The Bank of Nova Scotia (BNS) Q4 2021 Earnings Call Transcript | The Motley Fool

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The Bank of Nova Scotia (NYSE:BNS)
Q4 2021 Earnings Call
Nov 30, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

John McCartney

Good morning, and welcome to Scotiabank’s 2021 fourth quarter results presentation. My name is John McCartney, I’m head of investor relations here at Scotiabank. Presenting to you this morning are Brian Porter, Scotiabank’s president and chief executive officer; Raj Viswanathan, our chief financial officer; and Phil Thomas, chief risk officer. Following our comments, we will be glad to take your questions.

Also present to take questions are the following Scotiabank executives. Dan Rees from Canadian Banking; Glen Gowland from Global Wealth Management; Nacho Deschamps from International Banking; and Jake Lawrence from Global Capital Markets. Before we start, and on behalf of those speaking today, I will refer you to Slide 2 of our presentation, which contains Scotiabank’s caution regarding forward-looking statements. With that, I will now turn the call over to Brian.

Brian Porter — President and Chief Executive Officer

Thank you, John, and good morning, everyone. I will begin with a review of the bank’s performance and progress over the course of fiscal 2021, after which Raj will review the financial year in more detail, including our outlook for fiscal 2022. Phil Thomas, our chief risk officer, will follow Raj with commentary on risk performance. and outlook.

We will be pleased to take your questions following my closing remarks. The 2021 fiscal year was, indeed, the transition year to the full earnings power of the bank we anticipated. In fact, at the all bank level and adjusted for divestitures, earnings were 18% higher than fiscal 2019, and pre-tax pre-provision earnings were 8% higher. Our business lines have returned to or exceeded pre-pandemic earnings levels.

Loan growth has been strong, in line with customer preferences. Our loan growth is focused on secured lending, higher-quality unsecured retail lending, and maintaining a high-quality corporate and commercial loan book. This will generate consistent revenue growth while keeping PCL ratios well below historic levels. Our ability to deliver strong pre-tax pre-provision earnings in fiscal 2021 despite the realities of transition in many of our markets speaks to our high asset quality and diversified platform.

The pandemic period has been a comprehensive test of both customer behavior and our ability to deliver a superior digital offering across our footprint. J.D. Power recently recognized Scotiabank as No. 1 in Canadian online banking satisfaction.

We were also named Best Digital Bank in Mexico at the Global Retail Banking and Innovation Awards. The pace of digital adoption and lack of migration back to traditional channels as the pandemic recedes has given us confidence to further accelerate our platform transformation toward digital channels in International Banking. Digital transformation is a top-line growth engine, a cost-efficiency lever, and a driver of enhanced customer experience. Raj will speak in more detail to this quarter’s restructuring charge and related benefits driven by this accelerated adoption of digital channels in International Banking.

Credit quality in the bank remains very strong. Gross impaired loans are now below pre-pandemic levels, with formations in the quarter substantially below pre-pandemic levels. Loan growth has accelerated, and we expect PCLs to continue to trend lower. Phil Thomas will have more to say on this shortly.

Our common equity tier one ratio remained strong at 12.3%, driven by strong internal capital generation. With OSFI lifting capital restrictions and our confidence in future earnings growth, we have increased our quarterly dividend by $0.10 this quarter, and we will recommence our normal course issuer debt program immediately. As we have indicated prior to the pandemic, we will review our annual dividend in the second quarter. The bank has successfully exceeded our four medium-term financial objectives of EPS growth, ROE target, positive operating leverage, and strong capital ratios.

We are proud of our performance. Great progress on our commitments to strengthen the communities in which we operate was also evident through various social and sustainability efforts in fiscal 2021, as we were recognized by Global Finance for outstanding leadership in sustainability, transparency, and recognized by Refinitiv as being among the top 25 most diverse and inclusive global companies. Before I turn the call over to Raj, I want to take a moment to acknowledge the severe weather-related events in British Columbia. Like many Canadians, we’ve been following the news with real concern.

And our thoughts are with our customers, our colleagues, and their families, and we will continue to stand by them over the coming weeks and months. With that, I’ll turn the call over to Raj for the financial review.

Raj Viswanathan — Chief Financial Officer

Thank you, Brian, and good morning, everyone. Before I begin, I’d like to note that all my comments on the bank and business line results are on an adjusted basis. As I did in the past few quarters, quarter-over-quarter performance in some sections given the economic impact of the pandemic during most of 2020. I will also refer to numbers excluding the impact of FX in many areas as this has an important impact to the year-over-year comparatives.

You will recall last quarter, we added Slide 40, which discloses the impact of foreign currency to key income lines. This remains relevant this quarter. Starting on Slide 5, on fiscal 2021 performance. The bank ended the year with adjusted diluted earnings per share of $7.87 and a return on equity of 15%.

Pretax pre-provision income was up 2%, or up 5% excluding the impact of foreign exchange. Revenue was flat or up 3%, excluding the impact of FX, and expenses were down 1% or up 1% excluding the impact of foreign exchange, resulting in a positive operating leverage for the year. From a business line perspective, earnings from our P&C businesses, which were impacted by higher provisions for credit losses last year, recovered significantly in 2021. Canadian Banking earnings increased 60% and in transfer banking earnings increased 83% on a full year-over-year basis compared to 2020.

Global banking and markets maintained momentum in fiscal 2021, reporting earnings of $2.1 billion driven by good contributions from capital markets and corporate and investment banking. Global Wealth Management earnings of $1.6 billion was up 23% year-over-year, driven by record results across both advisory and asset management businesses. In 2022, all bank revenue is expected to benefit from good mid-single-digit loan growth, modest margin expansion, and higher noninterest income benefiting from improving economic conditions. The provision for credit losses ratio is expected to be below fiscal 2021 levels.

The bank is focused on prudent management of expense growth to generate positive operating leverage. I’ll review the performance for the quarter, starting on Slide 6. Let me address a couple of key expense items that add up to $188 million this quarter. It was recorded in the other segment and disclosed in Slides 20 and 21.

These impacted the reported net income to common shareholders by $129 million after tax and earnings per share by approximately $0.10. The bank recorded a restructuring charge of $126 million, primarily related to the cost of reducing approximately 10% of the branches and approximately 7% of full-time employees mainly in the middle and back offices, driven by the accelerated customer adoption of digital channels and process automation within International Banking. These efficiencies are a result of our commitment to simplify processes and optimize distribution channels to run businesses more effectively while meeting changing customer needs. We expect the charge will result in expense savings of a similar amount in 2022 in International Banking.

In addition, the bank recorded a settlement and litigation provision of $62 million pre-tax in connection with the bank’s former metals business. All my comments that follow will exclude the impact of these two items. The bank reported another strong quarter with earnings of $2.7 billion and diluted earnings per share of $2.10, an increase in EPS of 45% year over year and 4% quarter over quarter. All operating segments reported strong results again this quarter, reinforcing the strength of our diversified platform.

Return on equity improved to 15.6% this quarter, while pre-tax pre-provision earnings increased 4% year over year. Revenues were up 2% year over year, or up 4% excluding the impact of foreign currency translation. Revenue was down a modest 1% compared to last quarter, mainly due to lower trading-related revenues. Net interest income was down 1%, or up 2% excluding the impact of FX.

This increase was driven by strong loan growth in our Canadian Banking and Global Wealth Management businesses, as well as higher margins achieved in GBM, offset by slightly lower margins in International Banking. The all bank net interest margin declined six basis points quarter over quarter to 2.17%, driven by business mix changes in Canadian Banking and International Banking and lower contributions from asset-liability management activities. Noninterest income increased 7%, driven by higher banking fees, wealth management revenues, income from associated corporations, and investment gains. Quarter over quarter, noninterest income was down 2%, due mainly to lower trading revenues and underwriting and advisory fees.

The PCL ratio continued to decrease, falling to 10 basis points for the quarter, representing a decline of 63 basis points year over year and 14 basis points quarter over quarter. The improvement reflects changes in business mix and a more…