On Tuesday, Bank of Nova Scotia (TSX:BNS) discussed third-quarter financial results during its earnings call. The full transcript is provided below.

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Summary

The Bank of Nova Scotia reported record Q3 earnings with a 21% year-over-year increase in earnings per share to $2.28 and a return on equity of 14.2%, surpassing medium-term objectives.

The bank's capital deployment focused on organic growth, share buybacks, and strategic acquisitions, with $8.3 billion returned to shareholders over the past 12 months.

Positive operating leverage was maintained for the 10th consecutive quarter, and the CET1 ratio stood strong at 13.1%, reflecting robust capital management.

Canadian Banking saw growth in return on equity to 19.4%, with a focus on improving business mix and fee income growth.

Global Wealth Management and Global Banking and Markets posted significant year-over-year revenue growth of 18% and 32%, respectively, driven by higher mutual fund fees, brokerage revenues, and capital markets activities.

International Banking reported earnings of $725 million, with a focus on optimizing capital allocation and deposit growth.

The bank continued to invest in AI, expanding its Scotia Intelligence platform and launching the AI Consortium to foster safe AI deployment.

The future outlook remains positive, with expectations of continued momentum into fiscal 2027, supported by strategic initiatives and improving business mix.

Full Transcript

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 Bugdinaris from Canadian Banking, Jackie Allard from Global Wealth Management, Francisco Aristaguieta 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 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, 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%. 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. 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, 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. 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.

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 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%. 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.

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