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Good morning, and welcome to Scotiabank's Q1 2026 Results Presentation. My name is Meny Grauman and I'm Head of Investor Relations. 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. All the remarks today will be on an adjusted basis. With that, I will now turn the call over to Scott.
Thank you, Meny, and good morning, everyone. Building off a year of strong and consistent financial performance in 2025, we continued our momentum in Q1 as we executed on our strategic priorities despite what remains a challenging operating environment. This quarter, we delivered adjusted earnings of $2.7 billion or $2.05 per share. Earnings per share was up 16% year-over-year as strong revenue growth aided by constructive markets and good expense control offset the expected increase in our impaired PCL ratio that Shannon will discuss shortly. Our CET1 ratio was 13.3% even after repurchasing 4.9 million shares in the first quarter under our current NCIB. Our capital deployment priorities remain investing in organic growth opportunities, followed by share buybacks. Return on equity was 13%, up 120 basis points year-over-year, demonstrating our ability to deliver improved profitability over time. Our return on equity is tracking ahead of our Investor Day expectations, which gives us greater confidence in achieving our 14% plus medium-term target one year ahead of plan. Going forward, we expect to see return on equity expansion across each of our business units with the largest increase coming from Canadian Banking. Our key return on equity levers will be improved business mix in Canadian Banking, risk-adjusted margin expansion across Canadian and International Banking, the ongoing rollout of our global transaction banking capabilities and fee income growth and productivity enhancements across the enterprise. While we continue to focus on efficiency improvements, we are also making important technology investments that will help us redefine how Scotiabank serves clients, how our teams work and how we create long-term value, allowing us to compete and win in a rapidly changing landscape. AI is an important and growing part of our total technology spending. The investments we are making in AI include both technology and talent. And recently, we have made several strategic hires from other leading global banks. We are scaling AI to boost efficiency across the bank, including through Ask AI, a tool which allows employees to get instant access to policy and product guidance. In Q1 alone, we processed over 450,000 queries across the client experience center, the branch network and the client services and solution help desk, which represents over 60% of the queries in 2025. And in Tangerine, we recently completed an AML AI pilot that was supported by an external partner, which demonstrated positive results with a 37% reduction in existing alert volumes. We are now leveraging our internal AML AI subject matter expertise to design and implement a robust solution with improved precision and risk detection while minimizing false positives at a lower cost with faster time to market and no vendor dependency. We will continue to take a considered approach to our spending on AI to ensure that our investments are designed for long-term growth and sustainability. Turning to our operating segments. Fiscal 2026 stands as a pivotal year for our Canadian Banking unit, where we expect earnings to grow by double digits. Consistent with our outlook, this segment had a strong start to the year, driven by further sequential margin expansion, strong fee and commission growth of 8% year-over-year and positive operating leverage of 2.8%. Return on equity came in at 18.1%, up 140 basis points versus the same quarter last year. This quarter, we saw demand deposits grow by 5% year-over-year, while our retail mutual fund net sales doubled versus the same quarter last year and retail referrals to wealth were $2.4 billion, up 19% year-over-year. Term deposit balances declined given the low rate environment, but we've been able to keep over 90% of term maturities within the bank. These maturities are either moving to demand deposits, retail mutual funds or our wealth business through active referrals from the Canadian Bank. Our Mortgage+ program continues to drive over 90% of all mortgage originations. Through this bundled offering, encompassing both lending products and deposits, we are winning new and deeper client relationships and unlocking significant value for our retail banking franchise. Last month, we were delighted to announce that Shell Canada has joined the Scene+ loyalty network as our new fuel partner. This will unlock new ways for members to save and earn rewards on everyday essentials like fuel, groceries, entertainment, banking and travel, creating more opportunities for Canadians to put rewards to work in places they shop every day. In Global Wealth Management, we are delivering strong underlying performance. Net sales for the quarter came in at $1.8 billion, marking our sixth consecutive quarter of positive net flows and return on equity came in at 17.9%, up 180 basis points year-over-year and up 300 basis points since Investor Day. In Canadian Wealth Management, we continue to see momentum in our private bank offering with strong year-over-year loan and deposit growth. We also continue to add advisors to our full-service ScotiaMcLeod brokerage unit, where we had another quarter of strong net sales. In our Global Asset Management business, we continue to see positive net sales, including ongoing strength in our branch channel. This quarter, we ranked third amongst our peers in long-term retail mutual fund sales, up from sixth in the same quarter last year, highlighting the opportunities we have to deepen penetration within our own network. And in our International Wealth business, earnings are up an impressive 18% year-over-year with 45% growth in Mexico, driven by higher mutual fund and brokerage fee revenue. Performance in our International Banking segment continues to be driven by solid execution, including strong expense management. Earnings were up 10% year-over-year and return on equity came in at 16%, in line with our medium-term target. We continue working towards building deeper and more profitable client relationships across the countries that we operate in. In retail banking, non-mortgage growth continues to outpace mortgage growth. And in non-retail, we expect earnings growth to accelerate as the year goes on and the region's economies get stronger. Finally, Global Banking and Markets delivered another strong quarter as we continue to benefit from constructive markets, but also from the productive investments we have made across the business, including our new U.S. transaction banking platform. This quarter, we also saw significant margin expansion, which is being driven by more disciplined pricing on both sides of the balance sheet. Our first quarter trading results were broad-based, but we saw particular strength in equities, including equity derivatives and another strong quarter from our peer-leading prime services business. Return on equity came in above 14% for the second quarter in a row. The U.S. continues to comprise about half of segment earnings, and we expect this share to increase over time as we continue to invest in our capabilities in that critical market. Our objective in the U.S. is to drive sustainable growth while reducing volatility and focusing on those businesses where we have the right to win. Finally, we were pleased to confirm our partnership with the Defence, Security and Resilience Bank. This is yet another way that we are furthering our commitment to providing the capital, expertise and strategic advice to strengthen Canada's most critical sectors. In closing, I am pleased that the earnings momentum that we built in fiscal 2025 has extended into the first quarter of 2026. Our results give me increased confidence in our ability to deliver on the full year outlook we provided you last quarter. I will now turn it to Raj for a more detailed financial review.
Thank you, Scott, and good morning, everyone. My comments will be on an adjusted basis that excludes the loss on the sale of Colombia and Central America operations and the usual amortization of acquisition-related intangibles. Starting on Slide 8 for a review of the first quarter results. The bank reported quarterly earnings of $2.7 billion and diluted earnings per share of $2.05. Return on equity was 13%, up 120 basis points year-over-year or 110 basis points, excluding divestitures, driven by strong revenue growth. My remarks that follow will address data in the last column of the slide that excludes the impact of divestitures. Revenue grew a strong 11% year-over-year. Net interest income grew 13% year-over-year as net interest margin grew 27 basis points from higher business line margins and lower funding costs. Noninterest income was up 10% year-over-year from higher wealth management and trading-related revenues and the positive impact of foreign currency translation. Expenses grew 7% year-over-year, mainly due to seasonally higher personnel costs, higher volume-driven compensation from higher revenue, and advertising and development costs to support business growth. The technology-related spend that includes personnel costs, amortization, professional fees and direct technology costs of approximately $1.3 billion was up $38 million year-over-year. The pretax pre-provision profit grew a strong 16% year-over-year that was partly offset by PCLs of $1.1 billion. The bank generated positive operating leverage of 4.2% and the productivity ratio improved year-over-year by 200 basis points to 52%. The bank's effective tax rate increased to 25.7% from 23.8%, primarily due to lower income in lower tax jurisdictions and higher withholding taxes paid during this quarter. Moving to Slide 9, capital. We generated capital from the Davivienda transaction of approximately 15 basis points. Internal capital generation was 7 basis points and gains from higher fair values of OCI securities contributed a further 4 basis points. Capital usage was mostly related to model and methodology updates of 16 basis points and a net 8 basis points related to share repurchases. The model and methodology changes include the impact of periodic update to our risk parameters and a clarification of capital methodology relating to certain exposures from the regulator. The total risk-weighted asset was $474 billion, up approximately $2 billion quarter-over-quarter, excluding the benefit from foreign currency translation. The increase in Credit Risk risk-weighted assets from portfolio growth, migration and model and methodology updates was offset by RWA reduction from the closure of the Davivienda transaction. The bank remains committed to maintaining strong capital ratios. Turning now to the business line results beginning on Slide 10. Canadian Banking reported earnings of $960 million, up 5% year-over-year. Pretax pre-provision earnings also grew 5%, reflecting good revenue growth and strong expense discipline. Loans grew 3% year-over-year with mortgages up 5%, while business and personal loans were each down a modest 1%. Deposits declined 2% year-over-year. Day-to-day savings deposits grew a strong 5% that was more than offset by a 10% decrease in personal term and a 2% decrease in nonpersonal deposits. Turning to the P&L. Net interest income grew 3% year-over-year from loan growth and margin expansion. Net interest margin expanded 2 basis points quarter-over-quarter across retail and commercial banking from improving deposit mix, i.e., less term and more day-to-day and savings deposits. Noninterest income was up 2% year-over-year, impacted by lower private equity gains this quarter. Fee and commission income grew 8% from higher mutual fund fees, strong FX fees and higher credit card revenues. The PCL ratio was 49 basis points, mostly from impaired. The expenses were flat year-over-year, benefiting from efficiency initiatives that were reinvested in the business to support growth. The business generated strong positive operating leverage of 2.8% and the return on equity improved to 18.1%. Turning now to Global Wealth Management on Slide 11. The earnings of $488 million were up 18% with strong double-digit growth in both Canadian and International Wealth Management. Spot AUM was up 10% year-over-year to $436 billion, and the AUA grew 8% over the same period to over $800 billion, driven by market appreciation and higher net sales. The revenues were up 14% from higher mutual fund fees, net interest income and brokerage revenues. The expenses were up 12% year-over-year, primarily from higher volume-related expenses that resulted in positive operating leverage of 1.9%. International Wealth Management generated earnings of $64 million, up 18% year-over-year, driven by growth in Mexico. The return on equity improved almost 200 basis points compared to last year to 17.9%. Turning to Slide 12. Global Banking and Markets delivered strong earnings of $545 million, up 5% year-over-year. Revenue increased 11% as Capital Markets revenues were up 19%, while Business Banking grew a modest 2%. Net interest income was up 25% year-over-year, primarily due to higher margin and robust capital markets activities. The noninterest income was up 7% year-over-year due to higher trading-related revenues from fixed income and equities and higher underwriting and advisory fees. The expenses were up 14% year-over-year, mainly due to higher performance and share-based compensation and technology costs. The business generated a strong return on equity of 14.3% this quarter. Moving to Slide 13 for a review of International Banking. My comments that follow are on a constant dollar basis and excluding the impact of divested operations. The segment delivered earnings of $717 million. That was up a strong 8% year-over-year and 11% quarter-over-quarter. Revenue was up 4% year-over-year with net interest income up 5% from lower funding costs, mainly in Mexico, while noninterest income was up 2%. The net interest margin remained stable at 454 basis points and expanded by 27 basis points year-over-year, mainly from lower funding costs due to decline in Central Bank rates. Deposits were up 4% year-over-year, while loans were down 1% year-over-year as non-retail loans declined $5 billion or 6%, while retail loans grew $3 billion or 5%. The provision for credit losses was $497 million and the PCL ratio was 131 basis points. The business generated strong operating leverage as expenses were up a modest 2% year-over-year from disciplined expense management. The effective tax rate increased to 23.5% from 21.8% in the prior quarter due to lower inflationary adjustments in Chile. The GBM business in International Banking generated strong earnings of $354 million. Turning to Slide 14. The Other segment reported an adjusted net loss of $41 million compared to $34 million in the prior quarter.
Thank you, Raj, and good morning, everyone. This quarter, impaired loan loss provisions remained elevated, in line with our expectations as we continue to operate in an environment of heightened macroeconomic uncertainty. Against this backdrop, all bank PCLs were approximately $1.2 billion. Performing PCLs were 3 basis points and impaired PCLs were 58 basis points, with 2 basis points of impaired PCLs related to the Central America and Colombia divestiture. Impaired PCLs increased quarter-over-quarter, driven primarily by elevated provisions in Canadian Banking Retail and GBM, offset by International Banking that was down $74 million, driven by the impact of divestitures. My remarks that follow will exclude the impact of divestitures. We increased allowances for credit losses by over $200 million quarter-over-quarter to approximately $7.2 billion. Performing allowances increased by $81 million, mainly due to credit migration and impaired allowances increased by $133 million, mainly in Canadian Retail and GBM. The bank's ACL ratio remained strong at 94 basis points, an increase of 2 basis points quarter-over-quarter. Turning to Slide 17. Gross impaired loans increased approximately $425 million quarter-over-quarter, excluding the impact of FX. This was driven by an increase of $200 million primarily from three accounts in GBM. The remaining relates to formations across products in Canadian retail, mostly in mortgages, where we have strong collateral coverage and do not expect to incur material losses. The GIL ratio increased 6 basis points to 95 basis points. Turning to Slide 18. All bank PCLs were approximately $1.2 billion this quarter. Excluding about $40 million recorded in the one month for the divested operations, PCLs were approximately $1.1 billion or 60 basis points. Impaired PCLs were 56 basis points, up 6 basis points quarter-over-quarter. Half of the increase was driven by three accounts in GBM with the balance driven by Canadian Retail. Looking at each business. In Canadian Banking, PCLs were $576 million or 49 basis points, up $81 million quarter-over-quarter. In retail, PCLs were $436 million, up $82 million quarter-over-quarter. Performing PCLs were $12 million, driven by deteriorating credit quality in unsecured lines and credit cards, partially offset by improving FLIs. Impaired PCLs were $424 million, up $91 million quarter-over-quarter, driven by increased net write-offs in unsecured lending, reflecting current unemployment trends. In our Canadian commercial portfolio, PCLs were $140 million, in line with Q4. Moving to International Banking. The PCL ratio was 131 basis points, down 1 basis point quarter-over-quarter. In International Retail, total PCLs were 218 basis points, down 3 basis points quarter-over-quarter, excluding FX. Performing retail PCLs were $38 million, driven by portfolio growth and continued credit quality deterioration, primarily in Chile consumer finance. Impaired PCLs were $375 million, down $11 million quarter-over-quarter, excluding FX, driven by continued weakness in Chile consumer finance, partially offset by improved performance in Peru and the Caribbean. In GBM, impaired PCLs were up $54 million this quarter relating to three accounts in the agriculture and wholesale and retail industries. While uncertainty continues across our markets, overall credit performance has remained in line with our expectations. To put this quarter's results in context, GBM contributed 3 basis points to the all bank impaired PCLs from three files. The portfolio trends remain stable and concentrated in investment-grade exposures underwritten to strong standards. Looking at each of our portfolios in Canadian Retail. While mortgage 90-plus day delinquency has increased quarter-over-quarter, this continues to be driven by the same trends we have been discussing, namely COVID era mortgages concentrated in Ontario and the GTA. However, impaired PCLs remain low despite elevated GILs, given the strong credit quality of the book and low average LTVs of approximately 55% in the uninsured portfolio. In auto, we continue to work through the COVID originated portfolio, which was driven by elevated exposure to used vehicles in our prime segment. We continue to monitor the portfolio closely with a strong focus on collections effectiveness and remain comfortable with how the portfolio is evolving. Turning to unsecured. We are seeing stress among single product, younger client cohorts. The portfolio continues to perform in line with expectations given how unemployment has trended for these segments. That said, despite some weakness, early-stage delinquency indicators in unsecured lending are showing signs of improvement as 30-plus day delinquency in both credit cards and UAC have shown sequential improvement. We also expect performance in unsecured will be further supported by ongoing collection initiatives with benefits expected towards the latter part of the year. From a macro perspective, the unemployment rate has improved in recent months and is expected to continue to trend down in coming quarters, but will take some time to impact portfolio behavior. In International Banking, while impaired PCLs remain elevated, the outlook is stable across our key markets. In Mexico, ongoing trade negotiations continue to weigh on sentiment. Macroeconomic indicators present a mixed outlook with improved GDP estimates offset by softer employment data. Chile's outlook remains stable, supported by strong commodity prices. However, sustained elevated unemployment and cumulative inflation effects continue to drive softness in our consumer finance portfolio. Similarly, in Peru, the GDP outlook remains stable, supported by the rise in commodity prices. However, uncertainty is likely to persist until a new administration is placed. Looking ahead, we expect the operating environment will continue to reflect ongoing challenges with impaired PCLs remaining elevated in the near term before gradually trending lower as the economic outlook improves as the year progresses. We remain comfortable with the adequacy of our allowances and the underlying quality of our portfolio. With that, I will turn it back to Meny for Q&A.
Thanks, Shannon. Operator, we're ready for our first question.
分析師問答
Your first question comes from the line of Ebrahim Poonawala with Bank of America.
I would like to discuss credit, specifically regarding the impaired PCLs for the quarter, which turned out to be somewhat higher than we anticipated. Can you provide some insights on whether the guidance for impaired PCLs, which indicated high 40s to mid-50s, still holds for the full year? Has there been any change in your perspective? Additionally, are you observing any improvement, deterioration, or stability in credit conditions compared to what you expected a few months ago, both for consumers and businesses?
Thanks for the question. I think it might be helpful if I anchor back to the outlook that we provided in Q4 and the assumptions that informed that guidance. At the time, we were operating in a highly uncertain macro environment, which is why we communicated that impaired PCLs would remain elevated in the near term, followed by gradual improvement, and that framing continues to hold today. In terms of outlook, I do think it is important to put this quarter's results in context. For non-retail, we had signaled results tend to be lumpy in the space. And this quarter, GBM contributed 3 basis points to our all bank impaired PCLs. As I mentioned in my remarks, the impact was from three files. And overall, the portfolio trends remain stable, and we are not seeing any systemic or trade-related issues. As I look to Canadian Banking, what I would point to there is that early-stage delinquency indicators in unsecured are beginning to show some improvement despite what is still a challenging macro backdrop. I also mentioned collection initiatives. We are expecting to see those benefits in the latter part of the year. And then importantly, as we think about unemployment, it has improved, and we are expecting that to trend down in the coming quarters. But we know that this is going to take a little time to work through the portfolio. And then as I turn to International Banking, overall performance this quarter is consistent with our expectations. And when you take into account developments across both our retail and nonretail portfolios, the impaired outlook across the region is expected to remain elevated but stable. That reflects some of the uncertainty in the market. So when I take all of those components together, so the gradual improvement that we're seeing in unsecured, supported by what we are expecting from a macro, that's really driving our support of our guidance.
So do you think these impaired PCLs could trend closer to 50 basis points or maybe even dip below 50 basis points as we think about the back half of the year, Shannon?
Yes. I think, Ebrahim, I just would go back to the guidance. Like we do expect it to be elevated in the first half and then coming down in the latter half. In terms of how far that comes down in the latter half, some of that is going to be impacted by what happens in the macro.
Got it. And I guess just one maybe for Scott or Raj, for you on Slide 5 on the ROE walk. I guess you all have made pretty significant progress over the last year or two in terms of improving the return profile. As we think about where could this go wrong? Like are you overearning in capital markets? Or could there be pressure on the net interest margin as we look out a year from now? Just maybe talk to us in terms of the downside risks to getting to this 14% plus and hopefully higher from there as we think about the next year or two?
Thanks, Ebrahim. It's Raj. I'll address that question. The waterfall does have many drivers, including risk-adjusted margin, which we're confident about. We expect the margin expansion observed this quarter across all business lines and the overall bank to continue into 2026 and 2027. The factors influencing '26 and '27 will differ. In '26, deposit margins will be key, and we've seen positive results this quarter. We're focused on sourcing and deploying deposits effectively, especially in the Canadian banking sector, which will support margins. Shannon mentioned the PCLs for 2026, and for '27, we anticipate an improvement over '26 if the latter half meets our expectations. Both aspects contribute to our outlook. The main risk remains macroeconomic factors, making predictions for the next seven quarters challenging. However, moving from 13% to 14% is achievable for us, as we are currently above 13% due to our efforts and favorable market conditions, such as in GBM and wealth management. We believe GBM will build a sustainable and profitable franchise. While 14% may fluctuate slightly next quarter, it's a small part of the bank. Wealth margins and return on equity will improve, and investment banking is already over 16% and continuously striving for efficiency. Our target for the Canadian bank is closer to 24% by 2028, and we're currently at 18% with a 140 basis points improvement. We expect to see ongoing progress each quarter. By 2027, we should be in a strong position, and we're confident about reaching 14% or higher. Besides macroeconomic factors, we don't foresee significant risks at this time, and we'll be prudent in our capital deployment and supportive of our buyback program. Overall, we have greater confidence now compared to a year ago, aided by macro factors, and we are well-prepared for future challenges.
Your next question comes from the line of John Aiken with Jefferies.
Thanks for the disclosures on the international ex, the divested operations. Francisco, was hoping to get a couple of comments from you. With the numbers that we saw in the first quarter, is this a good starting point for the international operations going forward? And what is your outlook, particularly for net interest margins and efficiency moving forward?
Well, thanks for the question. I apologize for my voice. I'm in the tail of a nasty cold. So I'll do my best to address the question. Number one, I think the quarter was a very strong quarter. It showed very strong resiliency across a complex footprint. When you look at the results on the revenue growth perspective and expense perspective show, number one, consistency of performance, alignment to our outlook and certainly, resiliency. Expenses are consistently performing better than expected. When you look at revenue growth in the key businesses, all performing better than expected in Q1, and particularly retail, which has been probably our most biggest effort in terms of getting back to where we believe that business should be performing. Q1 was a very strong quarter across the board. When you look at loan growth at 5%, third consecutive quarter, of non-mortgage growing at actually twice the pace of mortgage where you see expenses almost flat versus the prior quarter in spite of the revenue growth. And overall, PCL improvement on the back of significant effort on collection effectiveness across all markets. And when you strip out Cencosud in Chile, which is, as you know, a noncore business, we are encouraged with the performance of our PCLs, particularly related to the new vintages that are coming through the new strategy fully segmented across all markets. So when I look at Q1, although traditionally our strongest quarter in the year, the underlying performance, number one, is sustainable. But when I look at the rest of the year and where we need to be by 2028, there's significant upside to be had in retail as we pursue top line growth at a faster pace as we pivot to growth. In commercial, we're beginning to see growth for the first time in a number of quarters. That will pick up pace in the rest of the year. And GBM will continue to show performance very strong on the banking side as we saw in this quarter, but also on the capital markets side, where we have now deployed GBM in the Caribbean, whereas before we didn't have it. So I'm very optimistic about what's coming in the rest of the year, but we need to be mindful that we operate in emerging markets. Those emerging markets are not growing at full potential. Mexico, which is our core market. As you know, it accounts for 60% of our growth is going to be growing around 0.5% GDP this year. And the rest of the footprint is still going through an election cycle. So overall, the environment is one that continues to present the uncertainty, but we are very well positioned to capture our fair market share and continue to improve performance. I'm particularly proud of the ROE at 16%, which we committed to be there by 2028. Our ROA now at 2.25%. Again, all sustainable indicators on the back of the many decisions we've done over the last nine quarters. So overall, I would say the rest of the year is one where we continue to try to drive that pivot to growth and consolidated top line growth that will drive the consistent performance you saw in Q1.
Francisco, just as a follow-on, you mentioned Mexico, very strong performance, but driven by net margin expansion. How sustainable are the levels that you've been able to achieve at this stage?
Listen, we've done a significant amount of changes in the team in Mexico. I think we have now a very, very strong team that complements each other well, that understand the market extraordinarily well, very experienced leaders in each of the business segments. And that is resulting in shifts in strategy decisions, how we deploy the global strategy more effectively and how we capture our fair share. When you look at performance in Q1 on the back of all these changes, it's beginning to show the right trends across all business segments. And we believe that the rest of the year will be very much in line with that. When you look at the performance of our portfolio in new vintages, it's showing the right trends. Collections are showing a significant improvement over prior quarters. So I'm very confident that what we have in Mexico is a winning franchise with a winning team.
Your next question comes from the line of Sohrab Movahedi with BMO.
Okay. Raj, I just wanted to clarify, going back to an earlier question on that Slide 5, with this 14% plus in 2027. Can you just talk a little bit about what sort of capital ratios you expect to be running at? And I know part of the waterfall does include buybacks. I was a little bit surprised that I didn't see you try and file for a renewal of the NCIB. So if you could just talk a little bit about the pace of buyback activity as well.
Sure. Happy to do that, Sohrab. Yes, I did not mention capital ratio. Capital ratio in this waterfall that we have talked about is going to be well above 13%. That's the assumption we have made. So call it in line with this quarter, 13.3%. We're not looking for a huge benefit coming from net capital ratio being lower. On your buyback question, the 15 to 20 basis points that we talk about here primarily reflects the bulk of the buybacks that we have already done, which is about 15.7 million shares as of this quarter. We will renew the NCIB is our expectation, but the NCIB is not due till May, Sohrab, because it goes from May to May for us. And you should expect us to continue to be active in the buyback program, both in the remainder of '26 and perhaps into 2027 as well. But the benefits that you see here are largely relating to the buybacks that have already happened. So there should be some potential upside depending on how we execute under the new program as well.
Okay, that's very helpful. Could I get clarification on the three basis points of contribution from those files in GBM? When were they originated, and which business were they supporting? Specifically, were they related to your global corporate finance solutions or private credit? Can you provide more details about the region and business, and explain why this won't repeat?
Yes. So maybe a few comments. And first, thanks for the question. So in terms of these files and their location within the portfolio, this is in our corporate banking portfolio and split between Canada and the U.S., so two in one, one in the other. And then to your question on originations, I'd have to confirm, but not new originations. These are files that we've had for several years. So I don't know if that helps clarify that question. But maybe, again, just to your point about how we don't think this will happen again. I do think it's important to reemphasize that this can be lumpy. When we look at non-retail provisions, they certainly can be lumpy. But when I take a step back and look at the portfolio, we continue to be anchored in investment grade. We're very comfortable with our underwriting standards. And so that is something that's very important as we look ahead and we look in terms of expectations. And then just back to your question again, just to confirm that this is not in the private credit space.
Your next question comes from the line of Doug Young with Desjardins Capital Markets.
Just a two-part and they're probably related. But Shannon, when I look at International Banking, you did, I think it was a $53 million performing loan build. Just trying to understand what drove that? Was that migration? And then just tying that into Chile, when I look at the Chile results, it looked like PCLs were up materially. I think you did call out consumer finance was one of the drivers. Just hoping to get a little bit more color.
Yes, absolutely. So to your question on Chile, that is primarily in our Chile Cencosud business or Chile Consumer Finance, which I know we've chatted about on prior calls. And then when we look at the performing build, it is a mix of migration within the portfolio, which we would expect, including some growth as well.
Let me add something here. Just a reminder, Cencosud is noncore and it's a business that is not part of our future. It's the last piece of our footprint that we are working to get our way out of it, and we are optimistic in that process. But when you look at the bank ex Cencosud, we are very much in line with our historical performance and very much in line with competitors. The overall outlook in Chile is one that's improving on the back of the last election. So we are overall optimistic in Chile.
And then just maybe a follow-up, Shannon, what is the outlook for the Cencosud? Like I know it's not core, but it does still go through your results? Or should we expect further deterioration? And then Francisco, like I know this isn't core. Can you maybe give an update in terms of the plans of divesting or getting out of that partnership?
Yes. So in terms of our expectations for IB and as per my prepared remarks, we are expecting them to be elevated but stable. And that is really recognizing as you go throughout the portfolio when you look at the macro and you look at the mix, that is our expectations as we go forward. As it relates to Chile consumer finance and as Francisco mentioned, this is a higher margin contributor to our portfolio, but it's certainly impacted by the macroeconomic environment in Chile. And so again, when we look out at the balance of the year, we are expected to see that elevation continue throughout.
Yes, good point, Shannon. Thank you. Two things. Back in October of last year, there was a change in regulation in Chile that basically identifies any collecting calls. So this type of segment is more prone to avoid those calls, challenging collections. We have overcome that limitation, and we're back on track. But again, we got to see performance consolidate in the coming quarters. As it relates to commenting on what we're going to do with Cencosud, we don't do that. What we can do is revert to what we've done, and we've been extraordinarily disciplined in how we manage noncore assets, and we've demonstrated with what we've done with Credit Scotia, what we've done with Colombia, Panama and Costa Rica. This is no exception. So we're very focused on delivering on our commitments.
Your next question comes from the line of Gabriel Dechaine with National Bank Financial.
I want to focus on the credit discussion. You mentioned guidance in the high 40s to mid-50s for this year and that it will improve in the second half. You also pointed out the challenges in the Canadian and international portfolios, and that certain factors will positively influence the situation. To simplify, regarding your outlook for impaired provision for credit losses over the year, is it higher now than your expectations from a quarter ago? The anticipated improvements may not occur until later in the year, which seems more related to the calendar year than the fiscal year. We could be looking at 2027 before we see a reduction in these impaired losses.
Yes, first thanks for the question, Gabe. To revisit our outlook from the end of last year, we are where we anticipated being. We did indicate heightened impaired PCLs in the first half of the year. There are many variables at play, typical for our portfolio. However, as we analyze these variables and reflect on key points from my earlier comments, we see initial signs of improvement in our unsecured portfolio within Canadian Banking, which is positive for our outlook. I previously mentioned that the elevated levels in IB, while stable, contribute to our projections for the rest of the year. When considering corporate and commercial, there may be some variability, but we feel confident in the performance of those portfolios. The factors we considered when providing our guidance remain relevant today. However, as I've noted, external macroeconomic conditions affect that guidance, and we are navigating an uncertain environment. Depending on how the macro landscape evolves throughout the year, it could impact our projections, but we are still focused on the latter part of this year.
Okay. And just to be clear, when you refer to unsecured, that includes autos, right?
No, it's credit cards and ULOC.
Okay. Mexico, I know in the past, in the IB segment, whenever there's a hurricane or whatever, we start thinking about resorts exposure. Given recent events and very recent events in Mexico, like how big is your resorts exposure and tourism industry more broadly, I suppose?
This one I'll make a couple of comments on Mexico and then Francisco, maybe you add in. I mean, obviously, what's happened over the last couple of days came as a little bit of a surprise. But if you take a step back and think what President, Sheinbaum is doing, she's addressing the three areas that the U.S. has been concerned about immigration, Chinese investments and rule of law. And so now she's on the third last pillar of that. We've seen a much more stable environment this morning than we did yesterday. And in terms of our employees and our clients, everyone is safe and branches are actually open today. And so we don't see a huge impact or any impact as it relates to go forward from a financial performance perspective.
Let me add. Thank you, Scott. And again, apologies for my voice. On our strategy in Mexico, we are not actively participating in resource financing of any kind. Our exposure is related to working capital associated to merchant acquiring services and very significantly consolidated hotel operators. On the working capital side, we exited that business a long time ago, and we're very selective when we choose to do anything of this sort. And normally, it will be limited to an expansion of an existing profitable facility rather than in the greenfield project. So we're not concerned at all in specific exposures in Mexico. Now the impact of tourism on the overall GDP of the country is significant. And as we outlined, we did not expect this year for Mexico to have significant GDP growth. We're looking at 0.5 point. So it is not short-term good news, but I think it is a necessary set of actions that the government is implementing for the long-term benefit of the country. So want to go through some short-term volatility, but very much in line with what we want to see the country do in the long term, given our commitment to the country.
So no resort or resort operator exposure in Mexico?
No.
Your next question comes from the line of Paul Holden with CIBC.
I want to discuss the deposit margin priority you mentioned. You've pointed out a change in funding mix over time, specifically decreasing wholesale funding and increasing the share of low-cost retail. My question is what two or three metrics, aside from the net interest margin, would you suggest we track to demonstrate the improvements in funding that should lead to a better net interest margin? Also, how do those metrics look in Q1?
Sure, Paul. I'll begin by addressing your question. Deposits are a key area of focus, as I've mentioned before, and you can see the results of our efforts in this area. NIM is a direct result of the improvements we're making to our deposit profile. We monitor checking and savings accounts in our Canadian bank, similar to our international banking approach, though we define them slightly differently. We refer to them as core deposits, which represent our primary customers who we believe will be most profitable; deposits are a significant part of that. Another aspect to track is how our assets are growing in alignment with our deposit growth. We've been pursuing this for some time, aiming to lessen our reliance on what we term wholesale funding. We've exceeded our expectations as outlined in our strategic plans, which is beneficial since these deposits are crucial for enhancing client loyalty. You should also observe a shift in the business mix within both International Banking and the Canadian Bank regarding the asset portion of our balance sheet. We are constantly considering how to enhance our margins, particularly with regard to risk-adjusted margins, by ensuring we allocate our capital, funding, and liquidity effectively among the right clients. Pricing is another critical element across our GBM and P&C segments. We need to ensure we are accurately pricing the risks we take and finding ways to optimize the returns on our capital in these relationships. Our team engages deeply in these conversations as we strive to improve the company's risk profile while also enhancing our return profile. Many of these metrics are easier to monitor, though some may fluctuate from quarter to quarter given the nature of our business. I would highlight previous challenges that we are beginning to overcome, particularly in Canadian Banking, where we are seeing savings and deposits grow by 5%. While term deposits have been somewhat of a challenge, overall, we are pleased with our disciplined approach to term deposits and our focus on what we consider valuable core deposits. That is what we are tracking.
Yes, during the quarter, while it may not have a significant impact on the enterprise, it has been quite significant for GBM. Can you elaborate on how you're approaching discipline regarding deposit pricing and loan pricing, and how these factors are contributing to margin expansion in your business?
Thanks, Scott and Raj. If you take a step back and examine the GBM business, what we're doing is managing our asset and deposit betas. We've seen rates come down, and we've been fortunate in managing our deposit betas, allowing us to reduce deposit costs more quickly than the decline in asset yields, even with a predominantly floating book. This has required a relentless focus on deposit costs, ensuring we're also competing for basis points on the loan yield side. Additionally, while it's a small factor, the SOFR changes at the end of the year positively affect our margins over Fed funds. Overall, our strategy revolves around focusing on the entire relationship between loans and deposits, moving away from a loan-only perspective, and seeking deposit pricing adjustments as we consider that total relationship.
Second question related to, again, the ROE expansion team and the drivers there. One of the other key ones clearly is the efficiency ratio and again, something you've made good progress on to date. I guess the question people would ask on that one is given the tight expense control and given the evolving banking sector or evolving AI and technology investments more broadly, like how do we get comfort that you're making the right and appropriate level of investments for the future in the business at the same time as bringing down the total productivity ratio?
Yes, Paul, that's an excellent question. We have been focused on running this business with discipline, which allows us to take those savings and reinvest in areas that will help us in the future. For instance, we have historically managed a decentralized technology budget but have centralized it over the last three years. We are investing in moving our data to the cloud and optimizing it to enable large-scale AI operations. We've also strengthened our team, adding two notable data and AI experts in the past year. We are showcasing successful projects, which highlight the importance of data and AI for our bank's future success. Additionally, we are managing a cost base with opportunities for increased efficiency, which enables us to invest in crucial areas. For example, in the Canadian bank, we underwent significant restructuring and have indicated that you will see positive operating leverage, but we plan to reinvest the savings to benefit our retail clients. This approach ensures that our historical business becomes more efficient, freeing up capital to invest in future growth. That’s how we, as a management team, view this situation.
Your next question comes from the line of Mario Mendonca with TD Securities.
Scott, a sort of broad question for you. I suppose if you want to sort of farm it off to the segments, it would make sense. But really, starting with you, looking at this bank over the last few years, you've been on this optimization, rationalization strategy for some time now. But we really haven't seen any growth emerge. Looking back, it's probably Q4 '23 since we saw any meaningful growth in loans, probably even going back a little further than that. So what's your overall impression on when Scotia can actually sort of start participating in growth again? And again, I'm not looking at anything special. I'm just saying something more in line with your peers in sort of mid-single-digit range. I'm pointing to loan growth now?
Yes, I understand. We’ve gone through a phase of optimization, particularly in the case of our international bank, where we've managed to reduce costs significantly through regional identification efforts. This has enabled us to achieve a 16% return on equity, and now we're shifting our focus towards growth. While loan growth is important because it reflects acquiring additional clients and increasing market share, we've managed to grow our revenue by 11% without significant loan growth. This shift in focus from volume to value is leading to higher return on equity, greater fee income, and a more capital-efficient business. As the economies improve, we expect to see higher loan growth. In considering Aris' business, there's potential in varying business mixes, including lower mortgage growth and increased growth in areas like commercial, mid-market, and small business. This will combine loans with a more comprehensive relationship with clients, encompassing cash management, deposits, and ancillary revenue. It's important to note that loan growth alone does not define our success; it's about expanding return on equity and generating fee income, with loan growth naturally following as we engage with more primary clients. Being a bank with a substantial balance sheet, we are committed to providing services to our clients, but only when those relationships are profitable.
Okay. Maybe, Shannon, a quick question for you. On a couple of occasions, you referred to early signs of improvement in the unsecured portfolio. Can you be more specific? What signs are you seeing that would cause you to say that?
Thanks, Mario. Thanks for the question. So what we are seeing in both our credit card and our ULOC portfolio is improvement in the 30-plus day delinquency. And so that is sequential. We have seen a few months of that. So that's specifically what I'm pointing to there.
Do you know what might be causing that?
I think there's a few things. I mean we certainly have seen employment start to trend down. And again, that can be a bit of a lagging impact. I spoke also to collections effectiveness that is a focus for us here. And so that could also be having an impact as well.
Your next question comes from the line of Jill Shea with UBS.
I wanted to discuss the GBM segment. Travis, you touched on margin and pricing earlier, but could you elaborate on the margin? It saw a significant increase this quarter and has been improving over the past year. Is there still room for improvement regarding margin and funding costs? Additionally, considering the revenue stability in this segment, can you address the impact of the margin increase on revenue durability? Also, how should we view the net income outlook for this segment throughout the year? You mentioned a normalized expectation of $475 million to $500 million, and it seems you exceeded that in this quarter. I'm trying to understand the net income trajectory for the year and its relationship with the revenue.
Thank you, Jill, for your questions. I'll do my best to address them all. Regarding the margin, we are pleased with the over 40 basis point expansion. Importantly, we're not altering the risk profile of our portfolio, as evidenced by our maintained investment-grade status. We’re actively enhancing both sides of our balance sheet, focusing on loans and yields, with particular success in reducing deposit costs. That is reflected in our yields. In collaboration with Francisco, our initiatives in GTB are very promising. We are strengthening our sales force, improving our analytics and data, and gaining a clearer understanding of profitability by client, relationship, and product. Additionally, we are enhancing the quality of our deposits, acquiring higher-quality deposits, increasing our operational deposits, and implementing a stronger go-to-market strategy with GTB and corporate bankers. We’re also taking a better cross-jurisdictional approach for international clients, particularly those Fortune 1000 companies with global operations. Francisco and I are working closely to capitalize on every opportunity, which is a crucial strategy for both of our divisions, as reflected in our results. Regarding margin expansion going forward, I believe there is substantial potential long-term, especially as we develop our operating and payment capabilities, although this will require time and effort. Our clients are being educated, our bankers are receiving training, and our capabilities are improving daily. We are making joint investments in these areas alongside Francisco and GTB, as well as in our international and Canadian clientele. While the margin may not expand by 40 basis points in the short term, there is still room for growth in that area. As for the earnings run rate, we had an exceptional quarter, among the best we’ve seen in a long time, according to the data. We feel very confident about the current market conditions, which exhibit constructive volatility. This environment has been favorable for our trading business and has also led to a vibrant DCM and ECM investment banking landscape. If this volatility begins to decrease, businesses that are more contingent on market conditions may slow. We hope the constructive volatility continues throughout the year, and we are monitoring it closely. Our guidance remains consistent; we typically see some volatility at the start of the year that we aim to capitalize on, although we expect some normalization back to our run rate. Remember, within that run rate, our pretax pre-provision revenue is growing between 8% and 10%, depending on whether we analyze it quarterly or annually. This growth includes significant investments in new capabilities, products, services, teams, cash management, plus enhanced technology and analytics, as well as a better go-to-market strategy, all of which we believe will yield long-term benefits. We are disciplined in this approach and aim to build more diversification to ensure stable returns on equity over the long haul. That is our objective.
Your next question comes from the line of Darko Mihelic with RBC Capital Markets.
I'll try and be really quick here. I just wanted to mention that as I review the credit quality statistics and some of the forward-looking indicators, including 90-day past delinquency and your comments about mortgages, it reminded me to think about this. You said that this is similar to COVID era vintages. Can you remind me what it is about that vintage that's causing the issue here? And the key question is, are you in a position where you might be assisting customers with deferrals or any other mechanisms to avoid outright impairments?
Yes. So in terms of that cohort or that era, I'd say recognizing what was happening at that time. So very high house prices, very low interest rates. And so when we look at that particular cohort, that is a group that we are seeing having some stress. And I would also say that, that is concentrated primarily in Ontario and the GTA, although I think it's also important to reinforce we have very low or very comfortable with the LTVs on that portfolio. In terms of your question on supporting our clients, we are clearly supporting where we can, recognizing there are limitations to what we can do. We need to make sure that we are meeting the expectations in terms of when we can provide support. So again, that is happening through our collections activities. So we call out those two items. I don't know if that answers your question.
Is it significant? How much is it saving you regarding impairments? Considering the number of mortgages or customers that may have loan deferrals or any other mechanism that will come into play?
No, it's not material, Darko. And again, that comes back to the very strict guidelines or requirements in terms of when you can provide those types of support to our clients. So I would not call it material.
And just one last quick question on that topic. Is it primarily a variable rate or fixed rate where you're seeing these issues?
We're actually seeing it in both, I would say.
Your next question comes from the line of Matthew Lee with Canaccord Genuity.
Apologies for bringing this up again, Francisco, especially with your cold. However, considering the strong initiatives you've discussed, I’m somewhat surprised to see such a minor contribution from this segment on the waterfall in Slide 5. If we look solely at international, excluding wealth and GBM, would the ROE contribution be around 20 or 30 basis points? Or is Q1 really an exceptional peak due to the accomplishments you've made?
Matt, how would I start? It's Raj, and then Francisco can add if there's something specific to IB. So we lumped in three segments there, as you noted. It's got GBM, it's got Wealth and it's got International Banking. And if I split the three, wealth, we are very confident. That's actually the biggest contributor, we think that will continue to grow from the 17.9%, but it's about 15% to 20% of the bank. So you put that in perspective, we think it will help us. GBM, we are actually being cautious. You just heard Travis talk about how we'd like to continue to improve the returns. Now 14.1% is a great ROE for that business. We know there might be some moderation depending on how markets behave. So that's a bit of an offset if you look at it. International Banking being at 16% plus, they are well ahead of where we thought we'll be. Do we have greater confidence that this will be better than what we have factored into this number that we put on combining the three business lines? Absolutely. But International Banking, as you know, has got multiple countries. Francisco talked a little bit about the macro, particularly in Mexico. We want to be more confident about the Mexico GDP growth. And we think that, that could be a greater contributor. But I would say that at 16%, they're in a good spot. In a couple of years' time, they should improve, but I wouldn't put a lot of it in the numbers that we disclosed right now. So I'd probably leave it at that.
Okay. And then maybe if I just sneak one last one in here. KeyBanc, you've had it for a couple of years now. The investment has done fairly well. I'm sure you've been learning a lot. Can you maybe just update us as to what the plan is for that asset going forward? It didn't sound like a U.S. retail bank for your North American corridor strategy. So just any update on that is great.
Sure. Thanks, Matt. So as you know, we have 14.9%, so $400 million of NIAEH per year, 15% to 20% return on capital. And so we are pleased with it, Jacqui sits on the board. I think we've got a lot of learnings from that. As I said last quarter, there's no plans to increase our absolute dollar investment into Key. I think our priority is organic growth here or share repurchases. That being said, as they execute on their $1.2 billion share repurchase, which we're very supportive of, we'll probably tick up a little bit in terms of ownership just because we won't bend into it. So same plan as we talked about last quarter.
There are no further questions on the line. I would now like to turn the meeting over to Raj Viswanathan.
Thank you very much. Thanks all of you for participating in our call. And on behalf of the entire management team, I appreciate you all taking the time to talk to us. We look forward to speaking to you again at our Q2 call in May. Have a great day.
Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.