Bank of Nova Scotia (BNS) 2017 Q4 法說會逐字稿

Good morning, everyone, and welcome to Scotiabank's 2017 Fourth Quarter Results Presentation.

My name is Adam Borgatti, Vice President of Investor Relations.

Presenting to you this morning is Brian Porter, Scotiabank's President and Chief Executive Officer; Sean McGuckin, our Chief Financial Officer; and Daniel Moore, our Chief Risk Officer.

Following our comments, we will be glad to take your questions.

Also, in the room with us to take questions are Scotiabank's business line group heads: James O'Sullivan from Canadian Banking; Ignacio Deschamps from International Banking; and Dieter Jentsch from Global Banking and 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 Porter.

Thank you, Adam, and good morning, everyone.

We are very pleased with the bank's results in 2017.

Our team of 89,000 Scotiabankers has performed well to deliver these results.

Notwithstanding several catastrophic events that took place across our footprint, we are thankful that all our affected colleagues are safe, and we are continuing to support our customers.

Consistent with our strategic agenda, our 24 million customers remain our core focus.

Throughout the year, we implemented a number of initiatives that put our customers at the center of everything we do, including a digital customer experience management system that provides us with rich feedback from our customers.

We continue to make good progress on our digital transformation.

A good example is our Digital Factory network, which became fully operational in Canada and the Pacific Alliance in 2017.

The network is integrated, and we leverage our international scale and diversity of talent across our footprint.

It is also a driver of internal innovation and our digital targets.

Our increased attention to business mix has yielded good results on both sides of the balance sheet.

Our focus on deposits in our retail, commercial and corporate segments has reduced our wholesale funding ratio by approximately 20%.

This has improved our funding profile and further strengthened our financial position.

In Q2 of last year, we announced our structural cost transformation program to significantly transform the bank's cost structure.

For fiscal 2017, the first full year of this SCT program, I am pleased to report the bank generated savings of $500 million, well ahead of our target of $350 million for the year.

Our SCT program helps to make the bank more productive and create capacity for new investments.

Over the last few years, we have invested significantly in our leadership teams.

We have strengthened the bank's leadership capabilities with an infusion of new leaders from other businesses, industries and geographies.

These new Scotiabankers have brought depth and a diversity of experience that meaningfully improves our bank's strength and effectiveness.

Today, our teams are more performance oriented than ever before.

I will now shift and comment on our financial performance for the year.

In 2017, the bank delivered strong results, which were in line with our medium-term objectives.

Earnings per share of $6.49, up 8% from 2016, and return on equity was 14.6%, notwithstanding a 50% -- a 50 basis point increase in our common equity Tier 1 ratio.

We [achieved] very good positive operating leverage in our personal and commercial banking businesses, offset by performance in our Global Banking and Markets and Other segment.

As a result, operating leverage at the all-bank level was flat for the year.

In 2017, we raised our quarterly dividend twice, reflecting a 6% increase and well within our targeted 40% to 50% dividend payout ratio.

Our net income of $8.2 billion for the year was supported by strong earnings across all 3 of our business lines, which Sean will discuss further.

In terms of risk management, we have maintained good credit quality throughout the year, and our credit performance continues to improve.

The bank remains well capitalized with a strong common equity Tier 1 ratio of 11.5%.

This provides us optionality for acquisitions, dividends and share buybacks.

And earlier this morning, we announced a binding offer to acquire BBVA's 68% interest in BBVA Chile and its interest in certain subsidiaries for approximately USD 2.2 billion.

The Said family, which owns approximately 32% of BBVA Chile, has a right of first refusal.

BBVA is willing to accept our offer if the right of first refusal is not exercised.

The offer values BBVA Chile at approximately 2.1x price to book value and 18x price to trailing 12-month earnings.

If the offer is accepted, the transaction would utilize approximately 100 basis points of our common equity Tier 1 ratio.

Combining our operations would create Chile's fourth largest bank -- or third largest privately owned bank and would double our market share to 14%.

This is consistent with our core strategy to invest in faster-growing Latin American markets with solid macroeconomic fundamentals, favorable demographics and stable banking environments.

We will provide further financial and business benefits on the proposed transaction when a final agreement is in place, and we'll respond during the Q&A portion of this call to any questions related to the offer or the process.

To recap, we are proud of this year's accomplishments.

We have the right strategy, and we have strong momentum to sustainably grow our businesses and earnings for our shareholders.

I will now pass the call over to Sean to review the full year and the Q4 performance but will return to provide some additional comments on our outlook for 2018.

Thanks, Brian.

I will begin on Slide 6, which shows our key financial performance metrics for fiscal 2017.

The bank ended the year with diluted earnings per share of $6.49, up 8% in 2017.

All 3 of our business lines delivered a strong performance for the year.

Canadian Banking was up 9% in 2017, reflecting a strong performance in retail and small business banking, commercial banking and automotive finance.

The net benefit of high real estate gains and lower net gains on the sale of businesses contributed 200 basis points of the growth this year.

International Banking delivered strong results, up 15%.

Results were driven mainly by the Pacific Alliance countries with higher net interest income and fees from good loan growth and lower commercial provisions.

Ongoing benefits and cost-reduction initiatives also supported results.

Global Banking and Markets rose 16% from last year, driven by results in the equities business related primarily to higher client trading activity.

As well, lower energy-related provisions drove improvement in credit costs.

As Brian mentioned, while operating leverage was flat at the all-bank level in 2017, we saw good performances in Canadian Banking with adjusted positive operating leverage of 2.1% and International Banking at 3.3%.

Lower revenues in Global Banking and Markets and the Other segment offset the previously mentioned strong results.

The bank generated net additional savings of approximately $500 million in 2017 from a structural cost reduction program related to the restructuring charge taken in 2016.

These savings are well ahead of the 2017 guidance of $350 million, resulting in expenses growing only 3%, notwithstanding a 14% increase in technology-related costs.

Generating positive operating leverage remains a priority for the bank, and we are targeting positive operating leverage in 2018.

Turning to the Q4 results.

The bank reported diluted earnings per share of $1.64, up 4% year-over-year.

Our core retail personal and commercial banking businesses reported double-digit earnings growth while Global Banking and Markets was down 15% year-over-year.

Revenue growth was up 1% from Q4 last year.

While net interest income was up 5% or 7% adjusting for foreign currency translation from good asset growth in personal and commercial banking businesses, noninterest revenues were 4% lower.

This was primarily from significantly lower trading revenues from a high level last year and a reduction in real estate gains partly offset by higher securities gains.

Expense growth was 1%, reflecting further investments in technology, digital banking and higher employee-related costs.

Partly offsetting were additional savings from cost-reduction initiatives and lower expenses from the sale of HollisWealth and impact of foreign currency translation.

The Q4 productivity ratio was 53.8%, an improvement of 30 basis points year-over-year.

The credit quality of our portfolios remains very good and resulted in a 3 basis point improvement in our provision for credit loss ratio.

While the collective allowance against performing loans remained unchanged in Q4, an amount related to the recent hurricanes in the Caribbean was added, offset by reduction against other exposures, primarily energy.

On Slide 8, we provide an evolution of our common equity Tier 1 capital ratio over the last quarter.

As mentioned, the bank continues to maintain a strong capital position with a common equity Tier 1 ratio of 11.5%, up from 11.3% in the prior quarter and compared to 11.0% in Q4 of last year.

Common equity Tier 1 risk-weighted asset increased roughly 3% quarter-over-quarter and year-over-year.

Internal capital generation contributed to roughly 30 basis points of capital improvement, partly offset by business growth.

At 11.5%, our capital position is strong and, as Brian spoke to earlier, provides the bank optionality for capital deployment.

Moving to Slide 9. We provide some expectations around the adoption of IFRS 9 in fiscal 2018.

As a reminder, the first set of IFRS 9 financial statements will not be released until fiscal Q1 2018, and there'll be no restatement of prior period comparative statements.

We expect the impact to shareholders' equity and capital ratios from IFRS 9 to be as follows: transition adjustment to the opening balance sheet that will see a reduction in total shareholders' equity estimated at $600 million, primarily reflecting additional allowances for lifetime expected losses on performing loans, including our share of the impact from investments in associated corporations.

This level of additional allowances is within the range we anticipated.

This transition amount will result in a reduction in the common equity Tier 1 ratio of approximately 15 basis points.

Overall, our estimates are based on prevailing market and economic factors as well as forward-looking information.

We do expect slightly higher provisions in 2018 as a result of the adoption of IFRS 9, primarily related to portfolio volume growth, partly offset by benefits from our investments to enhance our collections capabilities.

Overall, our underlying credit performance remain strong.

Turning now to the business line results, beginning on Slide 10.

Canadian Banking produced a strong quarter with net income of nearly $1.1 billion, up 12% year-over-year.

As mentioned earlier, results include the gain on the sale of HollisWealth, which contributed 7% of the net income growth.

Loans and acceptances increased 6% from last year.

Residential mortgage growth was up 5% or 6% excluding the Tangerine mortgage runoff book.

Business loans were up a strong 13%.

Deposit momentum continued, with retail savings and checking deposit balances up 7% and 10%, respectively.

Small business and commercial operating accounts also grew 9%.

Strong asset and solid deposit growth was coupled with a 2 basis point increase in the net interest margin.

Total revenues are up 5% from last year, with net interest income increasing 7%.

The increase was negatively impacted by 2% as lower fees and commission revenues due to the sale of HollisWealth business was only partly offset by the gain on sale.

Provision for credit losses was relatively flat year-over-year as the loan loss ratio improved 1 basis point.

The improvement was broad-based across both retail and commercial portfolios.

Expenses were well controlled and increased only 1% year-over-year.

Higher technology and digital investments were partially offset by benefits realized from cost-reduction initiatives.

Canadian Banking delivered strong positive operating leverage of 2.9% for the year or 2.1% adjusting for the net gain from real estate and the sale of businesses from HollisWealth this quarter and the noncore lease financing business in Q2 of last year.

Turning to the next slide on International Banking.

Earnings of $605 million in Q4 '17 were up 11% year-over-year or 8% adjusting for the impact of foreign currency translation.

Our Pacific Alliance business had a strong quarter, growing 13% quarter-over-quarter and 11% year-over-year, adjusting for the impact of foreign currency translation.

Our Caribbean business was impacted somewhat by hurricanes.

However, the hurricanes did not impact our larger operations in the Caribbean.

As well, the earthquakes in Mexico did not materially impact business.

Our results included hurricane-related impact of roughly $20 million of earnings, primarily in lower revenues, which were offset by a gain on sale of the portfolio's own assets in the Caribbean, primarily reported as reduction in expenses.

Q4 results also includes the impact of lower tax benefits and lower contributions from affiliates.

Our underlying results continue to reflect strong operating performance, including loan and deposit growth at Pacific Alliance and very good expense performance.

International Banking grew loans by 7% in Q4 or 10% adjusting for the impact of foreign currency compared to a year ago.

On a constant-currency basis, the Pacific Alliance grew loans by 15% in Q4 compared to last year, led by robust retail and commercial growth of 14% and 16%, respectively.

The good asset growth in International Banking was supported by strong deposit growth, up 11% when adjusting for the impact of foreign currency.

The net interest margin decreased to 4.67%, down 10 basis points year-over-year.

The decline was mainly driven by changes in business mix as commercial loan growth outpaced retail loan growth, the impact of lower inflation and lower funding benefits in certain markets.

We expect margins to be generally stable at these levels going forward, impacted by business mix and, to a lesser extent, inflation impacts.

Loan losses were up 5%, but overall credit performance remained well controlled and the loan loss ratio improved 1 basis point compared to Q4 last year.

Expenses declined 1% but were up 2% adjusting for foreign currency translation.

Higher volume and inflation costs and increased technology and digital investments were mostly offset by the positive benefits of expense management programs.

For 2017, operating leverage was strong at positive 3.3%.

Moving to Slide 12, Global Banking and Markets.

Net income of $391 million was down 15% compared to last year.

Higher contributions from equities and Canadian corporate banking were more than offset by lower results in fixed income and precious metals.

All-bank trading revenues on a taxable-equivalent basis were down 30% year-over-year.

Total corporate loan volumes were down 2% versus Q4 of last year.

However, this was mostly offset by higher interest margins.

Revenues were down 7% year-over-year, reflecting lower loan origination fees and lower fixed income and precious metals trading revenues.

Provisions for credit losses of $8 million was down from $39 million in Q4 last year, and the loan loss ratio was 4 basis points.

Quarter-over-quarter, the loan loss ratio improved 7 basis points.

Expense growth was up 7% year-over-year, driven by higher regulatory and compliance costs as well as technology investments.

I'll now turn to the Other segment on Slide 13, which incorporates the results of Group Treasury and smaller operating units and certain corporate adjustments.

The results include the net impact of our asset/liability management activities.

The Other segment reported net loss of $48 million this quarter.

Earnings in the segment were down from a net loss of $23 million in Q4 last year.

The results reflected lower net gains on investment securities and lower real estate gains, partly offset by a reduction in expenses.

This completes my review of our financial results.

I'll now turn it over to Daniel to discuss risk management.

Thank you, Sean.

I'll begin on Slide 15.

We continue to remain comfortable with the fundamentals of the bank's risk portfolios.

Results this quarter are within expectations, and we saw the loan loss ratio improve to 42 basis points, down 3 basis points both quarter-over-quarter and year-over-year.

Looking back at our guidance of a cumulative energy loan loss ratio over the period 2015 to 2017 of less than 3%, we have outperformed with a loss ratio of 2.1%.

The energy portfolio had stable performance throughout the year.

Overall, we are seeing improvements in the PCL ratios across our personal and commercial banking businesses in Canada and internationally.

Specifically, in Canada, delinquency rates improved from prior periods across all of our retail product categories, including auto lending.

On product, our loss rates in residential mortgages remained minimal at 1 basis point.

All lines of credit, personal loans and credit card, all improved quarter-over-quarter.

Our residential mortgage portfolio remains high quality and lower risk.

49% is insured, and the uninsured portfolio has a loan-to-value of 51% on average, providing substantial equity buffer.

As well, new originations this quarter reflected average LTV of 64%.

Moving on to International Banking.

We continue to see good credit quality trends.

Retail performance was generally stable across the Caribbean and the Pacific Alliance countries.

Last quarter, the exception was Colombia, but we saw the portfolio improve the PCL ratio over 110 basis points quarter-over-quarter.

The natural catastrophe did not have a significant impact on specific provisions recorded in International Banking.

As Sean mentioned earlier, the bank did allocate a portion of its existing collective allowance against performing loans to the impacted portfolios while reducing other exposures, mostly energy, in the collective allowance.

Now looking at our credit metrics.

Gross impaired loans were down 1% quarter-over-quarter, reflecting improvement in Canadian Banking and Global Banking and Markets as well as commercial exposures in International Banking.

Similarly, our net impaired loans as a percentage of our portfolio improved 1 basis point quarter-over-quarter and 6 basis points year-over-year.

Turning to Slide 16.

You can see the recent trend in loss rates for each of our businesses.

We are reporting broad-based improvements, with loan loss ratios improving year-over-year across all of our portfolios, including retail, commercial and wholesale exposures.

Overall, we believe our credit portfolios continue to reflect broad diversification.

And notwithstanding the expected impact around the adoption of IFRS 9 standards, as Sean discussed, our underlying performance remains strong.

I'll now turn the call back over to Brian.

Thank you, Daniel.

I'd like to provide some thoughts on our outlook for next year.

As I mentioned earlier, we are very pleased with our performance in 2017 and the bank's accomplishments.

We are in a strong position as we head into 2018, and we expect to see good growth in each of our 3 business lines as economic conditions continue to improve.

We have made good progress against our digital strategy and the targets we set out at the beginning of the year.

Global growth is strengthening, and for the first time since the global financial crisis, balanced global growth between industrialized and emerging market economies is expected.

We expect the Canadian and U.S. economic backdrop to remain positive.

In the Pacific Alliance, we expect to see improved GDP growth in the range of 2.5% to 4%, led by Peru and Chile.

With this context as a backdrop, I will now turn to the outlook for our businesses for next year.

Canadian Banking is executing on its strategy of delivering an excellent customer experience and growing primary banking relationships.

More specifically, James and his team are reducing structural costs to create investment capacity that will drive shareholder value, leveraging digital to improve our operations and enhance the client experience and drive digital sales and continuing to optimize business mix by growing higher-margin assets, building core deposits and earning higher fee income.

We expect to see good volume growth in both lending and deposit products for our retail and business customers, and margins also have the potential to improve during 2018.

Operational improvements will continue to be a sharp focus that will drive positive operating leverage, leading to productivity gains.

Overall in 2018, we expect another strong financial performance from Canadian Banking, building on the momentum that we established in 2016 and 2017 and in line with our guidance of 6% to 9% earnings growth.

International Banking will continue to execute on its strategy focused on growing in the Pacific Alliance countries and optimizing operations in the Caribbean and Central America.

The key priorities for Nacho and his team in 2018 include: using our customer experience system to drive further improvements and systematically gathering feedback from our employees on how to better serve our customers; progressing further on our structural cost programs while focusing on developing new capabilities across the bank; and thirdly, scaling up our digital banking units across the network to drive digital sales on priority products and accelerate digital adoption and transaction migration.

International Banking's earnings growth in 2018 will be driven by the Pacific Alliance countries as impacts from natural disasters unwind.

We also expect private and public investment to pick up as the region benefits from strengthening in the global economy.

While elections in Chile, Colombia and Mexico and the ongoing NAFTA discussions create some uncertainty, we have a track record of managing through periods of changing geopolitical conditions.

With a positive outlook for the Pacific Alliance, we continue to expect double-digit loan growth with generally stable margins and credit performance.

Expense management is a key priority, and we expect to deliver positive operating leverage in 2018.

We remain confident in the medium-term growth outlook for the international bank, which calls for constant-currency earnings growth of 8% to 10%; and in the Pacific Alliance, growth of 9% to 11%.

Turning to Global Banking and Markets.

The business recorded a better year with net income of $1.8 billion as the business continues to execute on a more focused strategy under Dieter's leadership.

We are investing in the business and adding resources to investment banking, including growing our Latin American investment banking and capital markets capabilities.

Dieter and his team are sharply focused on executing on their strategy, reducing structural cost and investing prudently in technology to enhance the customer experience and improve efficiency.

In summary, the bank remains confident in our medium-term financial objectives of earnings per share growth of 5% to 10%, return on equity greater than 14%, positive operating leverage and strong capital levels.

With respect to operating leverage, our structural cost transformation program delivered on more than $500 million of savings in 2017, exceeding our previous guidance.

We will actively manage our SCT program over the next 2 years, along with prudent investments in our business and revenue growth to meet our productivity target of 52% by the end of 2019.

Over the next 2 years, we expect to generate approximately 200 basis points, on average, of positive operating leverage.

We are pleased that we've built our common equity Tier 1 capital ratio to a strong level of 11.5%.

As I said earlier, this provides us with good optionality for capital deployment, including investments in organic growth, acquisitions, buybacks as well as ongoing dividend increases.

I would also like to comment on the outlook for our technology and digital-related investments, a key consideration to improving the bank's productivity and delivering a better customer experience.

Technology expenditures in 2017 amounted to more than $3 billion, representing approximately 11% of our revenues.

This is in line with our global peers and is up 14% from last year.

We expect growth in technology and digital expenses to moderate somewhat in 2018.

As we continue on our strategy, we are delivering improved financial results and our business momentum is growing, all of which positions us well moving forward.

We are also very pleased with the progress we've made on our journey to become a digital leader.

We have hired some great new people, have strong leadership in place and are doing many exciting things across the bank.

And we look forward to hosting our all-bank Investor Day on February 1, here in Toronto, where we will provide a comprehensive review of our strategies and priorities.

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

Thanks, Brian.

That concludes our prepared remarks.

We'll now be pleased to take your questions.

(Operator Instructions)

Operator, can we have the first question on the phone, please.

Our first question comes from Gabriel Dechaine with National Bank Financial.

Just had a couple of quick ones on BBVA.

Firstly, you've given some guidance on the core Tier 1 adjustment whether you buy 70% or 100% of this thing.

I just want to confirm what's underlying those assumptions.

You're not intending to issue any new equity to finance it, this would be an excess capital financed transaction?

Yes, that is our intent, to fund this with existing capital.

Okay, great.

And then broadly, I guess, how do these businesses compare?

We see the loans and all that and the branch number.

Just wondering how they fit strategically into one another.

And then from a synergy standpoint, I see, over the past few years, your Chilean operations have had a quite substantial improvement in mix ratio.

What does -- would this be -- and BBVA happens to have quite a few more employees and quite a few more branches.

I was wondering if those business differences are something you can't really change or this is an adjustment that would lead to pretty material synergies on the combination.

Gabriel, it's Brian.

We're going to have to wait.

And we'll have another call in due course, assuming we get this done, and we can talk about the quality of the assets, accretion, synergies, all those things that we want to talk about and you want to -- I think, you want to hear about.

But I would reiterate that this is a high-quality asset bank.

It's very well run.

Risk appetite would be very similar to Scotia.

And we think it's a good fit of assets, would be a good fit of people and technology.

We've done extensive work on this.

We know the asset very well, and we'll have more for you to discuss in the future.

Well, it's not the accretion.

I mean, what's the -- where's the overlap in the businesses?

Are they strong in a market in which you're not, that type of thing?

Yes.

Well, both banks have a 7% market share.

So the most important impact of it will be, of course, a very valuable, we say, greater scale.

This would be 14% bank.

And we have a portfolio, due to the Cencosud acquisition, which has a larger unsecured lending.

But I would say, as Brian said, it's quite complementary, and there is a very strong fit to our strategy.

Our next question comes from Ebrahim Poonawala from BoA ML.

Just wanted to follow up, Brian, in terms of if you can put some numbers around -- you mentioned the target to maintain strong capital levels.

If we adjust for the BBVA transaction and the IFRS 9 impact, I get to about 10.35% CET1.

If you could, like what's the time line of how soon can that transaction close, if the Said family doesn't refuse the transaction?

And secondly, given that there is a likelihood that the global banking regulators may reach some sort of an agreement on Basel IV maybe as early as next week, can you help us sort of put some numbers around what B IV impact would be to your CET1?

Sure.

I'll start, and then I'll turn it over to Sean, who will walk you through the capital numbers.

If everything goes according to plan here, we would expect to close the transaction sometime in the summer of 2018.

And in terms of capital, Sean, do you want to walk through that?

Yes.

So that would be, for the 3 quarters of capital accretion, between 30 and, say, 45 basis points on top of where we're at today.

As you had mentioned -- or we mentioned, the IFRS 9 is only 15 basis points, so that would essentially put us around the 10.5%-plus level.

We also have expressed a dialogue -- we started a dialogue with FASB in terms of looking at revisions possibly on the Basel I floor.

FASB has agreed to look into that, so there may be some changes with respect to capital later -- in the near term, which could be a potential benefit, but we're not there yet.

So overall, we're comfortable that we'll still be at 10.5% or higher.

With respect to Basel IV, you're right, there could be an announcement coming up next week.

Our understanding is that would be effective for 2020 with then a 5-year, hence, time line to phase in a new floor expectation.

So there's -- that's still many years in front of us.

And again, we accrete quite a pretty good level.

We do not see the Basel IV being a headwind in the near term for us in terms of our capital management.

Understood.

And just to clarify, the 30 to 45 basis points, is that the capital you expect to accrete over the next 3 quarters, you said?

Yes.

And I get that there'll be enough of a phase-in to get into Basel IV, so clearly, there's no immediate shock.

But I'm just wondering -- I mean I'm sure you've run through the math.

I'm just trying to get a sense of is it a 20 basis point impact, is it a 50 basis point impact when you apply sort of a 72.5% output floor?

Any framework there would be very helpful.

Yes.

We're still working through that.

But again, we believe it's going to be very manageable for Scotiabank to accrete up to those newer levels under Basel IV.

Next question is from John Aiken from Barclays.

Sean, thank you very much for the disclosure in terms of the hurricane and other impacts in Mexico.

I was wondering, though, is there any ongoing lingering impact that you can talk to in terms of the operations?

And then specifically, what's been going on in Puerto Rico?

I'll pass it over to Nacho to answer.

Yes.

Well, we -- as Sean mentioned, really, the impact -- the direct impact was in Puerto Rico and some smaller countries, so it's relatively small.

It only represents 3% of the NAV of International Banking.

Going forward, of course, we expect that the tourism and economic activity will gradually recover.

And in terms of Puerto Rico, it's a very small portion.

It represents only around 1% of our assets today.

We have been derisking our operations in Puerto Rico in the past year, and it only represents around 30% of what it was 5 years ago.

Next question is from Steve Theriault of Eight Capital.

I had a question for Dieter.

But first, just, Sean, on the BBVA deal, how long does the Said family have to make the elections regarding their optionality and right of first refusal?

We think this will get settled sometime within our Q1, so it won't go beyond Q1.

Okay.

And then -- so for Dieter, I think we all expected trading to be weak this quarter, but $60 million of rate and credit trading, I think that's the weakest we've seen since 2014.

And I think there's a liquidity event in the quarter that we hit that.

So can we get a little more detail, a little more granular detail around how challenging the quarter was?

Obviously -- I mean, you guys had pretty good fixed income underwriting, and volatility was down but not that much quarter-on-quarter.

So just if you can get into that a little bit and if you can speak at all to the outlook and how November has been versus Q4, that would be helpful.

Yes.

Thank you, Steve.

You're absolutely right, the challenging was -- area was in the rate side of the fixed income business as we saw continued low volatility in the major government bond markets in the U.K. and the U.S. and Canada.

So a little volatility with a lack of movement in issuance, notwithstanding a very benign environment, resulted in trading revenues falling off considerably.

And that was off a very robust Q4 and Q1 last year.

You recall, with Brexit and the situation -- the election situation in the U.S., it was very constructive trading environment.

So that came off this quarter, as you saw.

We anticipate a much more proactive trading environment in the next quarter -- the next 2 quarters as the new Fed chairman takes over and some rate increases take place in the U.S. And so we also see a little more hawkish tone in the U.K. So you combine that together, we anticipate a much more, as I said, constructive environment.

And the good news is, is that our underlying platforms are operating efficiently, and we're ready to take advantage of those good flows.

And I'll also add to it that our debt origination you saw and the underwriting fees was also quite robust this quarter.

So are you seeing much of that in November?

Or is that more if Fed hikes in December, you expect to see...

Well, we've seen the...

Is November feeling like Q4, sorry?

November is feeling mildly more positive than the end of October.

We saw some volatility creep back in the markets and fade back.

So it isn't at the same levels as we saw at the end of Q4, but much more constructed to begin the quarter.

Next question is from Robert Sedran from CIBC Capital Markets.

Just, first off, a quick clarification.

Sean, you mentioned, on the back of IFRS 9, modestly higher provisions into next year.

I presume that off the roughly 45 basis points for the full year and not the 42 for the quarter.

Yes, it'd be off the whole year number.

Okay.

And again, as I mentioned, that's really off the volume growth.

Now with IFRS 9, as you originate loans, you have to put provisions up day 1, so there's a bit more upfront provisioning that's got to be done.

Got it.

And just a follow-up on the question about the international margin.

You mentioned that it was mix and also some inflation-related noise, I guess.

I'm curious, when you start talking about a flatter margin outlook, what of the mix do you see changing?

Are you expecting the commercial loan growth to slow a little bit?

Or are you seeing a better pipeline on the retail side to balance off some of that growth?

Or perhaps it's the funding side that I'm missing.

Yes.

We were saying that the margin should be in and around this level, but it will be impacted going forward based on business mix.

So as you would expect, if retail grows faster than commercial, you will see a higher margin.

But we think, at the current level, if everything grew at the same pace, at the same rate, then the margin should be in and around what you're seeing today.

Oh, I see.

So you weren't signaling a change in the direction of the business...

I was not.

From what you saw.

It was more just -- I understand.

The next question comes from Meny Grauman of Cormark Securities.

Just a follow-up question on what drove trading this quarter.

Specifically, wondering about the precious metals business and the reported challenges there.

I noticed that precious metals holdings are down quite significantly quarter-over-quarter and year-over-year, and so I'm wondering if you have any color on that, to what extent that specific business is impacting the results in capital markets.

So Meny, the main trading numbers, as I mentioned to Steve's comment, really focused around the rate side of the business in fixed income.

Even though cash equities were softer as well, we saw the market come off considerably in terms of new equity issuance.

So between cash equities and the rate side, that was the predominant side of the trading numbers in terms of the reduction.

But you're absolutely right, with gold being range bound for a good part of the quarter, we saw the trading numbers come off in gold as well as the lending side of the gold business.

So the metals business was off this year and this quarter as well.

And I don't know if you can answer, but in terms of your commitment to that precious metals trading business, is there anything you can add more publicly to those reports about a potential sale?

We're always looking at making our businesses better, and we continue to want to serve our customers the best way we can.

The next question comes from Scott Chan from Canaccord Genuity.

Just a quick clarification question.

When you talked about the international NIM guidance, was that based on Q4 or the 2017 run rate in terms of what you're talking about earlier?

This is Nacho.

Well, there can be -- we're talking basically about some volatility around these levels of Q4.

As Sean mentioned, I would put it this way, our margins in our core businesses, corporate and commercial and retail, are stable, and we expect them to continue, going forward, to be stable.

It's really asset mix, the main impact that could have some variation quarter-over-quarter.

And inflation also has, as you see, sometimes an impact, but we see relative stability at these levels.

And is the retail margin higher than commercial at international?

Yes.

The next question comes from Doug Young from Desjardins Capital Markets.

Sean, just on expenses, $500 million of savings achieved in fiscal '17.

Can you talk a bit about bottom line impact from that?

And then just off the same kind of vein, the NIX ratio in GBM, 52.3%, a lot higher versus last year.

I don't think it's been this high since 2011.

Just wanted to see what was flowing through there.

It didn't seem to be a revenue item from that ratio.

It looked like obviously NIX absolutely was higher.

Just wanted to get a little more detail there.

Yes.

On the cost savings, definitely, we're seeing good benefit from that.

As I mentioned, the whole year expense growth is up 3%, which is quite lower than what we were seeing up to Q3 year-to-date from the banking industry here in Canada.

So we are seeing savings from that.

As I mentioned, we're still heavily investing in digital and technology to drive ongoing sustainable efficiency gains but also better customer experience.

So again, we're very comfortable on the expense management side coming in at a very low 3% compared to what we're seeing in the rest of the marketplace.

In terms of GBM, again, slightly lower revenues than last year.

There's 2 sides to the equation when it comes to productivity and NIX, so slightly lower revenues than last year on a TEB basis.

But again, as we mentioned, that business continues to invest and earn through higher regulatory and compliance costs and also their own technology, digital investments.

So Sean, is this a new -- for GBM, is this a new level that we should expect going forward?

And then just on the total expense saves, I mean it sounds like most of the savings are being pumped back in the business and aren't going through to the bottom line.

Is that a fair assessment?

Are you talking about the all-bank from the last quarter?

Yes, yes.

Yes.

When you say it's not getting to the bottom line, when you've got expense growth of only 3% on a whole year basis, when our peers are running at 5.5%, it sounds to me like the expense savings are making their way through the bottom line from reduced expenses.

This year, we're saying that the revenues came in a bit lighter, again, on the trading side on a non-TEB basis, lower security gains for the year.

So the revenue side was a bit lighter, but the expense performance, I think, was quite strong.

And in terms of GBM, again, with a bit of a softer quarter, the NIX is a bit elevated, and we would expect to see that come off and back down into the kind of the high-40s range it was running before this quarter.

Nick Stogdill from Crédit Suisse.

Just on the IFRS 9, the $600 million opening transitional adjustment, can you give us some context on the geographic mix?

What's driving that by business line and maybe by product?

Just some high-level thoughts on what is driving those numbers?

Yes.

I'll kick off, and if Daniel needs to add, he can add afterwards.

So we're seeing higher provisions on the retail side, with the commercial and the nonretail actually a bit lower.

It's generally split on the retail kind of equally between Canada and the International Banking.

So that's the general split between retail and nonretail and between the business lines.

Was there anything else?

Just to clarify, so the $600 million is split equally between Canada and international and it's mostly on the retail side, the $600 million?

Or it's slightly more...

The $600 million is the charge to retain earnings, which is an after-tax number.

So just think of retail provisions were a bit higher than that number; and commercial provisions, a bit lower than that number.

And for the higher retail provisions, half of that is in Canadian Banking and half is in International Banking.

Okay.

If I could ask one more on BBVA Chile.

Just if you look at the loan-to-deposit ratio for Scotia, there's a bit of a gap, same with BBVA Chile.

Does scale matter on the deposit side in that market?

I guess, will having more scale improve your deposit-gathering capabilities?

Absolutely, they matter, and this will -- of course, would have a positive impact in the cost of funds.

If you see the largest banks in Chile, they have a largest -- larger mix of core deposits.

Next question is from Mario Mendonca from TD Securities.

If we could just revisit the expenses again, so $500 million in structural cost transformation.

Now presumably that wasn't all generated in the year, that's more of a run-rate look at it.

Is that fair, Sean?

That would be the incremental in-year P&L savings, yes.

Oh, that all fell into the year.

Okay then.

The reason why I -- that number just seemed large to me, considering what you -- the incremental investment spending.

The incremental -- you said there was $3 billion in digital or IT spending with an increase of about 14%.

That would imply then that your increase for the year was something like $350 million.

So without putting too fine a point, is it fair to say that as much as $115 million -- sorry, $150 million of cost savings fell into the year?

You can look at that, but there's more categories than just technology.

We've got people costs and some other costs that we're also looking in terms of procurement.

We have savings on that, which shows up in different lines as well.

So I think it's best, Mario, just to look at the overall expense growth of 3% in this environment, when you're spending significant amounts in technology.

I think the -- this program

-- go ahead.

And that's kind of where I'm going with this.

So if next year, as you suggest that you could keep the investment spend -- the growth in the investment spending to less than 14%, then is it fair to say then that the bottom line contribution -- or the contribution, let's call it, to lower expense growth could be greater next year than what we've seen in 2017?

Yes, I think that's correct.

We've signaled we expect ongoing expense benefits all the way to 2019 and beyond.

And we signaled we have a further $200 million next year.

And if we do as well as we did this year, we'll exceed that $200 million.

And as Brian mentioned, if our technology and digital comes off somewhat, then you will see even more reduction to our expenses, so even a lower expense growth possibly next year.

Okay.

And then to wrap it all up then, the -- you made reference -- I think, Brian, you made reference to 200 basis point positive operating on average over the next 2 years.

Is there any reason why that might be back-end loaded, like as in it's in the second year -- '19 rather than '18?

No.

I'll answer this.

We see a very good operating performance -- operating leverage performance next year.

So to get to 52%, which is a 2% improvement in productivity ratio, that means, on average, we need 2% a year operating leverage in '18 and '19.

And we think we'll do even better than that in 2018, so we will have less reliance on 2019 to get to that 52% target.

And if I could just squeeze in one more here.

You went through the segments, and you talked about your medium-term growth outlook, 6% to 9%, 8% to 10%.

There were a few numbers in there.

Given the momentum we're seeing in the bank throughout 2017 and your positive outlook on the macro environment, you sound constructive there, is there any reason why the medium-term growth outlooks could -- is there any reason why they would not be appropriate for 2018?

Mario, it's Brian.

It's -- we think the bank is in a very good spot.

And I think that if you look at our international business in particular, I think the performance was -- we're proud of everything that's been done this year and particularly in the P&C businesses.

But if you look at the international bank in particular, you look at the positive operating leverage of 330 basis points in an environment where revenue growth was hard to come by and that's -- I noted it in my opening comments.

Peru had devastating floods.

You know what happened in the Caribbean and Mexico, obviously, with the earthquake.

So we had to earn through that.

We did it in -- -- within our risk appetite.

Obviously, economic outlook is going to be more positive throughout the Pacific Alliance footprint next year, so we think international is going to have a very good year.

You've asked Sean the appropriate questions on the expense side and how we're going to get to our numbers.

And we think we're going to have a very good year in the Canadian bank, and we've got -- we'll certainly update you further on some initiatives and organic growth opportunities that present themselves on all our businesses on Investor Day in -- on February 1, but we look forward to a very constructive year next year.

Next question comes from Darko Mihelic from RBC Capital Markets.

Two really quick questions actually.

First question is with respect to B20 guidelines.

I think OSFI suggested that where possible, you're expected to comply with the principles as of the date of that letter.

So question is, have you started to basically underwrite according to B20?

And if so, have you seen any impact?

And then I have a second follow-up question for Sean on IFRS 9.

Yes.

On B20, I believe we'll be live January 1. Let me make a broader comment, if I may, Darko, on B20 and on mortgage growth generally.

Look, on B20, we think there will be some impact, and it will represent a bit of a headwind.

But I would point out that some customers are going to find more equity.

Others will extend amortization and some, to be sure, will purchase less home.

But I think offsetting that, higher retention is certainly possible.

So as we look at it, we kind of think about a 5% headwind to originations may be a reasonable guess.

But I want to be clear on our overall assessment.

Our overall assessment would be this.

We have very strong leadership in this business in the person of John Webster.

And as an executive team, we've discussed our outlook for 2018 more than once.

And based on that, we'd be aiming for growth in the mortgage book in 2018 of GDP plus.

And I want to point out, there is room here for mortgage growth to decelerate from current levels and yet, still deliver at those levels of nominal GDP plus.

Mortgage growth was 6% in Q4.

So one final thought, our assessment of risk and return is dynamic.

So if our assessment changes, our appetite will change.

But overall, we're in pretty good position here in Canadian Banking.

If we go back to Q1, the balance sheet was expanding at less than 3% annualized.

If you go to Q4, the balance sheet is expanding at just north of 6% annualized.

So we've got very good momentum in the balance sheet, which should feed into net interest income and into revenue as we head into '18.

Okay.

That's very good.

Just a quick follow-up for Sean on the IFRS 9 impact.

You mentioned that -- it sounded like -- the pretax number, I guess, we'll figure that out.

It sounded like retail was more than commercial, and you mentioned retail was equally split between Canada and international.

What about the commercial split, is that also equal between Canada and international?

Yes.

The commercial reduction, we're seeing primarily in international and some in GBM and just a bit in Canadian Banking.

But again, we'll be providing a lot more detail in our Q1 reporting around the transition but also the impact on provisions in Q1 itself.

The last question comes from Sohrab Movahedi from BMO Capital Markets.

Just a quickie for James.

James, the commercial loan growth in Canada was very strong as well.

Can you just provide some color as to where -- by industry segment or otherwise, where that's coming from?

Yes.

I think, in commercial, we had a strong quarter and a strong year.

I think we see very clear evidence now of good momentum in that business.

To your question, we're seeing good growth in certain focus areas.

So geographically, B.C. had a particular strong year, and sectorally, agriculture had a very strong year.

So 13% growth in assets, 18% growth in deposits.

The spreads have been under a bit of pressure.

But we're very, very pleased with this business, and it continues to be a priority as we go into 2018.

So, you think double-digit growth is doable in an environment where resi mortgages are growing, let's say, at GDP plus?

For commercial?

Yes.

Like, I mean, if you took that same operating environment that you have in mind for mortgages and applied it to commercial in Canada, would you think that you could continue with this kind of growth rate?

Yes, very much so.

So our expectation would be for solid double-digit growth in commercial and solid double-digit growth in small business.

And across the same sort of industry sectors?

I think so.

I don't see any particular shifts.

I think there's still lots of room for us to acquire share in certain segments, whether it's geographical or sectorally.

So I think 2018 will look a lot like 2017.

Very good.

Well, thank you, everyone, for participating, and we look forward to speaking with you again in the new year.

Have a great day.