Scotiabank Posts Record Q3 Profit, EPS Up 21% YoY to $2.28

On Tuesday, Scotiabank discussed its third-quarter financial results during its earnings conference call. The following is the full transcript provided.

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Summary

Scotiabank reported record Q3 earnings, with EPS up 21% year-over-year to $2.28 and a return on equity of 14.2%, exceeding its medium-term target.

The bank's capital allocation priorities remain organic growth, share buybacks, and strategic acquisitions, having returned $8.3 billion to shareholders over the past 12 months.

Positive operating leverage was maintained for the 10th consecutive quarter, with the CET1 ratio remaining strong at 13.1%, reflecting solid capital management.

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

Global Wealth Management and Global Banking and Markets delivered 18% and 32% year-over-year revenue growth respectively, driven by higher mutual fund fees, brokerage revenue, and capital markets activity.

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

The bank continues to invest in artificial intelligence, expanding the Scotia Intelligence platform and launching the AI Alliance to promote safe AI deployment.

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

Full Transcript

Manny Grauman, Head of Investor Relations

Good morning, and welcome to Scotiabank's Q3 '26 results presentation. I'm Manny Grauman, Head of Investor Relations for the bank. Presenting for you today are Scott Thompson, President and CEO of Scotiabank; Raj Viswanathan, our Chief Financial Officer; and Shannon McGinnis, our Chief Risk Officer. Following our remarks, we would be happy to take your questions. Also present to answer 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 begin, on behalf of everyone speaking today, I would ask that you please refer to page two of our presentation, which contains Scotiabank's caution regarding forward-looking statements. I will now turn the call over to Scott.

Scott Thompson, President and CEO

Thank you, Manny, and good morning, everyone. Q3 was a record quarter for the bank, as we reported strong earnings across all our business lines and exceeded all of our medium-term targets. We are particularly proud of achieving our 14% plus ROE target earlier than expected. This achievement was aided by strong markets, but is also a product of strategic repositioning and improved capital allocation that has led to sustainable improvements across the bank.

It continues to be driven by our Canadian Banking segment, which improved its ROE by 160 basis points quarter-over-quarter to 19.4% this quarter. We expect to continue to improve ROE and close the gap with our peers through a steadily improving business mix, fee income growth, and continued productivity gains. We are executing on our strategic priorities, and while you should expect to see some quarter-to-quarter volatility, we do not view 14% ROE as a ceiling for the bank.

This quarter, the bank reported record EPS of $2.28, up 21% year-over-year. We also delivered positive operating leverage bank-wide for the 10th consecutive quarter, and our CET1 ratio was 13.1% at quarter end. After deploying 23 basis points to organic growth and repurchasing an additional 8.6 million shares in the quarter, we have returned $8.3 billion of capital to shareholders over the past 12 months through share buybacks and dividends.

Our capital allocation priorities continue to be organic growth, followed by share buybacks and strategic tuck-in acquisitions that fill well-defined needs. The bank remains focused on deploying accumulated capital to support the Canadian economy, including helping to fund areas of national importance such as natural resources, critical infrastructure, AI, and defense. We expect to do all of this while maintaining strong capital ratios, all as the trade relationship between Canada and the U.S. evolves. The Canadian economy has proven more resilient than expected since tariffs were implemented last year. We will continue to monitor developments while supporting our clients and staying focused 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% quarter-over-quarter in Q3, following 2% growth in Q2.

Going forward, we expect growth to continue to improve, supported by our investments in verticals where we have historically been underpenetrated, including 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 further improvement by year-end, aided by growing purchase volumes that underscore the improving quality of our book. The prime mix of new card acquisitions is now 45%, compared to 35% last year. On the deposit side, we have been able to retain over 90% of retail GIC maturities. These flows either stay in Canadian Banking, where personal everyday and savings deposits grew 1% year-over-year, or move into retail mutual funds, where net sales were $4 billion year-to-date, up nearly two and a half times from last year. Record revenue in Canadian Banking was driven by a fifth consecutive quarter of net interest margin expansion and continued strong fee income growth, as we maintain our focus on growing retail mutual fund, credit card, and insurance revenue.

At the same time, credit trends are improving, partly due to better collections efforts, and we are managing expenses very effectively, even as we continue to invest heavily in frontline sales capacity and technology. We are also seeing business mix improvement in our International Banking segment, where retail loans grew approximately 5% year-over-year. This growth rate should continue to improve, even as growth in our non-retail loan book will remain constrained by design, as we continue to optimize our capital allocation to focus on primary relationships. Our focus on deposits in the region is also paying off, with Q3 deposits up 1% quarter-over-quarter and 6% year-over-year. As a result, earnings remained above $700 million for the third consecutive quarter, driven by strong 7% year-over-year revenue growth. The strategy continues to focus on deepening client penetration while driving further efficiencies. Our International GBM business grew pre-tax, pre-provision earnings by 13% year-over-year, aided by our capital markets platform, where we are increasingly focused on delivering capital-light, higher-value solutions to clients.

In Global Wealth Management, we continue to drive connectivity with the rest of the bank and invest in our full-service advisory and discount brokerage businesses. Net sales were $3 billion this quarter, a Q3 record, up 14% year-over-year compared to Q3 2025, marking our eighth consecutive quarter of positive net flows. Our year-to-date net sales are now higher than full-year fiscal 2025. Closed referrals between Canadian Banking and Canadian Wealth totaled $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 in the same period last year. In our Global Asset Management business, we ranked third among all bank peers in long-term retail mutual fund sales, up from fifth in the same quarter last year and sixth at Investor Day. In our International Wealth business, we continue to expand our full wealth solutions across the region, including in the Caribbean and Mexico, where earnings grew 14% and 15% quarter-over-quarter, respectively. Finally, in Global Banking and Markets, loans grew 7% quarter-over-quarter, with growth resuming after a period of optimization.

Deposits also grew 9% quarter-over-quarter, aided by positive momentum in Global Transaction Banking. We ended the quarter with the highest quarterly net income in the history of Global Banking and Markets, as both Global Capital Markets and Investment Banking closed several large deals for us. These included acting as joint lead underwriter and bookrunner on two of the largest debt capital markets transactions ever in Canada, our largest asset-backed securities transaction since establishing our structured credit platform, acting as bookrunner on the largest IPO in Canada since 2021, and our first lead-left leveraged finance transaction.

All of this activity speaks to the increasing depth and breadth of our Global Banking and Markets franchise on both sides of the Canada-U.S. 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, launching new capabilities to improve productivity and unlock 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 faster from concept to execution. With the recent launch of our Scotia Intelligence knowledge agents, employees now have access to AI-powered solutions that enable easy access to institutional information, making the execution of routine processes faster and helping them focus on higher-value innovation and client outcomes.

Also this quarter, Scotiabank partnered with Lightworks, Sun Life, and Telus to launch the AI Alliance, a collaborative Canadian model designed to help large regulated organizations build and manage the critical controls needed to deploy AI. Looking ahead, we are confident in our ability to finish the year with strong momentum and enter fiscal 2027. Our Q3 results are proof that our strategy is working, and we are successfully building deeper, more profitable client relationships in Canada and across our international footprint through an unwavering focus on improving business mix, growing fee income, and driving efficiency across the organization. I will now turn the call over to Raj for a more detailed financial review.

Raj Viswanathan, Chief Financial Officer

Thank you, Scott, and good morning, everyone. My comments on the bank-wide and other segments will be on an adjusted basis, which includes the usual acquisition-related intangible amortization. Business line results will be on a reported basis. Turning to page 8 for third-quarter results, the bank reported quarterly earnings of $3 billion, or diluted EPS of $2.28. My subsequent comments will refer to the last column on this slide, which excludes the impact of divestitures.

ROE 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 expanded 18 basis points from higher margins across all business lines. NIM was flat quarter-over-quarter, as higher margins in Canadian Banking and Global Banking and Markets were offset by lower margins in International Banking. Recall that International Banking margins had some seasonal benefits in the prior quarter.

Non-interest income grew 21% year-over-year, primarily due to higher banking and wealth management revenue, underwriting and advisory fees, and other fees and commissions, as well as higher income from associated companies. Expenses grew 14% year-over-year, primarily due to higher performance and stock-based compensation related to higher volumes and earnings, as well as higher technology spending to support strategic growth initiatives, which grew 16% to $1.5 billion this quarter.

This resulted in 18% year-over-year growth in pre-tax, pre-provision earnings. The bank generated positive operating leverage of 3.9% year-to-date, with the productivity ratio improving 90 basis points year-over-year to 52.5%. Average loans grew 4% year-over-year, while deposits grew 5%. Turning to page 9, the bank's CET1 capital ratio remained strong at 13.1%. We generated capital from strong earnings this quarter, offset by increased lending and underwriting activity.

We repurchased 8.6 million shares in the quarter, representing 20 basis points of capital usage. Total risk-weighted assets were $493 billion, up $11 billion quarter-over-quarter, largely excluding impacts related to higher credit risk, including the recycling of the Q4 synthetic risk transfer transaction. Certain International Banking portfolios are migrating from the standardized approach to the AIRB approach, which will reduce our capital ratio by approximately 15 basis points.

We expect to absorb this impact and maintain our CET1 ratio at around 13% next quarter. Now turning to business line results starting on page 10, Canadian Banking earned $1.1 billion, up 12% year-over-year, driven by strong pre-tax, pre-provision earnings growth of 11%, partially offset by higher credit loss provisions. 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%.

Everyday and savings deposits grew 1% year-over-year. Consistent with our strategy, term deposits decreased 2% year-over-year, largely internally. Moving to the P&L, net interest income grew 7% year-over-year, driven by loan growth and net interest margin expansion. Net interest margin expanded for the fifth consecutive quarter, up 2 basis points quarter-over-quarter, driven by higher loan and deposit margins. Non-interest income grew 11% year-over-year, driven by higher mutual fund distribution fees, credit card revenue, and insurance revenue.

The PCL ratio decreased 8 basis points quarter-over-quarter to 42 basis points, driven by lower performing and impaired PCL. Expenses grew 5% year-over-year, driven by technology investments supporting strategic growth initiatives, partially offset by benefits from efficiency initiatives. Year-to-date operating leverage was 3.7%. Now turning to Global Wealth Management on page 11, earnings of $515 million were up 23% year-over-year, as Canadian earnings grew 27% and international grew 4%.

Spot AUM and AUA grew 16% and 13% year-over-year, respectively, driven by market appreciation and higher net sales. Revenue grew 18% year-over-year, driven by higher mutual fund fees, net interest income, and brokerage revenue. Expenses grew 16% year-over-year, driven by higher volume-related costs, sales force expansion to support business growth, and technology costs. Year-to-date, operating leverage was 2.2%. Turning to page 12, Global Banking and Markets earned $647 million, up 37% year-over-year.

Revenue grew 32% year-over-year, as capital markets revenue grew 33% and commercial banking grew 30%. Net interest income grew 34% year-over-year, primarily due to higher margins and higher client-driven capital markets activity. Non-interest income grew 31% year-over-year, driven by higher underwriting and advisory fees and client-driven trading revenue from equities and FX. Expenses grew 26% year-over-year, primarily due to higher performance-related personnel costs from 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%, aided by positive momentum from the investments we have made in Global Transaction Banking. Turning to page 13, my comments on International Banking are on a constant dollar basis, excluding the impact of divested businesses. The segment delivered earnings of $725 million, up 6% year-over-year. Revenue grew 7% year-over-year, with net interest income up 3%, while non-interest income grew 18% from higher income from Davy V and A investments, card revenue, and insurance revenue.

Net interest margin of 469 basis points grew 18 basis points, but declined 7 basis points from the seasonally higher net interest margin last quarter. Deposits grew 6% year-over-year, as personal deposits grew 4% and non-personal grew 7%. Loans declined 1% year-over-year, as non-retail loans declined 7% while retail loans grew 5%. Year-to-date operating leverage was 1.9%. The PCL ratio decreased 28 basis points quarter-over-quarter to 138 basis points, primarily driven by lower impaired PCL.

The GBM business within International Banking generated earnings of $321 million, driven by strong capital markets revenue growth. The effective tax rate increased quarter-over-quarter to 21.3%, due to favorable adjustments in the prior quarter and a change in the mix of earnings across jurisdictions. Looking ahead, Chile announced a 4% reduction in its tax rate to 23% over the next three years. While this will result in lower taxes in future years, once enacted, it will also require a one-time deferred tax asset impairment in Q4.

Turning to page 14, the Other segment reported a net loss of $42 million, compared to income of $35 million in the prior quarter, due to elevated investment gains in the prior quarter. I will 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 PCL beginning to decline in line with our outlook for the second half of the year. In this context, bank-wide 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, primarily due to lower International Banking provisions related to the single corporate account we discussed last quarter, as well as improved Canadian retail performance.

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 page 17, total impaired loans increased 1 basis point quarter-over-quarter to 100 basis points, with modest growth 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 page 18, in Canadian Banking, provisions were $498 million, or 42 basis points, down 8 basis points quarter-over-quarter. In Commercial, total PCL decreased $11 million quarter-over-quarter to $129 million. In Retail, total PCL was $369 million, or 39 basis points, down $66 million quarter-over-quarter.

Performing PCL was $24 million, down $10 million quarter-over-quarter, reflecting more favorable forward-looking indicators, primarily from lower interest rates, as well as positive credit migration in auto and card. Impaired provisions in Retail were $345 million, down $56 million quarter-over-quarter, 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 delinquencies across most retail products, we continue to monitor some areas of weakness, including elevated mortgage delinquencies.

That said, mortgage customers remain resilient, and the overall quality of our retail portfolio remains strong, with an average FICO score of 798. Turning to International Banking, International Banking provisions were $522 million, or 138 basis points, down 28 basis points quarter-over-quarter. In Commercial, PCL decreased quarter-over-quarter, primarily due to lower impaired provisions related to the elevated Q2 associated with one of our accounts in Brazil. We continue to work through this account, and in the quarter, we took an incremental provision of $57 million and reclassified $14 million related to derivative exposure from CVA to PCL, with no change in the underlying exposure. International Banking retail provisions also decreased quarter-over-quarter, reflecting improved performance in Mexico and improved delinquency performance across most products in Chile. This was partially offset by higher mortgage impairments 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 higher impaired provisions primarily from new formations in Canada.

In conclusion, while delinquency trends are encouraging, we continue to monitor the sustainability of the improvement. Given ongoing geopolitical developments, increased inflation from elevated energy costs, and continued trade uncertainty, our provisions incorporate a range of forward-looking macroeconomic scenarios. This, combined with the high quality and proven resilience of our portfolio, supports our satisfaction with current provision levels and our position in the current environment.

I will now turn the call back to Manny for Q&A.

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