The Bank of Nova Scotia

Ladies and gentlemen, this conference is being recorded.

Good morning and welcome to Scotiabank's Q2 26 earnings call. 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 Bogdaneris 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.

Thank you, Manny, and good morning, everyone. Scotia bankers should be proud of this quarter as we continue to drive our business forward and deliver for shareholders, even in the face of unexpected geopolitical developments. We remain focused on the needs of our clients as we work to deepen client relationships across our bank. Adjusted earnings came in at $2.7 billion, or $2.02 per share. Pre-tax, pre-provision earnings were up 16% year-over-year as we continue to drive revenue growth and manage our expenses effectively. Our SETI 1 ratio was 13.3% even after repurchasing 6.4 million shares in the quarter, and today we announced a quarterly dividend increase of $0.04 per share, reflecting confidence in our earnings growth. Over the past 12 months, we have returned $7.5 billion in capital to our shareholders through share buybacks and dividends, and looking ahead, we expect to keep this pace while maintaining strong capital ratios. Our capital deployment priority continues to be organic growth, followed by share buybacks and strategic tuck-in acquisitions that fit a well-defined need. Return on equity for the quarter was 13.2% and remains on track to hit 14% plus in fiscal 2027, one year ahead of our investor day target. Our business mix is shifting, which is resulting in strong revenue growth and higher returns, and we expect those trends to continue into fiscal 2027. In Canadian banking, the momentum is building, and we are delivering better results quarter after quarter after quarter. Pre-tax, pre-provision earnings were up 13% year-over-year, help for the fourth consecutive quarter of margin expansion, and continued strength in our fee income line as we maintain our focus on growing wealth management, credit card, and insurance revenues. At the same time, we are managing expenses effectively, even as we continue to make substantial investments in frontline sales capacity and technology. As a result, Canadian banking's productivity ratio was down 230 basis points year-over-year, contributing to positive operating leverage for the third consecutive quarter. Industry-wide, term deposit balances continued to contract during the quarter, but we've been able to consistently retain over 90% of retail GIC maturities, despite intensifying deposit competition. These flows are either staying in Canadian banking, where savings and deposits were up 3% year over year, or are moving into retail mutual funds, where net sales were up significantly year over year. A key pillar of our strategy is to grow high-quality sticky deposits, and earlier this month we announced the launch of the Scotia High Interest Savings Account, which is one of Canada's first relationship-based accounts that offers tiered regular interest rates based on a client's total relationship balance across eligible Scotiabank accounts. Average loan growth remains in the low single digits, but by the end of the year, we expect to catch up to the broader market, thanks in large part to an acceleration in commercial loan growth. Commercial loans were up 2% sequentially this quarter, and we expect that pace to increase given our robust pipeline growth. Overall loan growth will also be supported by our small business portfolio, which continues to grow in the high single digits. Spot credit card growth is expected to reach mid-single digits by the end of the year, while our mortgage volume should keep pace with peers. In international banking, pre-tax, pre-provision earnings were up 12% year over year, helped by revenue growth of 7%. This, combined with strong expense discipline, delivered year-to-date positive operating leverage of 3.2%. Performance in Mexico was particularly strong this quarter, with revenue up 8% year-over-year and earnings up 25% year-over-year. Retail loans continued to grow across our footprint by 4% year-over-year, with non-mortgages growing by a strong 7%, especially in Mexico and the Caribbean. Commercial loan growth was up 2% quarter over quarter and should continue to modestly improve in the second half of the year as we pursue growth thoughtfully and employing a cash management first strategy. Our focus on deposits is also gaining traction, climbing 3% quarter over quarter and 5% year over year. Earlier this month, we were proud to sponsor Chili Day 2026, which brought together government and business leaders in New York and Toronto to strengthen Canada-Chile ties and advance investment in this important market. Scotiabank also hosted Mexico's official trade mission to Canada, convening senior government leaders, business executives, and clients. This event was a significant milestone and reinforced Scotiabank's role as a connector across the North American corridor. In global wealth management, we are continuing to drive our underlying business forward. Net sales for the quarter were at $4.7 billion, four times what we had in Q2 2025, and marking our seventh consecutive quarter of positive net flows. ROE came in at 17.9%, up 210 basis points year over year. Canadian wealth management is continuing to benefit from deeper connectivity with Canadian banking, the form of higher referral volume total closed referrals were at nine billion dollars year to date largely stemming from our retail and small business segments to wealth closed referrals between commercial banking and wealth were 2.8 billion or double what we reported in the first half of last year in our global asset management business we delivered year-to-date net sales of 3.1 billion and continue to rank third amongst our peers in long-term retail mutual fund sales, up from fifth in the same quarter last year, highlighting the opportunities we have to deepen penetration within our own network. And in our international wealth business, earnings were up 12% year over year and 22% in Mexico. This quarter, we were also recognized with eight EuroMoney private banking awards across our footprint, and Mexico's asset management unit was recognized by Morningstar with six funds ranked in the top 10 among all four and five star funds. Finally, in global banking and markets, revenues were up 9% year over year, driven by a 25% year over year increase in capital markets. Our deal pipeline is strong and Q3 has started off on a strong footing with a number of marquee transactions being announced over the past few weeks. Our mortgage capital markets business is accelerating, which is a good example of our U.S. growth strategy in action. GBM's loans grew 1% quarter over quarter or up 3% excluding our Asia portfolio, which is in runoff. Growth here should accelerate as the year goes on, but will increasingly be driven by our capital market strategy. We will continue to deploy balance sheets through our corporate revolver loan book, but with a focus on customers where we have a broader multi-product relationship. We are focused on improving returns while also growing our loan book and investing in critical technology, including AI. This quarter, Scotiabank announced the launch of Scotia Intelligence and Scotia Navigator. Scotia Intelligence unifies the capabilities, platforms, and governance required to deliver AI securely and at scale for employees and clients globally. And Scotia Navigator puts AI directly into the hands of employees across the bank, including advanced assistance that automates routine tasks and redirects capacity towards more complex, higher value tasks. Our approach to AI is designed to take us from isolated AI use cases to AI that is embedded across our processes, decision-making, and client interactions in a trusted, efficient, and effective manner. Our approach is grounded in four key principles, but at the top of the list is security, which has taken on added importance given the cybersecurity risk posed by advanced AI models. We are embedding security, governance, and controls into the foundation of our AI infrastructure by design, enabling us to scale not just quickly but safely, fully aware of both the opportunities and risks of advanced AI. We are also leveraging AI to strengthen our security posture, including AI-driven scanning and monitoring to proactively identify and mitigate risks. Our second principle is flexibility. The AI landscape is evolving rapidly, and we believe that no single model or vendor will dominate over an extended period of time. We have adopted a model-agnostic approach from day one, selecting models based on performance, security, and cost. This approach gives us maximum flexibility with what is a rapidly evolving technology. Our third principle is data. AI is only as effective as the data it can understand We have deliberately invested in getting our data foundation right, clean, well-governed, and richly described so that AI can deliver meaningful outcomes at scale. This is enabled by our enterprise data platform, which ensures that our data is discoverable, trusted, and ready for AI consumption across the enterprise. And our fourth and final principle is platform-first thinking. Rather than fragmented tools, we are building a unified enterprise AI platform This allows for faster deployment, consistent governance, and repeatable scale across the bank. It also enables the deployment of AI agents and continuous monitoring and improvement of models and production, all with enterprise-grade security guardrails built in from the outset. In closing, as we've committed to, we are delivering growth across product lines that are strategically important to us and work to drive client primacy. In Canadian banking, we delivered sequential commercial loan growth this quarter on top of already strong small business growth, and our growing commercial pipeline gives us confidence that that momentum will continue. Although total deposits are contracting because of industry-wide pressure on GICs, we are consistently growing our higher quality savings and day-to-day deposits, even as deposit dollars increasingly blow into retail mutual funds and our wealth business. The connectivity between Canadian banking and global wealth management continues to strengthen thanks to growing retail fund sales and two-way referrals between the two units. In international banking, retail and commercial loans grew 4% year over year, with non-mortgage loan growth continuing to outpace mortgage growth on the retail side and growth improving on the commercial side as we build deeper client relationships. Finally, in global banking and markets, capital markets loans are growing, even as total loan growth is being impacted by our decision to reduce our exposure in Asia. Overall, despite increased macro volatility, we continue to drive towards delivering on our medium-term financial objectives and building a stronger and more profitable bank for the long term. I will now turn it to Raj for a more detailed financial review.

Thank you, Scott, and good morning. 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 beginning this quarter. Moving to slide nine for a review of the second quarter results, the bank reported quarterly earnings of $2.7 billion and a diluted EPS of $2.02. My remarks that follow will refer to the last column of this slide that excludes the impact of divestitures. The return on equity was 13.2%, up 270 basis points year-over-year, driven by strong revenue growth of 13%. Net interest income grew 10% year-over-year, as net interest margin grew 24 basis points from higher business line margins and lower funding costs. The net interest margin expanded six basis points quarter over quarter, benefiting from some seasonality in international banking and increased levels of higher spread reverse repos. Non-interest income was up 17% year over year, mainly from higher wealth management revenues, investment gains, and income from associated corporations. Expenses grew 7% year over year, mainly due to higher performance base and personal costs. and technology spend that also grew 9% to $1.4 billion to support strategic growth initiatives. This resulted in a pre-tax, pre-provision profit growth of 20% year-over-year. The bank generated positive operating year-to-date leverage of 4.9%, and the productivity ratio improved by 290 basis points year-over-year to 52.5%. The bank's effective tax rate decreased percent quarter-over-quarter, primarily due to higher income and lower tax year restrictions and higher inflationary adjustments. Moving to slide 10, the bank's CET1 capital ratio remains strong at 13.3 percent. We generated capital from strong earnings in the quarter and prudent management of RWA growth. We completed the 2025 share repurchase program and commenced repurchases under the 2026 program this quarter. Under the two programs, we repurchased 6.4 million shares this quarter, representing 13 basis points of capital usage. The model parameter updates also consumed 13 basis points. Total risk-weighted assets was $474 billion, up $1.6 billion quarter-to-quarter excluding effects mainly relating to higher credit risk. Turning now to the business line results beginning on slide 11. Canadian banking earnings were $935 million, up 53% year-over-year from strong pre-tax pre-provision earnings growth of 13% and lower performing provisions for credit losses. Loans grew 3% year-over-year from mortgage growth of 4%, while commercial and small business loans grew 1%. Day-to-day and savings deposits grew 3% year-over-year in line with our strategy. However, deposits declined 3% year-over-year mostly in term. Turning to the P&L, net interest income grew 7% year-over-year from loan growth and margin expansion. Net interest margin continued to expand up four basis points sequentially. Non-interest income was up 10% year-over-year from higher mutual fund distributions and credit card revenues. The PCL ratio was 50 basis points, with impaired PCL declining two basis points quarter over quarter. Expenses were up 3% year over year from investments in technology, partly offset by the benefit of efficiency initiatives. Year-to-date operating leverage was 3.9%. Turning now to global wealth management on slide 12. Earnings of $474 million were up 19% year-over-year, as Canadian earnings were up 20%, and international was up 12%, mainly in Mexico. Spot AUM and AUA grew 18% and 15% year-over-year from market appreciation and higher net sales. Revenues were up 14% year-over-year from higher mutual fund fees, net interest income, and brokerage revenues. Expenses were up 12% year-over-year from higher volume-related expenses. Year-to-date operating leverage was 2.1%. Turning to slide 13, global banking and markets earnings were $457 million, up 11% year-over-year. Revenue grew 9% year-over-year as capital markets revenues were up 25%, while business banking was down 7%. Net interest income was 5% year-over-year, primarily due to higher margins. Non-interest income was up 10% year-over-year due to higher trading-related revenues from equities, commodities, and fixed income, partly offset by lower FX trading and underwriting and advisory fees. Expenses were up 10% year-over-year, mainly due to higher technology and personal costs. Moving to slide 14, My comments on international banking are on a constant dollar basis and exclude the impact of divested operations. The segment delivered earnings of $701 million, up 3% year over year. Revenue was up 7% year over year with net interest income up 5% and non-interest income up 14% from higher investment in associated corporations and insurance income. Net interest margin of 476 basis points expanded by 22 basis points quarter over quarter from lower funding costs in Latin America and inflation benefits mainly in Chile. Deposits were up 5% year over year as personal deposits grew 3% and non-personal grew 7%. The loans were down 2% year over year as non-retail loans declined 8% while retail grew 4%. The operating leverage was 3.2% year-to-date. The PCL ratio was 166 basis points, mainly from in-paid. The effective tax rate was 17.3%, mainly from higher inflation, frequent or prior taxes in Peru, and higher income from associated corporations. The GBM business and international banking generated earnings of $237 million, impacted by higher loan loss provisions. Turning to slide 15, the other segment net income was $35 million, compared to a loss of $41 million in the price order, benefiting from higher mark-to-market gains. I'll now turn the call over to Shannon to discuss risk.

Thank you, Raj, and good morning, everyone. The macroeconomic environment remains uncertain, shaped by geopolitical developments and elevated energy costs that continue to affect trade flows and the GDP growth outlook. In Canada, near-term growth has moderated amid continued trade headwinds, and inflation remains a key focus for policymakers. Against this backdrop, all bank provisions were $1.2 billion, or 66 basis points, up 5 basis points quarter over quarter. Impaired provisions were $1.1 billion, or 61 basis points, up 3 basis points quarter over quarter. This increase was driven mainly by one corporate account in international banking, which represented about seven basis points of the all-bank-impaired PCLs. Performing provisions were five basis points, up two basis points quarter over quarter, driven mainly by the impact of forward-looking indicators in Canada. Our allowance for credit losses increased to $7.3 billion, or 96 basis points, up two basis points quarter over quarter. Turning to slide 18. Gross impaired loans increased four basis points quarter over quarter to 99 basis points, driven mainly by the one corporate account in international banking and higher formations in Canadian commercial. Retail gross impaired loans declined across both Canada and international banking, as lower new formations reflected the impact of enhanced collections efforts. In non-retail, GIL formations increased $368 million quarter over quarter, driven mainly by one account in international banking and one account in Canadian banking. Overall, the non-retail portfolio remains well positioned and underwritten to strong credit standards. Turning to slide 19. In Canadian banking, provisions were $575 million, or 50 basis points. In retail, total PCLs were $435 million, flat quarter over quarter, as lower impaired provisions across most products were offset by higher performing PCLs. Performing PCLs were up $22 million quarter-over-quarter, driven primarily by unfavorable impact and or forward-looking indicators, partially offset by credit quality improvements. In unsecured lending, we are seeing the benefit of targeted collection actions, including expanded capacity, enhanced client segmentation, and increased self-service options through our online channels. These efforts contributed to a 20 basis point quarter over quarter improvement in 90 plus day delinquency for unsecured products. That said, we continue to closely monitor the portfolio given ongoing macroeconomic uncertainty affecting consumers, including elevated energy costs and inflationary pressure. Moving to international banking. International banking provisions were $599 million, or 166 basis points, up from $536 million in the prior quarter. In non-retail, the increase in PCLs was concentrated mainly in a single corporate account. This reflects primarily company-specific factors rather than broader macroeconomic or trade-related pressures. We continue to actively manage the exposure with close monitoring and ongoing engagement and expect non-retail impaired PCLs to meaningfully moderate from Q2 levels. On the retail side, total PCLs were lower quarter-over-quarter, reflecting lower new formations in the Caribbean and Peru, and lower performing provisions in the Chile consumer finance portfolio. Retail impaired PCLs were $381 million, down $24 million quarter-over-quarter, driven by divestitures. In global banking and markets, provisions were $38 million, or eight basis points lower quarter-over-quarter. The macroeconomic environment has evolved meaningfully since the start of the year. Elevated energy costs, persistent trade uncertainty, and higher unemployment continue to pressure both consumers and businesses across our footprint. Against this backdrop, we expect impaired PCLs to settle in the mid 50 basis point range for the remainder of 2026. While this is slightly elevated relative to our initial outlook, we still expect PCLs to moderate from first half levels though more gradual than previously anticipated. Looking at each of our portfolios, in Canadian retail, Q2 performance benefited from collections efforts. However, prolonged inflationary pressures could further strain already vulnerable client segments. In Canadian commercial, performance remains resilient and in line with expectations, with continued attention on potential second-order impacts from trade developments and sustained elevated oil prices. Across our key international markets, retail impaired performance is expected to remain elevated in line with our earlier outlook. In Mexico, macroeconomic indicators continue to present a mixed outlook given trade uncertainty. In Chile and Peru, credit performance has been stable, supported by commodity fundamentals, although the potential impact of higher energy costs remains an area of focus. In non-retail for international banking, we continue to actively manage the portfolio through ongoing reviews and early warning monitoring. And while the macro uncertainty remains, we expect impaired PCLs to meaningfully moderate from Q2. In closing, we continue to build allowances, adding $159 million this quarter to bring total reserves to $7.3 billion, or 96 basis points, and now 24 basis points higher than Q1 2023. Importantly, these allowances reflect a range of forward-looking macroeconomic scenarios, and we are comfortable that both the level of reserves and the quality of our portfolio position us well to navigate the environment. With that, I will turn it back to Manny for Q&A.