Prepared remarks
Ladies and gentlemen, this conference is being recorded.
Good morning, and welcome to Scotiabank's Q3 '26 Results Presentation. My name is Meny Grauman, and I'm Head of Investor Relations here at the bank. Presenting to you this morning are Scott Thomson, Scotiabank's President and Chief Executive Officer; Raj Viswanathan, our Chief Financial Officer; and Shannon McGinnis, 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. Aris Bogdaneris from Canadian Banking; Jacqui Allard from Global Wealth Management, Francisco Aristeguieta from International Banking and Travis Machen 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 Scott.
Thank you, Meny, and good morning, everyone. Q3 was a record quarter for the bank as we reported strong earnings across all business lines and exceeded all of our medium-term objectives. We are particularly proud of the fact that we demonstrated our ability to hit our 14% plus return on equity target sooner than we had projected. This achievement was aided by strong markets, but is also the product of strategic repositioning and improved capital allocation that have led to sustainable improvements across the bank. It continues to be driven by our Canadian Banking segment, whose return on equity improved 160 basis points sequentially and hit 19.4% this quarter. We expect to continue to improve the return on equity and close the gap with peers through a steady improvement in our business mix, fee income growth and ongoing productivity gains. We are delivering on our strategic priorities. And although you should expect to see some quarter-to-quarter variability, we don't see 14% return on equity as a ceiling for the bank.
This quarter, the bank reported record earnings per share of $2.28, up 21% year-over-year. We also delivered all-bank positive operating leverage for the tenth consecutive quarter while our CET1 ratio ended the quarter at 13.1% after deploying 23 basis points to organic growth and repurchasing an additional 8.6 million shares in the quarter. Over the past 12 months, we have now returned $8.3 billion in capital to our shareholders through share buybacks and dividends. Our capital deployment priorities continue to be organic growth followed by share buybacks and strategic tuck-in acquisitions that fill a well-defined need. The bank remains focused on deploying accumulated capital in support of Canada's economy including helping fund areas of national importance such as natural resources, critical infrastructure, AI and defense, and we expect to do all of this while maintaining strong capital ratios.
While the trade relationship between Canada and the U.S. is evolving, ever since tariffs were imposed last year, the Canadian economy has proven to be much more resilient than expected. We will continue to monitor developments while supporting our clients and focusing on our strategic priorities. Our business mix continues to evolve across our footprint as loan growth improves in higher returning portfolios and we gather higher quality deposits. In Canadian Banking, commercial loans grew 3% sequentially in Q3 after growing 2% in Q2. Looking ahead, we expect growth to continue to improve supported by investments we are making in verticals where we've been historically underpenetrated, including the mid-market and small business lending where loan growth was up 3% quarter-over-quarter and 10% year-over-year. Credit card balances were up 3% quarter-over-quarter, and we continue to expect that to further improve by the end of the year, helped by growing purchase volumes, which are underscoring the improving quality of our book.
The premium mix of new card acquisitions is now at 45% versus 35% last year. On the deposit side, we've been able to retain over 90% of retail GIC maturities year-to-date. These flows are staying in Canadian Banking, where personal day-to-day and savings deposits grew 1% year-over-year or are moving into retail mutual funds, where net sales of $4 billion year-to-date, up nearly 2.5x from last year. Record revenue in Canadian Banking was helped by the fifth consecutive quarter of margin expansion and continued strong fee income growth as we maintain our focus on growing retail mutual fund, credit card and insurance revenues. At the same time, credit trends are improving, thanks in part to better collection efforts, and we are managing expenses very effectively even as we continue to make substantial investments in frontline sales capacity and technology. We are also seeing improving business mix in our International Banking segment, where retail loans grew by approximately 5% year-over-year.
This growth rate should continue to improve even as growth in our non-retail loan book will remain restrained by design as we continue to optimize our allocation of capital to focus on primary relationships. Our focus on deposits in the region is also working with Q3 deposits up 1% quarter-over-quarter and 6% year-over-year. As a result, earnings remained above the $700 million mark for the third consecutive quarter, led by strong revenue growth of 7% year-over-year. The strategy remains focused on deepening client penetration while further driving efficiencies. Pretax pre-provision earnings in our International Global Banking and Markets business were up 13% year-over-year, helped by our capital markets platform where we're increasingly focused on delivering capital-light higher-value solutions to our clients. In Global Wealth Management, we are continuing to drive connectivity with the rest of the bank and investing in both our full-service advice and discount brokerage businesses.
Net sales for the quarter came in at $3 billion, a record Q3, up 14% versus Q3 2025 and marking our eighth consecutive quarter of positive net flows. Our net sales for the year-to-date are now higher than full year fiscal 2025. Total closed referrals between Canadian Banking and Canadian Wealth Management came in at $14 billion year-to-date, and more specifically, closed referrals between commercial banking and wealth were $4.5 billion or 33% higher than what we reported for the same period last year. In our Global Asset Management business, we ranked third among our bank-owned peers in long-term retail mutual fund sales, up from fifth in the same quarter last year and sixth at Investor Day. And in our international wealth business, we are continuing to scale our total wealth solution across the region, including in the Caribbean and Mexico, where quarter-over-quarter earnings were up 14% and 15%, respectively.
Finally, in Global Banking and Markets, loans were up 7% quarter-over-quarter as growth returns after a period of optimization. Deposits were also up 9% sequentially, helped by positive momentum in Global Transaction Banking. We ended the quarter with the highest quarterly net income on record in Global Banking and Markets as both Global Capital Markets and Investment Banking delivered several marquee transactions for us. These include acting as joint lead and book runner on the 2 largest debt capital markets deals ever done in Canada, our largest asset-backed securities deal since we established our structured credit platform, acting as a book runner on the largest IPO in Canada since 2021 and our first lead left leveraged finance deal. All of this activity speaks to the increasing depth and breadth of our Global Banking and Markets franchise on both sides of the border and the investments we have made in capabilities.
We are delivering strong and consistent results across the bank, while still investing in the future, including in AI, where we continue to advance our enterprise-wide AI agenda with a focus on practical adoption, including training, scalable infrastructure and responsible governance. This quarter, we expanded Scotia Intelligence, our bank's centralized data and AI platform, to launch new capabilities to improve productivity and free up capacity for higher value work. These new advanced features will help our teams collaborate in real time, turn complex information to clear outputs and move from concept to execution faster. With the recent launch of our Scotia Intelligence Knowledge Agents, employees now have access to AI-powered solutions that facilitate easy access to institutional information, enabling faster execution of routine processes, helping them to focus on higher value innovation and client outcomes.
Also this quarter, Scotiabank joined with Lightworks, Sun Life and TELUS to launch the AI Consortium, a collaborative Canadian model designed to help large regulated organizations build and govern the critical control systems required to deploy AI safely. Looking ahead, we are confident that we'll be able to finish the year strong and enter fiscal 2027 with momentum. Our Q3 results are proof that our strategy is working and that we are succeeding in building deeper, more profitable client relationships, both in Canada and across our international footprint through a constant focus on improving business mix, boosting fee income and driving efficiency gains across the organization. I will now turn it to Raj for a more detailed financial review.
Thank you, Scott, and good morning, everyone. My all bank and other segment comps will be on an adjusted basis, which includes the usual amortization of acquisition-related intangibles. The business line results will be on a reported basis. Moving to Slide 8 for a review of the third quarter results. The bank reported quarterly earnings of $3 billion and diluted earnings per share of $2.28. My remarks that follow will refer to the last column on this slide that excludes the impact of divestitures. Return on equity was 14.2% or up 170 basis points year-over-year, driven by strong revenue growth of 16%. Net interest income grew 12% year-over-year as net interest margin grew 18 basis points from higher margins across all business segments. NIM was unchanged quarter-over-quarter as higher margins in Canadian Banking and Global Banking and Markets were offset by lower margins in International Banking.
Recall, International Banking margins had some seasonal benefits last quarter. Noninterest income was up 21% year-over-year, primarily on higher banking and wealth management revenues, underwriting and advisory fees and other fees and commissions and higher income from associated corporations. Expenses grew 14% year-over-year, mainly due to higher performance and share-based compensation related to higher business volume and profitability and higher technology spend to support strategic growth initiatives, which grew 16% to $1.5 billion this quarter. This resulted in pretax pre-provision profit growth of 18% year-over-year. The bank generated positive year-to-date operating leverage of 3.9% and the productivity ratio improved by 90 basis points year-over-year to 52.5%. The average loans increased 4% year-over-year, while deposits increased 5%. Moving to Slide 9. The bank's CET1 capital ratio remained strong at 13.1%.
We generated capital from strong earnings in the quarter, offset by increased lending and underwriting activity. We repurchased 8.6 million shares this quarter, representing 20 basis points of capital usage. The total risk-weighted assets was $493 billion, up $11 billion quarter-over-quarter, excluding FX, mainly related to higher credit risk, including the recall of a synthetic risk transfer transaction. In Q4, certain international banking portfolios are migrating from the standardized approach to the AIRB approach that will reduce our capital ratios by approximately 15 basis points. We expect to absorb this impact and maintain our CET1 ratio of around 13% next quarter. Turning now to the business line results, beginning on Slide 10. Canadian Banking earnings were $1.1 billion, up 12% year-over-year from strong pretax pre-provision earnings growth of 11%, partially offset by higher provision for credit losses.
Loans grew 3% year-over-year, driven by 4% growth in mortgages and 3% growth in commercial and small business loans, while personal loans grew 1%. Day-to-day and savings deposits grew 1% year-over-year, in line with our strategy. However, deposits declined 2% year-over-year, mostly in term. Turning to the P&L. Net interest income grew 7% year-over-year from loan growth and margin expansion. Net interest margin expanded for the fifth consecutive quarter, up 2 basis points sequentially, driven by an increase in both loan and deposit margins. Noninterest income was up 11% year-over-year from higher mutual fund distribution fees, credit card revenues and insurance income. The PCL ratio decreased 8 basis points sequentially to 42 basis points, driven by declines in both performing and impaired PCLs. Expenses were up 5% year-over-year from investments in technology to support strategic growth initiatives, partly offset by the benefit of efficiency initiatives.
The year-to-date operating leverage was 3.7%. Turning now to Global Wealth Management on Slide 11. The earnings of $515 million were up 23% year-over-year as Canadian earnings were up 27% and international was up 4%. Spot AUM and AUA grew 16% and 13% year-over-year, respectively, from market appreciation and higher net sales. Revenues were up 18% year-over-year from higher mutual fund fees, net interest income and brokerage revenues. The expenses were up 16% year-over-year from higher volume-related expenses, sales force expansion to support business growth and technology costs. Year-to-date operating leverage was 2.2%. Turning to Slide 12. Global Banking and Markets earnings was $647 million, up 37% year-over-year. The revenue grew 32% year-over-year as capital markets revenues were up 33% and business banking was up 30%. Net interest income was up 34% year-over-year, primarily due to higher margins and higher client-driven capital markets activities.
Noninterest income was up 31% year-over-year due to higher underwriting and advisory fees and client-driven trading revenue from equities and foreign exchange. Expenses were up 26% year-over-year, mainly due to higher performance-based personnel costs on stronger results and higher volume-related costs, including technology to support business growth. These results were supported by strong loan growth of 5% year-over-year. Canadian loans grew 7% quarter-over-quarter and 9% year-over-year. Deposits also grew 12%, helped by the investments we have made in Global Transaction Banking. Moving to Slide 13. My comments on International Banking are on a constant dollar basis and exclude the impact of divested operations. The segment delivered earnings of $725 million, up 6% year-over-year. Revenue increased 7% year-over-year, with net interest income up 3% while noninterest income increased 18% from higher income from the Davivienda investment, card revenues and insurance income.
Net interest margin of 469 basis points was up 18 basis points but declined 7 basis points from seasonally higher net interest margin in the prior quarter. Deposits were up 6% year-over-year as personal deposits grew 4% and nonpersonal grew 7%. The loans were down 1% year-over-year as non-retail loans declined 7%, while retail loans grew 5%. Operating leverage was 1.9% year-to-date. The PCL ratio declined 28 basis points sequentially to 138 basis points, mainly driven by lower impaired PCLs. The GBM business and International Banking generated earnings of $321 million, driven by strong capital markets revenue growth. The effective tax rate increased sequentially to 21.3% due to favorable adjustments in the prior quarter and changes in earnings mix across our jurisdictions. Looking ahead, Chile announced a reduction in the tax rate by 4% over the next 3 years to 23%. Although this will result in lower taxes in future years, once enacted, it will also require a one-time deferred tax asset write-down in Q4.
Turning to Slide 14. The Other segment net loss was $42 million compared to $35 million of income in the prior quarter due to elevated investment gains in the last quarter. I'll now turn the call over to Shannon to discuss risk.
Thank you, Raj, and good morning, everyone. Our credit performance improved this quarter, with PCLs beginning to decline in line with our outlook for the second half of the year. Against this backdrop, all bank provisions were $1.1 billion or 56 basis points, down 10 basis points quarter-over-quarter. Impaired provisions were $1 billion or 52 basis points, down 9 basis points quarter-over-quarter, driven mainly by lower international banking provisions related to the single corporate accounts we discussed last quarter and better performance in Canadian Retail. Performing provisions were 4 basis points, down 1 basis point quarter-over-quarter, reflecting lower provisions in Canadian and international banking, partially offset by higher provisions in Global Banking and Markets. Our allowance for credit losses increased to $7.6 billion or 97 basis points, up 1 basis point quarter-over-quarter.
Turning to Slide 17. Gross impaired loans increased 1 basis point quarter-over-quarter to 100 basis points, with modest increases across business lines. Overall, GIL formations declined quarter-over-quarter primarily reflecting elevated corporate formations in International Banking and Canadian Commercial in the prior quarter. Turning to Slide 18. In Canadian Banking, provisions were $498 million or 42 basis points, down 8 basis points quarter-over-quarter. In Commercial, total PCLs were down $11 million quarter-over-quarter to $129 million. In retail, total PCLs were $369 million or 39 basis points, down $66 million quarter-over-quarter. Performing PCLs were $24 million, down $10 million quarter-over-quarter, reflecting more favorable forward-looking indicators primarily from lower interest rates and positive credit migration in auto and cards. Impaired provisions in retail were $345 million, down $56 million, driven by lower net write-offs in unsecured lines of credit and lower impairments in auto, reflecting improved delinquency trends from continued collection efforts.
While we are encouraged by the improving trends in impaired provisions, and 90-day delinquency across most retail products, we continue to monitor some pockets of weakness, including elevated mortgage delinquencies. That being said, mortgage clients remain resilient and our overall retail portfolio quality remains strong with an average FICO score of 798. Moving to International Banking. International Banking provisions were $522 million or 138 basis points, down 28 basis points quarter-over-quarter. In Commercial, PCLs declined quarter-over-quarter, driven mainly by lower impaired provisions from an elevated Q2 relating to the one account in Brazil. We continue to work through this account. In this quarter, we took an incremental provision of $57 million and reclassified $14 million related to a derivative exposure from CVA to PCL with no change in the underlying exposure. International Banking retail provisions were also lower quarter-over-quarter, reflecting improved performance in Mexico and improved delinquency performance in Chile across most products.
This was partially offset by higher mortgage impairment in Chile and the Caribbean. In Global Banking and Markets, provisions were $53 million or 18 basis points, up 4 basis points quarter-over-quarter, driven by higher performing provisions from forward-looking indicators and impaired provisions mainly driven by new formations in Canada. In closing, while the delinquency trends are encouraging, we continue to monitor the sustainability of the improvement given continued geopolitical developments, elevated energy costs contributing to increased inflation and persistent trade uncertainty. Our allowances incorporate a range of forward-looking macroeconomic scenarios. This, together with the high quality and demonstrated resilience of the portfolio supports our comfort with current allowance levels and our position in the current environment. With that, I will turn it back to Meny for Q&A.
Thanks, Shannon. Operator, we're now ready for our first question.
Questions and answers
Operator provides instructions to participants on how to ask questions. Your first question comes from the line of Ebrahim Poonawala with Bank of America.
If I could start with the Canadian business segment, it feels like we’re making a lot of progress improving the business mix and growing that business. Year-to-date ROE in that business is about 18% and unchanged. Raj, when you presented at Investor Day you showed an ROE bridge that suggested moving from 18% toward roughly 22 to 23 percent. Is that the right way to think about the business, targeting low- to mid-20s ROE, and if so, what needs to happen over the next year or two for us to get from here to that point?
Aris here. Let me take that question. I think what is happening in business banking is that we have the Commercial segment and the smaller business banking segment. In the Commercial segment, what has been in flight for probably the last 18 months is the increase and buildup of our mid-market segment. We were quite heavy in real estate, and over time we are expanding into mid-market. Year-to-date we've added nearly 700 mid-market clients, up almost 85% year-on-year. These mid-market clients are deposit-rich and higher-margin lending, and that pipeline is building as we leverage the capabilities of GTB, or transaction banking, in that segment. On the mid-market we are also driving a lot of end-to-end process improvement in the commercial bank. In gathering operating deposits, we're up around 3% to 4% across the segment, all contributing to higher ROE over time. Then there is business banking, the smaller part of our commercial segment, where loans are growing double digits consistently quarter-on-quarter and deposits are growing.
We are focused on specialized segments such as health care professionals and accountants, where we are gaining share and margins are rich. You see the ROE there almost at 25%. When you take these two businesses together, we are confident that as our transaction banking capabilities improve we can hit a 20% plus ROE over time. So everything is on a good track.
Your next question comes from the line of John Aiken with Jefferies.
Francisco, I was hoping that we could dive into the outlook for international. I mean, we're seeing, on a sequential basis, loan growth revenues pick up. Do we think that we're at an inflection point or a pivot in terms of the loan growth looking forward? And then secondarily, even though with the revenue growth, we are still seeing expenses remaining reasonably high. Any sense in terms of when that might move into positive operating leverage territory?
Well, thank you very much for the question. This is an important quarter in the sense that it marks the effectiveness of the pivot to growth effort we've been leading for the last 4 quarters. We're now seeing the business growing at 6% year-on-year. And when you look at the underlying business lines are growing substantially higher revenues than what we saw in 2025. And that positions us to the target in 2027 and beyond of growth within the 6% to 8% level on the revenue front. We don't see a reason for expenses to move beyond where we've been, which is around the 4% level. That continues to be materially below inflation. We have been able to capture the power of synergies and scale through the regionalization effort that we implemented in the first 2 years of the transformation, and we see that trajectory stable over time. And we see our ability to drive very important solutions across all markets at scale.
So when you combine those 2, you should see PTPP like you see in this quarter, growing sequentially year-on-year at 8% or above. We are very encouraged with the quality of the new vintages that we're onboarding and the effectiveness and penetration on our GTB business across corporate and commercial. So the combination of those 2 should allow us to see a more stable credit performance going forward that should allow us to deliver double-digit earnings in '27 and beyond. That's the path we're in. And that path is demonstrated by the ROEs that today are sitting north of 16%, and we see that path going forward. So we are very excited by the delivery across all markets and business lines that we've seen so far, and we don't see a change going forward other than consolidating this revenue growth performance that we've seen throughout 2026.
And your next question comes from the line of Gabriel Dechaine with National Bank Financial.
Just sticking with international. On that, you mentioned some conversion of portfolios from standardized to AIRB and that is going to reduce your core Tier 1 by 15 basis points. I'm just wondering why that is. Typically it goes the other way. Is this a one-time change or is there more of that type of transition taking place?
Gabe, it's Raj. Yes, it's one and done. There were certain portfolios we should have converted a few years ago. We've been on a journey to improve our data quality, and in the upcoming quarter we'll convert those portfolios to AIRB. Some of the change reflects the conservatism expected under Basel because the data quality in those countries is not as strong, not because of our portfolio. I expected us to add a level of conservatism to the modeled outputs, which is why capital requirements increase by about 15 basis points. There will be some near-term impact to ROE in the International Banking business because the denominator will increase next quarter, but it's largely complete. After that, our portfolio should grow in line with the new risk appetite Francisco is outlining, and we should begin to see returns improve. ROE should continue to rise, with the adjustment finished by Q4.
Okay. And actually, I'll stick with international and ask about the Global Banking and Markets earnings that are booked in the segment. We're up over 40% of total segment earnings from that source so far this year. Like how intertwined is that business with your personal and commercial bank, if you will, across the region? And what does the ROE look like if that business is not there? I expect quite a bit lower.
Well, thanks for the question. It's a very important one because this is a decision we made, I would say, probably 1.5 years ago, a little more as we continue to try to drive higher earnings and create value for investors, managing capital very smartly. And we decided to build market-leading capital markets capabilities supporting the international footprint. And we've been able to put together an extraordinary team, very aligned by the way, with the global strategy that Travis is also leading in the same space. So what we're doing is really capturing the piece of the wallet we never pursue, and we're seeing fantastic response from our clients. We are now covering the sovereign space, which before we did never covered. Given our very substantial presence in many of these markets, we're covering sovereigns with structured solutions and liability management. And we're participating in domestic capital markets in a way that before we couldn't. So what you saw in this quarter and sequentially year-on-year, you're seeing growth on the revenue front of 40% without necessarily absorbing material capital.
This is also very accretive to primacy within the GBM space because we're now having strategic conversations with clients in a nature that we couldn't have before. So when you see this contribution together with our very strong corporate relationships, now capturing the full space of the wallet, including transaction banking and a deeper relationship on the transactional basis with clients, this is really capturing the full wallet on the GBM space. So we see that as a very powerful development in our business strategy and the carry forward definitely going beyond 2026. So very strong showing this quarter, and we're very excited about the potential of this business going forward.
And the ROE?
We don't break that out, Gabe. Obviously, the ROE between the separate business lines.
Your next question comes from the line of David Konrad with KBW.
Just want to talk a little bit about capital markets. You highlighted in the call, just a really strong quarter, particularly in the IB side with a lot of large deals. So maybe can you talk about like maybe near-term expectations next quarter or so? Is there going to be a little bit of a giveback in that, but also maybe the long-term growth rate with all the investments you made in the business.
Yes, sure. Dave, thanks for the question. I'd be remiss if I didn't say that we were thinking about you and your firm over the next couple of weeks; I appreciate it. If you think about where we are right now, this quarter was obviously a broad-based record quarter for GBM. Looking through the numbers—whether in capital markets or investment banking, loans or deposits—you saw a lot of activity throughout the quarter. Step back and it's very intentional. Over the last two or three years we've been on a journey: deemphasizing some businesses or regions and doubling down on building new products and services and focusing on our core footprint in Canada, the U.S., and the rest of the world. We're trying to build a very durable, broad-based franchise. We feel like we're building a business that's well suited to this environment, where we can offer excellent products, services, and advice to clients navigating a complex environment. Our outlook and pipelines remain quite strong, and I think we're proving quarter over quarter that when markets are constructive we can capitalize on that and service our clients with excellent products and advice.
Your next question comes from the line of Doug Young with Desjardins Capital Markets.
I guess this is for Shannon. Shannon, I think you expected or you talked about impaired PCL rate to be mid-50 basis points in the second half was 52 this quarter, and that included a decent drag from the Brazil loan this quarter again. So I think it's safe to say things seem to be progressing better than expected. Just wanted to kind of get your sense as to what's driving that? And are you sticking with that guidance for Q4? And maybe if you can kind of layer on, obviously, some new tariff announcements here. How does that impact your outlook and your view on credit over the near term?
Yes. Thanks for the question. Maybe I'll start with what informed our outlook at the time, since there were a few items we were monitoring closely. The first was the macroeconomic environment and the uncertainty around it. In Canadian Retail, entry rates and early-stage delinquency were improving, but we were monitoring whether those improvements would be sustained. We also had several collections initiatives still coming online. And for non-retail, we were mindful of the risk of episodic activity given the environment. Since then, there are a few things I would highlight. In Canadian Banking retail, early-stage and 90-plus day delinquency has improved across products, except for mortgages, and our collections initiatives are delivering strong benefits. We also saw deal formations decline in Canadian commercial. Overall, performance is developing largely as expected and our collections initiatives are yielding strong results.
Looking back at our original outlook, our performance is in line with what we said at the time, which was that impaired PCLs would trend down in the latter half of the year, and that is what we are seeing. On tariffs, I think about the issue in a few ways. Clearly, the evolving trade outlook affects our clients and our portfolio and requires active management of that risk. This is a good example of the uncertainties we’re managing: the scope and duration of tariffs continues to evolve, and the ultimate impact will depend on the degree of retaliation, government support, and how consumers and businesses respond. Regarding our exposure, we have been monitoring industries more vulnerable to tariffs since last year, and the latest measures announced represent less than 1% of our total bank loans. In terms of how we are managing these risks, our scenarios and allowances already reflect a range of outcomes, and we will continue to reassess developments as they occur.
To give context, in Q2 of last year we built 18 basis points in performing PCL, and our downside scenarios at that time modeled Canadian tariff rates of 12.5% up to 25% with full retaliation. Our base case today assumes tariffs are implemented and that trade negotiations continue. In short, we are monitoring the situation, we are very comfortable with where we are, and we will continue to reassess as it evolves.
And maybe just, Doug, if I can add a couple of things on the tariff situation. I think it's important to take a step back: the fundamentals in Canada are pretty good. If you look at the job growth numbers, the physical capacity supported by oil prices, and some activity starting because of the Prime Minister's agenda, you have a pretty good backdrop. The tariffs that were just put in place affect 5% of exports. It's a small impact on GDP, around 0.2 to 0.3 percent. At 11:00 today you'll see support programs rolled out by the government for some of the sectors that will be impacted, and there will be select sectors affected. Putting all that together, it obviously creates uncertainty, but with the current tariffs it's manageable. I think we should use this moment as a country to accelerate the Prime Minister's agenda: remove interprovincial trade barriers, shorten approval timelines, get big things done, and continue to diversify trade while maintaining our strong trade relationship with the U.S. The U.S., as you saw from Travis' business, is doing quite well. So all things considered, there is uncertainty, but it feels like a manageable situation for the country and for the North American corridor as well.
Appreciate it. And then just a second question, ROE is at 14% or adjusted ROE top of house 14%. I think that's your target and if you're targeting that for next year, so a little earlier than expected. I guess my question is like is there any structural reason why this bank can't be a 15% plus ROE bank? And like what takes you from where you are to that 15% plus?
Yes. Listen, I think we're very pleased, and I want to thank all Scotiabankers for the efforts they've put in place to get to our targets prior to where we thought we were going to, and that's the 14.2% this quarter. There is more opportunities for sure. And if you think about the Canadian bank, which maybe Aris will expand on later in the call or after this, we see a significant opportunity to continue that progression. And that is up 160 basis points year-over-year. It's on the back of the business mix strategy we've put in place. And we're just getting started. We are just getting started in Canada. And over the last couple of quarters, you've seen these green shoots. And this quarter, you're starting to see more than green shoots. And that is going to be the biggest driver of the ROE improvement of this bank over the next journey. So maybe Aris, just talk a little bit about Canada.
Thanks, Scott. So as Scott talked about earlier in the call, there's 4 components to our what I call ROE expansion strategy, and we laid it out during Investor Day. And you see in this quarter and the last progress translating into the P&L. On the business mix, we've talked about it many times, non-mortgage lending now is accelerating and actually pass mortgage growth in the quarter for the first time in 2 years, and we see that in the card book, the business banking book, ULOC and commercial, and that should continue. You see also the second component on the business mix is on the deposit side, more day-to-day, more savings, that will continue. The other big component of our capital heavier businesses in auto and mortgage is the improvement in RAM, and we're seeing that. Also, as we renew the mortgages, you're going to see the RAM lifting, and we saw that in the quarter as well, a big increase in RAM.
And then fees, we've talked about the big components of fees, cards, insurance and mutual funds, all grew over 20% increase in revenues this quarter. That's significant. And the near overall was double-digit despite the impact of NSF fee regulation changes, which impacted, but we still came in double digit. And then finally, we shouldn't forget productivity. We've had 5 consecutive quarters of margin expansion. Where is that coming from? We haven't grown direct costs in 12 months. So year-on-year, the direct cost base for the Canadian bank has been flat. That said, we've added over 500 salespeople and continue to invest in digital, AI and technology enablement. This quarter, actually, digital sales passed 44% of total sales. That's almost double what we had during the Investor Day. So we're making huge progress on that. And of course, we can't ignore the power of the network and what we're doing on the sales side in mutual funds. And I think it's important also to pass to Jacqui to give a bit of color on the progress we're making just in the sales power in the network.
Yes, sure. Look, when I think about retail fund flows, Aris, we've made significant progress on both an absolute and a relative basis. It's not an anomaly; we're ranked number three for the quarter. We're also number three on a year-to-date basis with over $4 billion in retail fund sales. Rankings are nice, but our confidence really comes from the underlying operating improvement. The drivers are right in line with the strategy we laid out: stronger execution of our partnership with Canadian Banking, multiyear investments in advisers, investment specialists, financial planners and technology, as well as better coverage in our wholesale channel. The last thing I'd say is we still have so much opportunity. We've dramatically improved our penetration of the retail client base since Investor Day. We're currently sitting at around 11.6% and we think 15% penetration is absolutely achievable in this business.
Your next question comes from the line of Paul Holden with CIBC.
On GBM, there was very strong sequential loan growth of 7%, which is by design. Can you discuss what a reasonable run rate would be, since 7% is probably not sustainable? Also, it looks like loan growth is coming with deposit growth, which was even stronger—can you explain how the two are tied together as part of the strategy? And should we expect fee income to increase along with those wholesale loans?
Yes. Paul. Paul, it's Travis. Thanks for the question. And I think you're right. I think a couple of quarters ago, I mentioned that we might be at an inflection point where we thought loans would bottom out. And if you look at the investments we're making in our franchise, we're investing across sectors. We're deepening into sectors where we're already strong. We're well positioned for the current environment. And I think our loan book is reflecting that. In addition, we've been building out new products and services, as I've mentioned before, whether it's mortgage capital markets or CRE or other subsectors. And I think you're starting to see those businesses taking off. And I think loan growth is really just a reflection of the economic output and the focus that we have on our clients, it's not a KPI that we're trying to drive. I mean we're not out there just trying to grow loans to grow loans.
We're looking at covering our clients, providing great products and services and using our capital and our liquidity as efficiently as possible, and we're highly focused on the velocity of our capital. So if you look at some of the data you will see that our return per risk unit are up significantly. You can see that our fees per loan unit are up significantly. And so we're picking the right clients. We're banking those clients. We're providing all the products and service to those. And I think loan growth will be an outcome of that strategy. On the deposit side, you're absolutely right. That is very, very intentional. We are super, super focused on deposits. Anything and everything we do is really trying to capture those core operating deposits in connection with Francisco on the GTB build-out. We're investing heavily there. And we are looking to continue growing that business. And I think one of the things you'll notice that our net interest margin was up 30-something basis points year-over-year. So we've been able to grow deposits, grow loans and expand our margin. And that's a hyper focus on quality, customer segmentation and cross-selling.
And then one really quick sort of micro question for me, if you don't mind. Just in terms of the SRT, can you remind us what drove the decision to bring that back on balance sheet? And did that play a role in that 7% sequential growth in GBM?
Paul, it's Raj. No, that doesn't contribute to the 7% because the loan is always on our book. The SRT is only a capital structure. It's an SRT we put in place about 3 years back when we had floor constraints. So it's an expensive SRT. As we look at it today, we obviously don't have capital constraints. So we just recall that SRT and that increases RWA, which is a benefit or some part of the benefit we got in 2023 when we put it on, but it doesn't impact loan growth.
Your next question comes from the line of Mario Mendonca with TD Securities.
I want to go back to capital markets for a moment. I think we're all impressed and a little surprised at how strong capital markets-related revenue is. What I'm trying to think through is what conditions could cause this to slow or even reverse. I take you back to last week when there was a fair bit of uncertainty around U.S. Treasuries and some intervention. Is that the sort of condition that drives up liquidity and hurts capital markets? Or are the overall macro drivers, like the hyperscalers and AI and the capital formation related to them, along with your expansion and capabilities, likely to overwhelm an event like what happened in U.S. Treasuries last week?
Yes. What you saw in U.S. Treasuries was mainly focused on the long end of the bond curve, and that doesn't affect capital markets as much. More of the 10-year and inside yields affect capital markets. In terms of a reaction function, you want volatility on the capital markets side, but you want constructive volatility. Too much volatility will compress ECM and DCM businesses; if the VIX pops above 50, you'll see that compression. Constructive volatility, which is what we have globally right now, means clients are trying to navigate a really complex environment. They're trying to understand their FX risk, capital formation, and the right capital structure for their businesses in the new world. This is where we are very well positioned to advise our clients. We are building world-class expertise, investing in our people and our products, and we can provide debt capital markets, equity capital markets, hedging, investment banking, corporate banking, deposits, and global banking capabilities.
This is all very intentional as part of our strategy. When looking for reaction functions, the 30-year matters less; the 10-year and in, along with the VIX and some volatility in exchange rates, are more important. For the last year or two since liberation day, these trends have been highly constructive. You are also seeing reinvestment in Canada—Canada is really looking to grow. Our loan growth in Canada is up 9% year-over-year versus 5% in average loans. We are investing in our local markets and local clients, and we are well positioned for cross-border activity.
So notwithstanding this pretty strong growth we've seen over the last couple of years. And again, I'm not so much asking you for guidance for next year, but we shouldn't be surprised if this environment allows for our Canadian banks to grow their capital markets revenue still further. You wouldn't guide us to something like a contraction revenue from this point forward.
I think capital markets businesses are always hard to predict, right, because you need a lot of the things I just talked about. And if you can tell me exactly where the S&P or the Toronto Stock Exchange is going to be, where rates are going to be, where FX is going to be next year. I can probably reverse engineer into the answer that you're looking for. I think what we're trying to do is we're trying to build products and services that we can help our clients in any environment. So it's a little difficult to tell you exactly what the magnitude or order of where revenue or net income would be next year. But we are investing in our future. We're investing in new products and capabilities. And I think what you could take away from this quarter, while it was a record in an exceptional quarter, it was very broad-based across every single product, region, service, subgroup, you name it. We saw a broad base of widening of our business.
Okay. A question for you, Scott. I take you back a couple of years when you and I had a conversation about sort of long-term aspirations for Scotia. And you described it to me as wanting to see Scotia in the North American corridor, and that included Canada, U.S. and Mexico. I think that was the way you described it. There is an important opportunity here for our Canada's banks in looking at U.S. regionals given the disparity in valuation. I think where I'm going with this question is, can Scotia grow in the U.S. through acquisition, while still in this lockup with Key, which I know ends sometime, I think it's December 2029. Can you grow in the U.S. through acquisitions while still maintaining this interesting Key? Or do you see those as they need to be separate. You need to be either in Key or out of Key before you can make an acquisition in the U.S.
Those are a couple of different questions. First, the Key investment has been discussed extensively and it has been a great investment. If you look at their share price, performance, and execution, it has been very beneficial for the firm, but it remains just that: an investment. As we think about growing in the U.S., the primary focus is Travis's business. We have said this repeatedly, and you are beginning to see the investments we have been making start to pay off. We have talked about Canada, which we are very proud of, but the U.S. is also broad based, with many capabilities being added. In Mexico, as Francisco mentioned, the capital markets investments are doing really well. I do think there is a lot of organic room to continue to grow across the corridor in each of those three countries. Last quarter we bought MapleMark intentionally; it was a small commercial bank based in Texas that helps Travis further build his capabilities and allows us to attract more deposits to fund those capabilities. So the priority right now is organic growth, with some tuck-in acquisitions potentially to build out the capabilities we are focused on.
So it sounds like your interest in the U.S. is in capital markets, not in commercial banking. Is that true?
Yes. Right now our biggest opportunities are in Travis's business and Jacqui's business. Jacqui's business is doing very well, with both a Canadian and an international focus, and has been growing around 15 to 20 percent over the last three to four years, so we see a lot of opportunity there. We could benefit from U.S. capabilities that connect that footprint, and through the MapleMark meeting some of that growth may come from small acquisitions or other initiatives. That will be our priority before we move into areas like commercial or retail. Retail is not appealing at all, so we would address these priorities before considering commercial.
Your next question comes from the line of Matthew Lee with Canaccord Genuity.
Maybe back to Francisco. LatAm retail growth continues to be strong. I think you particularly called out non-mortgage. So I assume some of that's coming from credit cards. So can you just talk about how you think about balancing growth, credit and primacy as you expand that credit card portfolio in LatAm?
Thank you, Matt. Absolutely. This has been a very deliberate journey, right? If you go back to Investor Day, what we tried to do is, number one, segment our client base. And that took us about a year in really understanding who our client was, what the needs were and how do we segment across the footprint and not country by country. Remember, the key goal here is scale in everything we do in retail. We completed that segmentation. And on the back of that, we created value propositions that were very specific to primacy. What we concluded in that journey is that mortgage monoline does not deliver primacy. And the problem with nonprimacy and monoline is that you don't capture deposits and you have high attrition. So the journey needed to shift our focus towards primacy. The definition for us is really the combination of the full suite of products, where you need transactionality and transactionality is delivered by credit cards, is delivered by personal loans, is delivered by payroll, is delivered by insurance and investment advice.
And that's what we're looking for. And where you see the growth of non-mortgage and what we refer to non-mortgage is really a combination of all those products. And what we're seeing today is that we're seeing deposit growth to an extent that we've never seen before in retail, although the average deposit growth is 5%, core deposits are up 7%. And that is a huge contributor to our returns in the long term. So the other component to think about here is that when you talk about cards, for example, it's a de minimis share across all countries, right? Probably the only exception being Chile where we have a little bit more. But beyond Chile, we're not necessarily playing to our size and scale in any market. So it's not a credit card strategy per se. It is a primacy strategy that recognizes that cards and personal loans are an important component to be prioritized by our clients as they transact with the bank. Without having a transactional relationship, they will not bring the payroll to you. So it is really a combined effort. And that's why we're so deliberately focused on non mortgage.
Your next question comes from the line of Stephen Boland with Raymond James.
Just I guess the comment about the Canada agenda. I guess, OSFI is giving you another 50 basis points of excess capital. So I'm wondering if part of that capital is going to be used to support that Canada agenda, so defense, infrastructure, AI? Or is that excess capital just going to be used to continue to buy back shares?
Yes. Thanks, Steve. It's Scott. I'll start and Raj can add, feel free. I mean the first call for our capital is organic growth. And I think we have, as you see, some great organic growth opportunities, and you saw that in the quarter with deployment of capital to organic growth. As I look at the Canada agenda, I do think there are a lot of opportunities and you think about infrastructure pipelines, you think about defense. We've actually really organized ourselves significantly differently over the last 6 months to capitalize on the defense opportunity. And now as you think about an emerging or evolving relationship with the U.S., I think there's going to be some opportunities to really lean in to our small business clients and our commercial clients to help them through an uncertain period. And so I do see the opportunity for more capital to be deployed, frankly, across all of our business.
And it's not going to be an issue of capital availability because we've managed this bank to a point where we now have the capital. So that's good news. Now if there is excess capital, well, the first place that will go will be share repurchases. And that's because there's a valuation gap, and we still think there's great opportunity. You saw a little bit of that in last quarter, and you'll continue to see us renew and do more as we go forward. And so it's that combination of organic growth and share repurchases that I think right now provide the best equation for our shareholders.
There are no further questions on the conference line. I would now like to turn the meeting over to Raj Viswanathan.
Thank you. On behalf of the entire management team, I want to thank everyone for participating in our call today. We look forward to speaking to you again at our Q4 call in December. Have a great day.
Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.