks, Bill. We'll now be pleased to take your questions. Please limit your question to 1 and then rejoin the queue to allow everyone the opportunity to participate in the call. Operator, can we have the first question on the phone, please?

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