The Bank of Nova Scotia (BNS:CA) Q1 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary indicates strong financial performance with sustainable growth, especially in retail and commercial sectors. Despite macroeconomic challenges, the bank's strategic investments in technology and AI, along with a disciplined approach to expenses, are positive indicators. The Q&A session highlighted limited exposure to volatile sectors, strong capital ratios, and a focus on value over volume. Although there are some uncertainties in emerging markets, the overall sentiment is positive, with a focus on growth and efficiency.
Key Financial Performance
Adjusted Earnings $2.7 billion or $2.05 per share, up 16% year-over-year. The increase was driven by strong revenue growth, constructive markets, and good expense control, which offset the expected increase in the impaired PCL ratio.
CET1 Ratio 13.3%, even after repurchasing 4.9 million shares. This reflects strong capital deployment and organic growth opportunities.
Return on Equity (ROE) 13%, up 120 basis points year-over-year. The improvement was attributed to better profitability and strategic initiatives.
Canadian Banking Earnings $960 million, up 5% year-over-year. Growth was driven by revenue growth, strong fee and commission growth (8% year-over-year), and positive operating leverage of 2.8%.
Global Wealth Management Earnings $488 million, up 18% year-over-year. This was supported by higher mutual fund fees, net interest income, and brokerage revenues.
International Banking Earnings $717 million, up 8% year-over-year. Growth was driven by disciplined expense management and stable net interest margins.
Global Banking and Markets Earnings $545 million, up 5% year-over-year. Revenue increased 11%, supported by higher trading-related revenues and disciplined pricing.
Net Interest Income Grew 13% year-over-year, driven by higher business line margins and lower funding costs.
Noninterest Income Up 10% year-over-year, driven by higher wealth management and trading-related revenues, as well as positive foreign currency translation.
Expenses Grew 7% year-over-year, mainly due to seasonally higher personnel costs, volume-driven compensation, and technology-related spending.
Provision for Credit Losses (PCLs) $1.1 billion, reflecting elevated impaired loan loss provisions due to macroeconomic uncertainty.
Canadian Banking Return on Equity 18.1%, up 140 basis points year-over-year, driven by margin expansion and improved deposit mix.
Global Wealth Management Return on Equity 17.9%, up 180 basis points year-over-year, supported by strong earnings growth in both Canadian and International Wealth Management.
International Banking Return on Equity 16%, in line with medium-term targets, supported by stable net interest margins and disciplined expense management.
Global Banking and Markets Return on Equity 14.3%, supported by strong earnings and higher trading-related revenues.
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Operating Highlights
AI Investments: Scotiabank is scaling AI to boost efficiency, including the Ask AI tool which processed over 450,000 queries in Q1 2026. A successful AML AI pilot in Tangerine reduced alert volumes by 37%.
Mortgage+ Program: Over 90% of all mortgage originations are driven by this bundled offering, enhancing client relationships and retail banking value.
Scene+ Loyalty Network: Shell Canada joined as a fuel partner, expanding rewards opportunities for Canadians.
Canadian Banking Growth: Earnings expected to grow double digits in 2026, with strong fee and commission growth (8% YoY) and demand deposits up 5% YoY.
International Wealth Business: Earnings up 18% YoY, with 45% growth in Mexico driven by mutual fund and brokerage fee revenue.
Global Banking and Markets Expansion: U.S. comprises about half of segment earnings, with plans to increase this share through investments in capabilities.
Efficiency Improvements: Positive operating leverage of 4.2% and productivity ratio improved by 200 basis points to 52%.
Technology Spending: Technology-related spend was $1.3 billion, up $38 million YoY, supporting business growth.
Capital Deployment: Priorities include investing in organic growth opportunities and share buybacks, with a CET1 ratio of 13.3%.
U.S. Market Focus: Objective to drive sustainable growth while reducing volatility in the U.S. market.
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Risk or Challenges
Impaired Loan Loss Provisions: Impaired loan loss provisions remain elevated due to heightened macroeconomic uncertainty. Canadian Banking Retail and Global Banking and Markets (GBM) experienced increased provisions, with Canadian Retail seeing stress in unsecured lending and mortgages, and GBM impacted by three specific accounts.
Allowance for Credit Losses (ACL): Allowances for credit losses increased by over $200 million quarter-over-quarter, driven by credit migration and impaired allowances in Canadian Retail and GBM. This reflects ongoing credit quality deterioration.
Gross Impaired Loans (GIL): Gross impaired loans increased by approximately $425 million quarter-over-quarter, driven by three accounts in GBM and formations in Canadian Retail, particularly in mortgages.
Canadian Retail Credit Stress: Stress observed in unsecured lending among single-product, younger client cohorts, and COVID-era mortgages concentrated in Ontario and the GTA. Auto loans also show stress due to elevated exposure to used vehicles in the prime segment.
International Banking Credit Performance: Impaired PCLs remain elevated in International Banking, particularly in Chile's consumer finance portfolio due to sustained unemployment and inflation effects. Mexico and Peru also face macroeconomic uncertainties.
Macroeconomic Uncertainty: Ongoing macroeconomic challenges, including trade negotiations in Mexico, unemployment in Chile, and political uncertainty in Peru, are impacting credit performance and economic outlooks.
Technology Investments: While technology investments, including AI, are being made to boost efficiency, there is a risk of overspending or misalignment with long-term growth and sustainability goals.
Capital and Risk-Weighted Assets: Capital usage was impacted by model and methodology updates, which included periodic updates to risk parameters and regulatory clarifications, leading to a 16 basis point impact on capital.
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Guidance & Outlook
Return on Equity (ROE): The company expects to achieve its 14%+ medium-term ROE target one year ahead of plan, with further expansion anticipated across all business units, particularly in Canadian Banking.
Canadian Banking Earnings: Earnings are expected to grow by double digits in fiscal 2026, supported by margin expansion, fee and commission growth, and positive operating leverage.
Global Wealth Management: Continued strong performance is expected, with positive net sales and growth in private banking, full-service brokerage, and asset management.
International Banking: Earnings growth is expected to accelerate as regional economies strengthen, with a focus on building deeper and more profitable client relationships.
Global Banking and Markets: The U.S. market is expected to comprise a growing share of segment earnings, with a focus on sustainable growth and reduced volatility.
AI and Technology Investments: The company plans to continue investing in AI and technology to enhance efficiency, client service, and long-term growth, including scaling AI tools and implementing advanced AML solutions.
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Shareholder Return Plan
Dividends: No specific mention of dividends or changes to the dividend program was made in the transcript.
Share Buybacks: The company repurchased 4.9 million shares in the first quarter under its current NCIB (Normal Course Issuer Bid). Share buybacks remain a priority for capital deployment after investing in organic growth opportunities.
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Key Q&A
Q:Can you provide an update on the guidance for impaired PCLs for the year and whether credit conditions are worsening or improving?
A:The guidance for impaired PCLs remains consistent with the outlook provided in Q4, expecting elevated levels in the near term followed by gradual improvement. Non-retail results were lumpy this quarter, with GBM contributing 3 basis points to all bank impaired PCLs. Early-stage delinquency indicators in unsecured loans are showing improvement, and unemployment is expected to trend down. International Banking performance is consistent with expectations, with impaired outlook expected to remain elevated but stable.
Q:Do you expect impaired PCLs to trend closer to 50 basis points or dip below in the latter half of the year?
A:Impaired PCLs are expected to remain elevated in the first half of the year and come down in the latter half, but the extent of the decline will depend on macroeconomic conditions.
Q:What are the downside risks to achieving a 14%+ ROE target in the next year or two?
A:The main downside risks are macroeconomic factors. The bank is confident in its margin expansion and deposit strategies, which are expected to continue improving through 2026 and 2027. The Canadian bank aims to reach a 24% ROE by 2028, and the bank is focused on thoughtful capital deployment and buyback programs.
Q:Is the Q1 performance a good starting point for international operations, and what is the outlook for net interest margins and efficiency?
A:Q1 was a strong quarter showing resiliency and alignment with outlook. Loan growth was 5%, with non-mortgage loans growing at twice the pace of mortgages. Expenses were flat despite revenue growth, and PCL improvement was noted. The underlying performance is sustainable, with significant upside in retail and commercial growth expected. However, macroeconomic challenges in emerging markets, including Mexico's low GDP growth, remain a factor.
Q:How sustainable are the net margin levels achieved in Mexico?
A:The performance in Mexico is supported by a strong team and strategic shifts. Improvements in portfolio performance and collections are sustainable, and the franchise is well-positioned for continued success.
Q:What capital ratios are expected to be maintained while achieving the 14%+ ROE target, and what is the pace of buyback activity?
A:Capital ratios are expected to remain well above 13%, in line with the current quarter's 13.3%. The buyback program has already executed 15.7 million shares, and the NCIB is expected to be renewed in May, with continued activity anticipated.
Q:Can you provide more details on the 3 basis points contribution from GBM files and why it won't repeat?
A:The 3 basis points contribution came from three corporate banking files in Canada and the U.S., which are not new originations but have been in the portfolio for several years. Non-retail provisions can be lumpy, but the portfolio remains anchored in investment grade with strong underwriting standards.
Q:What drove the $53 million performing loan build in International Banking, and what is the outlook for Chile's Cencosud business?
A:The performing loan build was driven by portfolio migration and growth. The Cencosud business in Chile, which is non-core, is impacted by the macroeconomic environment and regulatory changes. The bank is optimistic about exiting this business and remains focused on delivering commitments.
Q:Is the trajectory for impaired PCLs higher now than a quarter ago?
A:The trajectory for impaired PCLs remains consistent with the guidance provided earlier, with expectations of elevated levels in the first half of the year and improvement in the latter half. The macroeconomic environment remains a factor.
Q:What is the exposure to resorts and tourism in Mexico, and how does it impact the bank?
A:The bank does not actively participate in resort financing in Mexico. Exposure is limited to working capital for merchant acquiring services and consolidated hotel operators. The impact of tourism on Mexico's GDP is significant, but the bank's exposure is minimal.
Q:What metrics should be tracked to assess improvements in funding and deposit margins?
A:Key metrics include growth in checking and savings accounts, core deposits, the alignment of asset growth with deposit growth, and the reduction of wholesale funding dependency. Business mix shifts and pricing discipline are also important indicators.
Q:How is the bank balancing expense control with investments in technology and AI?
A:The bank is running the business with discipline, allowing savings to be reinvested in technology and AI. Investments include centralizing the technology budget, moving data to the cloud, and building AI capabilities. The focus is on preparing for the future while maintaining efficiency.
Q:When can the bank start participating in growth again, particularly in loan growth?
A:The bank is shifting from volume to value, focusing on ROE expansion and fee income. Loan growth will come as economies improve, with a focus on profitable primary client relationships. The bank has grown 11% in revenue without significant loan growth.
Q:What early signs of improvement are being seen in the unsecured portfolio?
A:The unsecured portfolio is showing improvement in 30-plus day delinquency rates, supported by better employment trends and enhanced collections effectiveness.
Q:What is the outlook for GBM margins and revenue durability?
A:GBM margins have expanded by 40 basis points due to disciplined deposit and loan pricing. Long-term opportunities exist in building operating and payment capabilities. Revenue durability depends on constructive market volatility, with expectations of some normalization in earnings run rate.
Q:What is the plan for the KeyBanc investment?
A:The bank has no plans to increase its absolute dollar investment in KeyBanc. The focus is on organic growth and share repurchases, with potential slight increases in ownership due to KeyBanc's share repurchase program.
Q:Review of Unclear Management Responses
A:Management avoided providing a direct answer on the specific timing and extent of improvement in impaired PCLs, citing macroeconomic uncertainties. Additionally, there was limited detail on the exact plans for exiting the Cencosud business in Chile and the specific impact of regulatory changes on collections.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI technology
AML AI
Central America
Chile consumer
Davivienda transaction
FX
International Wealth
Retail GBM
Shannon
account GBM
allowance credit
bank PCLs
branch
commodity price
consumer finance
credit quality
day delinquency
decrease
deposit fund
divestiture remark
expertise
exposure
fuel
fund sale
gain
increase account
line expectation
maturity
methodology update
migration
model methodology
month
network
partner
point Slide
point increase
query
remark follow
return equity
unemployment
unit
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