Bank of Nova Scotia (NYSE:BNS) reported third-quarter financial results on Tuesday. The transcript from the company's third-quarter earnings call has been provided below.
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The full earnings call is available at https://www.gowebcasting.com/events/scotiabank/2026/08/25/q3-2026-financial-results-conference-call/play
Watch the full earnings call below:
Summary
The Bank of Nova Scotia reported a record quarter with strong earnings across all business lines, achieving a return on equity of over 14% ahead of projections.
Earnings per share increased by 21% year over year to $2.28, with positive operating leverage for the 10th consecutive quarter and a CET1 ratio of 13.1%.
Strategic priorities include organic growth, share buybacks, and strategic acquisitions, with a focus on Canada's economy and key sectors such as natural resources and AI.
Canadian Banking saw a return on equity improvement to 19.4%, aided by business mix improvements and fee income growth.
International Banking experienced strong retail loan growth and deposit increases, focusing on optimizing capital allocation.
Global Wealth Management and Global Banking and Markets both reported strong growth, with significant contributions from capital markets and investment banking activities.
Investments continue in AI and digital capabilities, with initiatives such as Scotia Intelligence to enhance productivity and client outcomes.
Future outlook is positive, with continued momentum expected into fiscal 2027, driven by improving business mix and fee income growth.
Full Transcript
OPERATOR
Ladies and gentlemen, this conference is being recorded.
Manny Grauman, Head of Investor Relations
Good morning and welcome to Scotiabank's Q3 26 results presentation. My name is Manny Grauman and I'm Head of Investor Relations here at the bank. Presenting to you this morning are Scott Thompson, 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, Eris Bogdanaris from Canadian Banking, Jackie Allard from Global Wealth Management, Francisco Aristiguieta 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 two of our presentation which contains Scotiabank's caution regarding forward-looking statements. With that I will now turn the call over to Scott.
Scott Thompson, President and Chief Executive Officer
Thank you, Manny, 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 10th 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 and 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 either 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 are $4 billion year to date, up nearly two and a half times 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. Pre-tax, 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 bookrunner on the two 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 bookrunner 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 into 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 and 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 will 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.
Raj Viswanathan, Chief Financial Officer
Thank you, Scott, and good morning, everyone. My All Bank and Other segment comments 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%, 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.
Non-interest 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 pre-tax, 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 effects 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 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 pre-tax, 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 internal. 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. Non-interest 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. The 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, Salesforce 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 were $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. Non-interest 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 non-interest income increased 18% from higher income from the Davy V and A 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 non-personal 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 in 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 jurisdictions. Looking ahead, Chile announced a reduction in the tax rate by 4% over the next three 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.
Shannon McGinnis (Chief Risk Officer)
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 account 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, and 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 improvements. 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 Manny for Q&A.
Manny Grauman, Head of Investor Relations
Thanks, Shannon. Operator, we're now ready for our first question.
OPERATOR
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press Star one on your telephone keypad to raise your hand and join the queue. And if you would like to withdraw your question, again, press Star one. Your first question comes from the line of Ibrahim Poonawalla with Bank of America. Please go ahead.
Ibrahim Poonawalla, Analyst at Bank of America
Hey, good morning. I guess maybe if we could, if I could start with the Canadian business segment, it feels like we're making a ton of progress there in terms of just improving the business mix, growing that. But I was looking at the year-to-date ROE in that business is about 18% and change. If I go back, I think Raj, when you presented at the Investor Day you talked about a big sort of the ROE bridge and that 18% going into I think 22, 23% kind of sort of ballpark.
Just talk to us. When we think about the ROE in that business today at 18 and that journey towards maybe low to even mid-20s, one, is that the right way to think about that business and, if so, what else needs to happen over the next year or two for us to get to that point from where we are today? Thank you.
Eris Bogdanaris, Group Head, Canadian Banking
Here, let me take that question. So I think what is happening in business banking, we have to, obviously, we have the commercial segment and the smaller business banking segment. But on the commercial segment, what has been in flight for probably the last 18 months is the increase and buildup of our mid-market segments. So as you know we were quite heavy in the real estate side and over time now we're expanding into the mid-market. Year to date we've added nearly 700 mid-market clients which is up almost 85% year on year.
And obviously this mid-market client is deposit rich, higher-margin lending, and that pipeline is building in market as we also leverage the capabilities of our transaction banking in that segment. We're also, as you know, on the mid-market. In addition, we are also driving a lot of process improvement end to end in the commercial bank and, of course, gathering these operating deposits. We're up probably around 3 to 4% in operating deposits across the segment, all contributing, of course, to higher ROE over time.
So that's one aspect. And then we shouldn't forget business banking, the smaller part of our commercial segment, where you see loans growing double digit consistently, quarter on quarter, deposits growing, and, more importantly, we are focused on specialized segments — that's healthcare professionals, accountants — and here we're gaining share and, obviously, the margins are rich. And you see the ROE there almost at 25%. And when you take these two businesses together, we're confident as we continue, and especially as our transaction banking capabilities improve, that we can hit the 20% plus ROE over time.
So all on a good track.
OPERATOR
Your next question comes from the line of John Aiken with Jefferies. Please go ahead.
John Aiken, Analyst at Jefferies
Good morning, 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 moving 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?
Francisco Aristiguieta, Group Head, International Banking
Thank you very much for the question. And good morning to all. 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 four quarters. We're now seeing the business growing at 6% year on year. And when you look at the underlying business lines, we're 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 two 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 two, 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 GTP business across corporate and commercial. So the combination of those two should allow us to see a more stable credit performance going forward. That should allow us to deliver double-digit earnings in 2017 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.
Manny Grauman, Head of Investor Relations
Thanks, Francisco.
OPERATOR
I'll requeue, and your next question comes from the line of Gabriel Dechaine with National Bank Financial. Please go ahead.
Gabriel Dechaine, Analyst at National Bank Financial
Hey, just sticking with International — you mentioned some conversion of portfolios from standardized to AIRB and that's going to reduce your core Tier 1 by 15 basis points. Just wondering why that is. Typically it goes the other way. And is this a kind of a one and done or is there more of that type of transition taking place?
Raj Viswanathan, Chief Financial Officer
Hey Gabe, it's Raj. Yeah, it is one and done. I think there were certain portfolios we should have converted a few years back. We've been on a journey because our data quality had to continue to improve. And this is the quarter — which is the upcoming quarter — we're going to convert those to AIRB. Some of it comes down to conservatism that is expected in Basel because the data quality in the countries are not as great — not our portfolio. So it's expected to add a level of conservatism to the modeled outputs and that's why it results in a 15 basis point increase in our capital requirements.
Obviously there'll be some near-term impact to the ROE in the International Banking business because the denominator is going to increase next quarter. But it's pretty much done. And afterwards we should see our portfolios growing in line with our new risk appetite, the way Francisco is laying out his business for growth, and we should start seeing our returns improving there. We should continue to improve, but it's done with Q4.
Gabriel Dechaine, Analyst at National Bank Financial
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. How intertwined is that business with your personal commercial bank, if you will, across the region? And what does the ROE look like if that business is not there? I suspect quite a bit lower. And the ROE?
Francisco Aristiguieta, Group Head, International Banking
Well, thanks for the question. It's a very important one because this is a decision we made, I would say probably a year and a half 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 pursued. And we're seeing fantastic response from our clients. We're now covering the sovereign space — which before we 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 in the GBM space.
So we see that as a very powerful development in our business strategy and to carry forward definitely going beyond 2026. So very strong show in this quarter and we're very excited about the potential of this business going forward.
Raj Viswanathan, Chief Financial Officer
We don't break that up, Gabe. Obviously, the ROE between the separate business... funds.
OPERATOR
Your next question comes from the line of David Conrad with KBW. Please go ahead.
David Conrad, Analyst at KBW
Yeah, good morning. Just want to talk a little about capital markets. You highlighted in the call a really strong quarter, particularly in the IB side with a lot of large deals. So maybe if you talk about like maybe near-term expectations next quarter or so, is there going to be a little bit of a give back in that, but also maybe the long-term growth rate with all the investments you made in the business?
Travis Machen, Group Head, Global Banking and Markets
Yeah, sure. Hey Gabe, thanks for the question and I'd be remiss if I didn't say that we were thinking about you and your firm over the next couple of weeks.
David Conrad, Analyst at KBW
Thank you. Appreciate it.
Travis Machen, Group Head, Global Banking and Markets
If you think about where we are right now, I think for this quarter, if you look it was obviously a broad-based record quarter for GBM and if you look through the numbers, whether that was in capital markets or investment banking, whether it's loans, deposits, you've seen a lot of activity throughout the quarter and if you step back and look at it, very intentional. Over the last two or three years we've been on a journey. We've been deemphasizing some businesses or regions and we've been doubling down on building new products and services and focus in our core footprint, both Canada and the U.S. and the rest of the world. And so we're on the journey of trying to build a very durable franchise that's very broad based. We feel like we're building a business that is perfect for this environment where we can offer excellent products and services and advice to our clients as they're trying to navigate the complex environment. Our outlook and our pipelines remain quite strong and I think we're proving quarter over quarter that when the markets are constructive that we can capitalize on that and we can service our clients with excellent products and advice.
David Conrad, Analyst at KBW
Great, thank you.
OPERATOR
Your next question comes from the line of Doug Young with Desjardins Capital Markets. Please go ahead.
Doug Young, Analyst at Desjardins Capital Markets
Hi, good morning. I guess this is for Shannon. Shannon, I think you expected or you talked about impaired PCL rate to be mid-50 basis points and 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?
Raj Viswanathan, Chief Financial Officer
Yep, thanks for the question. So maybe I'll go back to what informed our outlook at the time as there were a few items I called out that we were monitoring quite closely. You know, the first was the macroeconomic environment and just the uncertainty within it. In Canadian retail, you know, we were seeing entry rates and early-stage delinquency were improving but we were certainly monitoring whether they would be sustained at those levels. And we had several collection initiatives that were still coming online.
And then lastly for non-retail we always talk about the risk of episodic activity given the environment we're operating in. So if I think about what's occurred since then, I think there's a few things I would highlight. One, in Canadian banking, retail, the 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 GIL formations decline in Canadian commercial.
So the performance continues to develop largely as expected as our collections initiatives are yielding quite strong results. And when I go back to our original outlook, our performance is in line with what we said at the time, which was that impaired PCLs were going to trend down in the latter half of the year, which is certainly what we are seeing. And then if I think about tariffs, I think there's maybe—I think about it in a few ways. Clearly the evolving trade outlook, you know, we look at the impact to our clients and our portfolio and then how we are managing that risk.
You know, in terms of outlook, I think this is a good example of the uncertainty that we are currently managing. The scope and duration of tariffs continues to evolve and the ultimate impact is going to depend on degree of retaliation, government support, and how consumers and our businesses respond. In terms of our exposure, we've been monitoring industries more vulnerable to tariffs since last year. And if I look at the latest measures that were announced, just to give you some context, that represents less than 1% of our total bank loans.
In terms of how we're managing these risks, our scenarios and allowances already reflect a range of outcomes, but we'll continue to reassess new developments as they occur. And maybe if I just take a step back, if you go back to Q2 last year we did build 18 basis points in performing PCL. And at that time our downside scenarios modeled Canadian tariff rates of 12.5% and up to 25% with full retaliation. And our base case today assumes that tariffs are implemented and that trade negotiations continue.
So if I put all of that together, you know, we're monitoring the situation, we're very comfortable with where we are, and we'll continue to reassess the situation as it evolves.
Scott Thompson, President and Chief Executive Officer
Maybe just—Doug, if I can add on a couple things on the tariff situation, I mean, I think it's important just to take a step back. The fundamentals in Canada are pretty good. And if you look at the job growth numbers, if you look at the fiscal capacity on the back of oil prices, and if you look at some of the activity that's starting because of the Prime Minister's agenda, you actually have a backdrop that's pretty good. As you think about the tariffs that were just put in place, it's 5% of exports.
It's a small impact on GDP, 0.2–0.3. And you're going to see at 11 o'clock today support programs rolled out by the government on some of the sectors which will be impacted, and there will be select sectors that will be impacted. So as I put all that together, I think this obviously creates uncertainty, but with the current tariffs it's manageable. I think if I could add one point, I think we should use this as a country, use this moment to accelerate further the Prime Minister's agenda.
Removing interprovincial trade barriers, reducing the timing of approvals, getting big things done and continuing to diversify trade while also continuing the great trade relationship we have with the US. And we look at the US—as you saw from Travis's business—it’s doing quite well. So you put that all together, I mean, of course there's uncertainty, but it does feel like a manageable force to get through as a country and as a North American corridor as well.
Doug Young, Analyst at Desjardins Capital Markets
Appreciate it. And then just second question, ROE at 14% or adjusted ROE top of house, 14%. I think that's your target. And if you were targeting that for next year, so a little earlier than expected, you know, 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?
Scott Thompson, President and Chief Executive Officer
Yeah, listen, I think we're very pleased and I want to thank all Scotiabankers for the efforts they 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. You know, there is more opportunities for sure. And if you think about the Canadian bank, which maybe Eris 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 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, the improvement of this bank over the next journey. So maybe Eris, just talk a little bit about Canada.
Eris Bogdanaris, Group Head, Canadian Banking
Thanks, Scott. So as Scott talked about early in the call, there's four 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 passed mortgage growth in the quarter for the first time in two years. And we see that in the card book, the business banking book, HELOC 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—saw 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 NIR 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 five consecutive quarters of operating leverage expansion. Where's that coming from? We haven't grown direct costs in 12 months. So year on year the direct cost base of 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 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 Jackie to give a bit of color on the progress we're making just in the sales power in the network.
Jackie Allard (Group Head, Global Wealth Management)
Yeah, sure. Like when I think about retail fund flows, there is, you know, we've made significant progress on both an absolute and a relative basis and it's not an anomaly. We're ranked number three for the quarter. We're also ranked number three on a year-to-date basis with over 4 billion in retail fund sales. And rankings are nice but I think we take our confidence really from the underlying operating improvement. The drivers are right in line with the strategy that we laid out.
Stronger execution on our partnership with Canadian Banking. Multi-year investments that we're making in advisors, investment specialists, financial planners, technology, as well as better coverage in our wholesale channel. So I think the last thing I'd say, Eris, is we still have so much opportunity. I think we've dramatically improved our penetration of the retail client base since Investor Day. We're currently sitting at around 11.6%. We think 15% penetration is absolutely achievable in this business.
Doug Young, Analyst at Desjardins Capital Markets
Appreciate the.
OPERATOR
Your next question comes from the line of Paul Holden with CIBC. Please go ahead.
Paul Holden, Analyst at CIBC
Thank you. Good morning. Question on GBM. So very strong sequential loan growth, 7%. So obviously that's by design, but maybe talk a little bit about that in terms of what a reasonable run rate is. Obviously it's 7%, probably not a run rate. What do you think a reasonable run rate is? And just confirmation, it seems like that's coming with the deposits. Deposit growth was even stronger. So maybe talk about how the two were tied together in terms of, you know, again, by design—that's the strategy.
And then the fee income, that should also come with those wholesale loans. Thank you.
Travis Machen, Group Head, Global Banking and Markets
Yeah, Paul, thanks for the question. And I think you're right. I think a couple 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 the 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 CREF 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, 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 is 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 services 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. Everything we do is really trying to capture those core operating deposits. In connection with Francisco on the GTB buildout, we're investing heavily there and we are looking to continue growing that business.
And I think one of the things you'll notice is 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.
Paul Holden, Analyst at CIBC
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?
Raj Viswanathan, Chief Financial Officer
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 three 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 the benefit or some part of the benefit we got in 2020 when you pull it on, but it doesn't impact loan growth.
OPERATOR
Your next question comes from the line of Mario Mendonca with TD Securities. Please go ahead.
Mario Mendonca, Analyst at TD Securities
Good morning. I want to go back to capital markets for a moment. I think we're all impressed and also a little surprised at how strong capital markets related revenue is. And what I'm trying to think through is what are the conditions that cause this to slow or even reverse. And I take you back to last week when there was a fair bit of uncertainty around U.S. Treasuries. There was some intervention there. Is that the sort of condition that dries up liquidity and hurts capital markets or are the overall macro drivers like the hyperscalers and AI and the capital formation related to that and also your expansion and capabilities?
Are those macro drivers sort of. Would they overwhelm something like what happened US Treasuries last week?
Travis Machen, Group Head, Global Banking and Markets
Yeah, I would say what you saw on the U.S. Treasuries, you know that was mainly focused on the long end of the bond and as you know that doesn't affect capital markets quite as much. I would say more of the 10-year and inside would affect capital markets. And what you're really thinking about and the reaction function I think you're looking for is you want volatility on the capital market side. But you want constructive volatility, too much volatility.
So if the VIX pops to 50-plus, you're going to see your ECM and DCM businesses compress. But when you have constructive volatility, which is what we have right now on a global scale, you have clients trying to navigate a really complex environment right now. They're trying to understand their FX risk, they're trying to understand capital formation, they're trying to understand the right capital structure for their businesses for the new world. And this is where we're super well positioned to help advise our clients.
We are building world-class expertise. We're investing in our people and our products and we can provide those, whether it's debt capital markets, equity capital markets, hedging, investment banking, corporate banking, deposits, and global banking capabilities. And this is all very, very intentional as part of our strategy. So when you're looking for reaction functions, the 30-year a little less so, probably 10-year and in; I would say VIX and some of the volatility in exchange rates for the last year or two, or since Liberation Day, these have all been highly constructive.
And you're also seeing a reinvestment in Canada. I mean, Canada is really looking to grow. And you look at our loan growth, we're actually up 9% in Canada year over year versus 5% on average loans. We are investing in our local market and our local clients and we're well positioned for that cross-border activity.
Mario Mendonca, Analyst at TD Securities
So notwithstanding this, sorry, 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 Canadian banks to grow their capital markets revenue still further the year. You wouldn't guide us to something like a contraction in revenue from this point forward.
Travis Machen, Group Head, Global Banking and Markets
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 or rates are going to be or FX is going to be next year, I could 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, you know, 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 can take away from this quarter, while it was a record and an exceptional quarter, it was very broad based across every single product, region, service subgroup, you name it. We saw a broad base widening of our business.
Mario Mendonca, Analyst at TD Securities
Okay, a question for you, Scott. I'll 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 a 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 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 interest in 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. well,
Scott Thompson, President and Chief Executive Officer
Those are a couple different questions in there. So first, the Key investment was an investment. We've talked about that ad nauseam and it's been a great investment. And when you look at their share price and their performance and how they've executed, it's a great investment for the firm, but it is just that. And so as we think about growing in the U.S., the first protocol is Travis's business. And we've said this continually and you're starting to see that investment that we've been making start to pay off.
Travis talked about Canada, which we're super proud of, but the U.S. also is very broad based, lots of capabilities being added. And frankly, in Mexico you heard Francisco talk about the capital markets investments and that Mexican business doing really well also. And so I do think we've got a lot of organic room to continue to grow across the corridor in each of those three countries. You saw last quarter we bought MapleMark. That was intentional.
It was small. It was a small commercial bank based in Texas. That actually really helps Travis build out again further some of his capabilities and allows us to attract more deposits to actually fund those capabilities. And so I think it's that type of organic with some tuck-ins potentially to build out on the capabilities that we're focused on. That's the priority right now.
Mario Mendonca, Analyst at TD Securities
So it sounds like your interest in the U.S. is in capital markets, not in commercial banking. Is that true?
Scott Thompson, President and Chief Executive Officer
Yeah, I think right now where we've got the biggest opportunity is in Travis's business and Jackie's business. As we think about Jackie's business, it's doing so well. The Canadian focus and also the international focus. I mean, it's growing at kind of 15, 20% for the last three or four years. And we see lots of opportunity there. We could benefit from some U.S. capabilities that connect that whole footprint. And, you know, some of that may be through MapleMark, some of them may be through small acquisitions that we look at in other ways.
But that would be the priority before we start to get into things like commercial or retail. And in fact, retail is not appealing at all. So let's. Before you get into commercial.
Mario Mendonca, Analyst at TD Securities
Got it. Thank you for that.
OPERATOR
Your next question comes from the line of Matthew Lee with Canaccord Genuity. Please go ahead.
Matthew Lee, Analyst at Canaccord Genuity
Hi, good morning. Thanks for taking my question. 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?
Francisco Aristiguieta, Group Head, International Banking
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 non-primacy 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 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.
Matthew Lee, Analyst at Canaccord Genuity
Okay, that's helpful. I'll pass mine.
OPERATOR
Your next question comes from the line of Stephen Boland with Raymond James. Please go ahead.
Stephen Boland, Analyst at Raymond James
Thanks. Thanks for putting me in. Just a comment about the Canada agenda. I guess, you know, OSFI's 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 defence, infrastructure, AI, or is that excess capital just going to be used to continue to buy back shares?
Scott Thompson, President and Chief Executive Officer
Yeah, thanks, Steve. It's Scott. I'll start and Rosh, 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 defence. You know, we've actually really organized ourselves significantly differently over the last six months to capitalize on the defence opportunity.
And now as you think about, you know, an emerging or evolving relationship with the U.S., I think there's going to be some opportunities to really lean into our small business clients and our commercial clients to help them through, you know, 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 that will go would 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. 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.
OPERATOR
There are no further questions on the conference line. I would now like to turn the meeting over to Raj Viswanathan.
Raj Viswanathan, Chief Financial Officer
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.
OPERATOR
Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. Thank you. And you may now disconnect.
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