Bank Of Nova Scotia Q4 FY2025 Earnings Call

Good morning, and welcome to Scotiabank's Q4 results presentation. My name is Meny Grauman, and I'm Head of Investor Relations. Presenting to you this morning are Scott Thomson, Scotiabank's President and Chief Executive Officer; Raj Viswanathan, our Chief Financial Officer; and Phil Thomas, 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: Aris Bogdaneris from Canadian Banking; Jacqui Allard from Global Wealth Management; Francisco Aristeguieta 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 2 of our presentation, which contains Scotiabank's caution regarding forward-looking statements. All the remarks today will be on an adjusted basis. With that, I will now turn the call over to Scott.

Thank you, Meny, and good morning, everyone. Our Q4 results cap off a year of strong and consistent financial performance, and we've entered into fiscal 2026 from a position of strength. 2025 was a year of execution. We did what we said we were going to do despite the emergence of unexpected trade-related economic challenges. We accomplished this by focusing on what we can control and delivering our strategic plan. Overall, EPS grew by 10% for the full year. We also ended Q4 with an ROE of 12.5%, up 190 basis points year-over-year and an efficiency ratio of 54.3%, an improvement of 180 basis points versus the prior period. These results demonstrate clear and measurable progress against our medium-term financial targets. Recapping our strategic objectives, our focus on client primacy is yielding results as we drive strong cooperation across the bank. Closed referrals between Canadian retail, commercial and wealth were $15 billion for the year, up 18% over last year. And our emphasis on deposit gathering is also paying off as we increased our mix of P&C deposits for the second year in a row. We've added 400,000 primary clients since we launched our new strategy, and I am confident we will continue to accelerate client acquisition as we enhance our client experience and build out our data and personalization capabilities. We also remain disciplined in our approach to reallocating capital to key growth areas and continue to strengthen our balance sheet and maintain a strong capital position. We reduced our wholesale funding ratio by 60 basis points this past year, while our loan-to-deposit ratio closed the year at 104%. On capital, we ended the year with a CET1 ratio of 13.2% after repurchasing 10.8 million shares in fiscal 2025. Turning to our Q4 results. We delivered earnings of $2.6 billion or $1.93 per share, up 23% year-over-year. Our quarterly results exclude a restructuring charge with the majority related to actions taken to simplify our Canadian operations. While these types of decisions are always difficult, they are nevertheless necessary as we work to boost the value of the Canadian bank. The actions simplify and streamline our organizational setup, which will free up capacity to further invest in technology and revenue-generating sales staff to propel future revenue growth. We do not anticipate additional charges, but we remain focused on running our bank as efficiently as possible, including taking full advantage of emerging technologies. Our technology spend in 2026 will be concentrated in the following key areas: further building out our global transaction banking platform, enhancing our technology platforms, including AI investments, balancing security and client experience with a continued focus on fraud and transaction monitoring and adding new product capabilities to drive client primacy. Moving to our operating segments. Fiscal 2025 stands as a pivotal year for our Canadian Banking unit as we laid the groundwork to drive stronger earnings growth in the years ahead. We did this by improving client primacy through growth in core deposits and increased in-branch sales of mutual funds, improving our channel mix with a focus on increasing our sales capacity and improving efficiency. Performance in Canada has improved sequentially over the past 2 quarters, setting this business up for strong earnings growth in 2026. Our Mortgage+ program remains a key contributor to the growth we are seeing in multiproduct banking relationships with over 90% of all mortgage originations, including a product bundle, helping drive both deposits and cards growth. We are capturing an increasing share of money in motion, especially in the retail bank, where day-to-day and savings deposits rose by 6% year-over-year and closed referrals between retail banking and wealth management came in at $8.1 billion or up 20% from fiscal 2024. In commercial banking, full year pretax pre-provision earnings were up 21%, even as average loan balances declined by 1%, evidence that our focus on value over volume is delivering tangible results. Our commercial bank is an important and growing source of referrals with our Global Wealth Management unit with closed referrals up 35% this year and a growing source of revenue for our Global Banking and Markets unit, especially in the FX business. Global Wealth Management continued its positive momentum with record earnings across Global Asset Management, Canadian Wealth Management, Private Banking and ScotiaMcLeod. Rising markets are helping drive assets under management higher, and we are also seeing strong underlying performance as full year net sales improved by $11.5 billion versus fiscal 2024. In Canadian Wealth Management, we are seeing strong momentum in our differentiated private bank offering, including double-digit loan and deposit growth. At the same time, we onboarded 5,000 households to our recently launched Signature Bank offering and our full-service ScotiaMcLeod brokerage unit saw double-digit growth in fee-based assets, helped by net sales of approximately $6 billion in fiscal 2025. In our Global Asset Management business, retail net sales improved by almost $7 billion in fiscal 2025, led by our own branch channel. And this past year, we launched 4 new private asset funds, delivering compelling private asset solutions tailored for our wealth and institutional investors. We continue to see strong growth within the liquid alternatives asset class and remain a market leader in this space. And in our International Wealth business, earnings are up 14% for the year with 20% growth in Mexico. We also delivered continued progress in our International Banking segment with results in fiscal 2025 coming in ahead of what we committed to at our Investor Day. This happened in what is still a challenging economic environment as we demonstrated the benefits of our geographic diversification and executed to our plan. Performance in our International Banking segment continues to be driven by solid execution, including strong expense management and improved profitability metrics as we shift our business mix to deeper and more profitable client relationships. We recently launched our singular retail brand and value proposition across Mexico, Peru and Chile, which highlights the work we are doing around both regionalization and client segmentation. For the year, expenses were flat and ROE came in at almost 15%, up 110 basis points versus the prior year. We look to maximize shareholder value across all the markets we operate in. The Davivienda transaction that closed yesterday is a prime example of that. This deal creates additional scale in Colombia and is immediately accretive with further upside from the benefits of scale and diversification as well as from future collaboration. Finally, Global Banking and Markets delivered another strong quarter as we continue to benefit from constructive markets, but also from our organic investments in new capabilities, particularly in the U.S. Our prime services business, where we believe we have a competitive advantage relative to our Canadian bank peers, is a growing contributor to GBM's earnings, and we will continue to build on our relationships with top-tier U.S. managers. Fiscal 2025 was the best year for underwriting and advisory fees in our history, rising 35%. Looking ahead, we have a strong pipeline to execute in 2026 and the federal government's Grow Canada initiative with a focus on energy and mining is well suited to our core capabilities. The U.S. contributed 50% of GBM earnings in fiscal 2025, and we will continue to invest in our U.S. capabilities in fiscal 2026 to increase this contribution over time. Part of that investment is going to the build-out of our U.S. cash management business. After a successful pilot, we officially launched this fall. Across all business lines, we increased the number of enterprise-wide cash management clients by 15,000 in fiscal 2025, exceeding our own internal targets. Success here will help us grow primary client relationships, further reduce our reliance on wholesale funding and drive fee income. Our focus on accelerating the velocity of our balance sheet and growing fee income is delivering results. For the year as a whole, GBM loan balances were down 13%, but earnings in this division were up 30% and ROE increased by 320 basis points. Looking ahead to our strategic priorities for fiscal 2026. We will continue to improve our business mix as we further deepen our client relationships. In Canada, mortgage growth is outpacing growth in commercial loans and cards. But nevertheless, we are making progress in deepening client relationships, thanks to our success in growing core deposits and investments. Looking ahead, we aim to accelerate card growth by further tapping into our Scene+ loyalty program and building on the momentum of our Mortgage+ proposition. And in commercial, the pipeline is growing as we target markets and regions that we've historically been less focused on, which should gradually improve loan growth in 2026. We will continue to build on the strength of our business lines. In Canadian Banking and International Banking, this means building a more efficient, digitally forward bank that seamlessly integrates our branch network with mobile customer service capabilities, meeting our clients where it is most convenient for them. In Global Wealth Management, we will continue to build on our strong sales momentum as well as grow the number of relationship managers in both our Private Bank and ScotiaMcLeod. And in Global Banking and Markets, we will focus on accelerating our balance sheet velocity as we further optimize our use of capital. In the U.S., this includes pursuing a thoughtful organic growth strategy by expanding our product offering while avoiding areas where we do not have scale to compete. Finally, we are focused on further improving connectivity across the North American corridor. We are pursuing deeper connectivity as we continue to build out our global transaction banking business and optimize the value of our international footprint. In closing, we feel good about our earnings momentum heading into 2026 and the ability to continue to execute on our strategic priorities and deliver our medium-term financial objectives, including achieving an ROE of 14% plus. Improved revenue growth, coupled with positive operating leverage should help us deliver double-digit annual EPS growth in fiscal 2026 despite what remains an uncertain operating environment. Canada's renewed focus on natural resource development will drive higher GDP growth and improved national prosperity over the medium term. The recent memorandum of understanding on energy between the Canadian federal government and the province of Alberta is a very significant development in our view and proof that Canada truly is on a new economic trajectory. This renewed focus also plays into our bank's strengths as a trusted provider of capital and advice to key sectors such as mining, energy and critical infrastructure. We are well positioned to contribute to the ambitious plans of the major projects office by helping our clients drive forward large-scale infrastructure projects. This includes pipelines that will enable Canadian oil and gas producers to access global markets, strengthen export opportunities and support Canada's energy competitiveness. And we will continue to advocate for those measures that will unlock greater economic prosperity within our markets. Our results this year have truly been an enterprise-wide team effort, and I would like to thank our entire Scotiabank team for their many contributions in 2025. Two years into our strategic journey, we head into 2026 with momentum and excitement about all that we will accomplish in the year ahead. I will now turn it to Raj for a more detailed financial review.

Thank you, Scott, and good morning, everyone. This quarter's net income was impacted by $299 million of adjusting items after tax and noncontrolling interest or $0.28 of earnings per share and approximately 7 basis points on the common equity Tier 1 ratio. The adjusting items include a $268 million after-tax charge to simplify the Canadian banking organization, right size Global Banking and Markets operations in Asia and regionalized activities in International Banking, in line with the bank's strategy. Legal provisions of $54 million, a $43 million credit related to the Colombia and Central America transaction and our usual amortization of acquisition-related intangibles. All my comments that follow will be on an adjusted basis and on a constant dollar basis for the International Bank. Starting on Slide 7 for a review of the fiscal 2025 results. The bank ended the year with adjusted diluted earnings per share of $7.09, up 10% compared to the prior year and a return on equity of 11.8%, up 50 basis points and a return on tangible common equity of 14.3% that was up 60 basis points. Revenue was up 12% year-over-year, while expenses grew 9%, resulting in positive operating leverage of 3% for the year. The provision for credit losses were $4.7 billion, driven mainly by higher performing PCLs. Canadian Banking earnings were $3.4 billion, down 9%, impacted by higher PCLs of approximately $600 million and lower margins due to rate cuts. Revenue grew 3%, driven by solid asset and deposit growth, while expenses were up 5%. Global Wealth Management earnings of $1.7 billion were up 17% year-over-year, benefiting from strong AUM growth of 16%. Revenues were up 15%, driven by higher fee revenue and net interest income across the Canadian and international businesses. Global Banking and Markets reported earnings of $1.9 billion, up 30%, driven by higher trading-related revenues, fees and commissions, underwriting and advisory revenues and higher net interest income. International Banking earnings were $2.7 billion, up 1% year-over-year. Revenues were up 2%, while expenses were up 1% year-over-year, resulting in positive operating leverage. The Other segment reported a loss of $347 million compared to a loss of $815 million in 2024, benefiting from significantly lower funding costs. As disclosed on Slide 25, excluding the foregone income from the sale of Colombia, Central America and CrediScotia in Peru, 2025 adjusted earnings were $9.3 billion, up 9% year-over-year. Now a few comments on the outlook for 2026. Our outlook commentary normalizes fiscal 2025 to exclude the contribution of the now divested operations. The bank expects to generate strong earnings growth in 2026, underpinned by growth in both net interest income and noninterest revenue. The earnings are also expected to benefit from lower provisions from credit losses, mainly performing, partially offset by a higher tax rate that is expected to be around 25%. Net interest income is expected to grow from both loan and deposit growth and benefit from margin expansion. Noninterest revenue is expected to grow across all business segments. Expenses are expected to grow from increased technology spend to strengthen and strategically grow the bank. The bank is expected to generate positive operating leverage in 2026. From a business line perspective, Canadian Banking is expected to generate double-digit earnings growth, driven by good revenue growth and moderating loan losses. The business will continue to maintain strong expense discipline with a focus on generating positive full-year operating leverage. International Banking earnings are expected to be modestly higher, adjusting for the impact of divestitures. Good growth in pretax pre-provision earnings is expected to be offset by slightly elevated loan loss provisions and a higher tax rate. Global Wealth Management is expected to generate strong earnings growth in 2026. Global Banking and Markets earnings are expected to grow modestly after a very strong fiscal 2025. Moving to Slide 8 for a review of the fourth quarter results. The bank reported quarterly earnings of $2.6 billion, which is up 21% and diluted earnings per share of $1.93, an increase of $0.36 compared to last year. Return on equity was 12.5%, up 190 basis points year-over-year, driven by strong pretax pre-provision growth of 19%. Net interest income grew 13% year-over-year from higher net interest margin and loan growth. The all-bank NIM expanded significantly, up 25 basis points year-over-year, mainly from lower funding costs. Quarter-over-quarter NIM expanded 4 basis points from business line margin expansion. Noninterest income was $4.2 billion, up 16% year-over-year from higher wealth management and underwriting and advisory fees and the contribution from the KeyCorp investment. Expenses grew 11% year-over-year and 4% quarter-over-quarter, driven by higher personnel costs, including performance-based compensation and technology costs. The PCLs were approximately $1.1 billion, mostly impaired and the PCL ratio was 58 basis points. The bank's effective tax rate increased to 23.6% from 21.8% last year due primarily to lower income in lower tax jurisdictions and the implementation of the global minimum tax. Moving to Slide 9, which shows the evolution of the CET1 ratio and risk-weighted assets during the quarter. The bank's CET1 capital ratio was 13.2%, down approximately 10 basis points quarter-over-quarter. Internal capital generation was 9 basis points, while gains from higher fair values, FVOCI securities contributed 5 basis points. This was offset by the allocation of capital to share repurchases of approximately 12 basis points and 7 basis points from the impact of adjusting items. Risk-weighted assets grew $6 billion, excluding the impact of FX to $474 billion from book size and book quality changes of $4 billion, the impact of model updates and higher operational risk, partly offset by lower market risk. The bank remains committed to maintaining strong capital and liquidity ratios in 2026. Turning now to the business line results beginning on Slide 10. Canadian Banking reported earnings of $942 million, up 1% year-over-year as pretax pre-provision profit growth of 3% was mostly offset by a substantial increase in loan loss provisions. The average loans were up 2% year-over-year as mortgages grew 4% and credit cards 1%, partially offset by lower personal and commercial loans. Although deposits were down 1% year-over-year, retail savings deposits grew 7% and the retail day-to-day balances grew 6%. This was offset by an 8% reduction in retail term deposits and a 2% decline in nonpersonal deposits that improved the deposit mix in line with our strategic objectives. Net interest income grew 1% year-over-year due primarily to loan growth, while year-over-year net interest margin was down 2 basis points due to business mix changes. Quarter-over-quarter net interest margin expanded 1 basis point from higher asset and deposit margins, partly offset by the impact of changes in business mix. Noninterest income was up 8% compared to the prior year due to elevated private equity gains, higher mutual fund distribution fees and insurance income. The PCL ratio was 43 basis points. Expenses grew a modest 2% year-over-year and 1% quarter-over-quarter from higher investments in technology that support our strategic initiatives. The fiscal 2025 operating leverage was negative 1.6%. Turning now to Global Wealth Management on Slide 11. Earnings of $453 million were up 17%. Canadian earnings grew 16% year-over-year to $390 million, driven by higher brokerage revenues, net interest income from private banking and strong mutual fund fee growth driven by assets under management growth of 15%. International Wealth generated earnings of $63 million, up 30% year-over-year, driven by higher net interest income and higher mutual fund fees as AUM grew 25%. The full year operating leverage was positive 1.6%. The spot AUM increased 16% year-over-year to $430 billion and AUA grew 13% year-over-year to almost $800 billion, driven by market appreciation and higher net sales. Turning to Slide 12. Global Banking and Markets delivered earnings of $519 million, up 50% year-over-year. Revenue increased 24% year-over-year as capital markets revenues were up 43%, driven by strong growth across both FICC and global equities. Quarter-over-quarter revenues were up 3%, driven by higher business banking revenues. Year-over-year, net interest income was up 29% from higher lending margins and deposit volumes. Quarter-over-quarter net interest income was up 4% from higher deposit margins and volume growth. Loan balances declined 8% year-over-year and were in line with last quarter. However, deposits were up 4% quarter-over-quarter and year-over-year. The noninterest income was up 23% year-over-year, driven by higher fee and commission revenues and underwriting and advisory fees. Expenses were up 11% year-over-year, mainly due to higher personnel costs, including performance-based compensation and higher technology costs. Operating leverage was a strong 7.7% in fiscal 2025. Moving to Slide 13 for a review of International Banking. The segment delivered earnings of $638 million, up 3% year-over-year, but down 7% quarter-over-quarter. Revenue was up 3% year-over-year as noninterest income grew 7% from higher capital markets revenues, while net interest income increased 2% year-over-year from margin expansion of 12 basis points, mainly from lower funding costs. Deposits were up 4% year-over-year with personal deposits growing at 1% and nonpersonal up 5%. Loans were down 2% year-over-year as business loans declined 7%, while retail loans grew 4%. The provision for credit losses was 144 basis points, up 5 basis points quarter-over-quarter. Expenses were up a modest 2% compared to the prior year and prior quarter from continued disciplined expense management, resulting in full year operating leverage of positive 1.6%. The effective tax rate increased to 22.9% from 20.7% in the prior year due to global minimum tax implementation and earnings mix changes. The GBM business in International Banking generated earnings of $295 million, up 19% year-over-year or up 13% on a constant FX basis, driven by good performance in Brazil and Mexico. Turning to Slide 14. The Other segment reported an adjusted net loss of $34 million, an improvement of $22 million compared to the prior quarter. With that, I'll now turn the call over to Phil to discuss risk.

Thank you, Raj, and good morning, everyone. This quarter, we continued to operate in what remains a highly uncertain macroeconomic environment. Shifting tariff policy and an unclear path forward and trade negotiations are muting economic activity even as some indicators are showing signs of resilience. Looking at this quarter's results, all bank PCLs were approximately $1.1 billion or 58 basis points, up $72 million or 3 basis points quarter-over-quarter. Impaired PCLs were approximately $1 billion or 54 basis points, up 3 basis points quarter-over-quarter and in line with the outlook we provided in Q3. The increase in impaired was mainly driven by our retail portfolios across both Canadian and International Banking. Now turning to the business lines. In Canadian Banking, PCLs were $494 million or 43 basis points, up 3 basis points quarter-over-quarter. In retail, PCLs were $354 million, up $34 million quarter-over-quarter. Performing retail PCLs were $21 million, primarily driven by negative migration that was partially offset by improvements in prime auto and releases as performing mortgage allowances migrated to impaired. Impaired retail PCLs were 36 basis points, up 2 basis points quarter-over-quarter, driven primarily by unsecured lines and Canadian mortgages. Although clients are showing some signs of stress, partially due to elevated unemployment, these remain isolated and not systemic. Overall, 94% of our Canadian retail exposure is secured with an average FICO score above 790. 90-day plus mortgage delinquency ticked up 4 basis points quarter-over-quarter. Increased delinquency was seen across both fixed rate and variable rate clients, driven primarily from weakness in Ontario and more specifically in the GTA. On unsecured, we continue to see some weakness with delinquency driven mainly by non-primary and younger clients. In our Canadian commercial portfolio, PCLs totaled $140 million, up $4 million from Q3. Moving to International Banking. The PCL ratio was 144 basis points, up 5 basis points quarter-over-quarter, driven primarily by impaired PCLs. In international retail, total PCLs were 239 basis points, up $21 million quarter-over-quarter, excluding FX. Performing retail PCLs were $32 million, driven by portfolio growth and continued credit quality deterioration, primarily in Chile Consumer Finance. Impaired PCLs were $468 million, up $17 million, excluding FX driven by Chile Consumer Finance and increased net write-offs in Mexico. On a full year basis, our all-bank PCL ratio was 62 basis points, of which 54 were impaired. The significant performing build in Q2 contributed to an increase of performing allowances by $630 million in fiscal 2025. That helped increase the total ACL ratio by 10 basis points year-over-year to 98 basis points. Looking ahead to fiscal 2026, we expect the full-year impaired ratio to be in the high 40s to mid-50s basis point range. The outlook reflects the expectation that we will continue to operate in an environment of elevated global macroeconomic uncertainty in fiscal 2026. In Canada, the absence of a trade deal with the U.S. and elevated unemployment continue to weigh on sentiment. However, we are cautiously optimistic that the federal budget will contribute to greater economic growth and improved consumer and business sentiment that will benefit the performance in the latter half of the year. In International Banking, the outlook across the region remains mixed, characterized generally by subdued economic activity and evolving political dynamics in Peru and Chile. Looking across our markets. In Mexico, trade negotiations continue to weigh on overall sentiment, but GDP forecasts are being revised upwards, suggesting some resilience amid ongoing uncertainty. Chile's forecast remains stable, supported by strong commodity prices. However, unemployment remains elevated, and as a result, we are seeing continued softness in our consumer finance portfolio. Peru's GDP outlook remains stable. However, the benefit of the pension fund withdrawals and client liquidity is tapering, and political uncertainty will linger until we get past next year's presidential and parliamentary elections. It is important to note that we are seeing the early signs of our primacy strategy in International Banking, driving improved credit outcomes across the region. While these benefits are observable in the behavior of our newer vintages since 2023, overall credit performance is still being impacted by older vintages. In closing, the credit picture remains stable, but trade uncertainty continues to be a factor across our markets. We remain comfortable with the adequacy of our allowances and the overall quality of our portfolio. With that, I will pass it back to Meny for Q&A.

Operator, can we have our first question, please?

And your first question comes from Ebrahim Poonawala with Bank of America.

I guess maybe, Raj, I think you mentioned double-digit EPS growth in the Canadian Banking segment. If you don't mind unpacking that for us in terms of how much of that is like PCL normalization relative to the impaired guidance you just put out? And then what should we expect in terms of the PTPP growth? Is it loan growth that's going to be driving it? Is it margin expansion? If you could just dig into that a little.

Certainly, Ebrahim. I anticipate that the growth will primarily come from mid-single-digit PTPP growth. This will be driven by loan growth. As you've observed, our deposit growth continues to be strong in the Canadian Bank, emphasizing the right types of deposits. This has contributed to margin expansion, which increased by 1 basis point compared to the previous quarter. The growth will stem from margin expansion resulting from loan repricing; many fixed-rate mortgages will be due for repricing in 2026. Additionally, we are enhancing our deposit margins by focusing on our valuable deposits and reducing some term deposits, which typically shift towards the Wealth segment. It's a mix of these factors, and we are also committed to disciplined expense management, which includes leveraging some benefits from restructuring charges. However, not all of the benefits from these charges will directly impact the bottom line as we also plan to invest in our product capabilities and frontline staff to support business growth. This outlines the expected composition of PTPP growth. You’re correct that PCL is expected to normalize; this quarter it was at 43 basis points, and we estimate it will be in the high 30s next quarter. Phil mentioned that next year may see slightly elevated impaired loans in the first couple of quarters followed by normalization, which is our current expectation. Thus, PCL will significantly contribute to overall bottom line growth. I believe Aris may have additional insights to share.

Ebrahim, Aris here. I just wanted to add one thing to what Raj said. I think it's important also on the fee line. We're going to see very good fee growth, almost double-digit next year across insurance, mutual fund fees as we grow and also card fees. And so this is something we've been investing in and working on very hard, and we'll start to see that impact in F '26, which will also help us drive positive operating leverage.

Got it. And I guess maybe one, Scott, for you. You made significant progress over the last 2 years. As we think about the ROE journey from here, 2 questions. One, structurally, like a lot of your peers are targeting a 15%, 16% ROE. Structurally, are there any reasons why Scotia cannot attain a 16% ROE, number one? And second, in terms of capital deployment, talk to us in terms of priorities, could M&A, you've talked about U.S. being obviously the second most important market. Is there any tactical M&A that you would look to do over the course of the next year?

Right. So as we said when we rolled out the Investor Day 2 years ago, we said 14% plus, and we thought 14% was a conservative estimate. And we are tracking ahead of that plan to date, seeing good ROE expansion in our international bank, good ROE expansion in our GBM bank, continued growth in Wealth, which we know is ROE accretive. And next year, you're going to see significant earnings growth in our Canadian bank and significant ROE expansion in our Canadian bank. And so as we sit here next year at this time, I'm confident you're going to see another step in that ROE journey, which is going to get us a lot closer to that 14%, probably a year earlier than we thought. And so is 14% plus conservative? I continue to believe it's conservative. But part of this journey is continuing to deliver day in and day out for our shareholders on a consistent basis and do what we say we're going to do. And we're 8 quarters now into doing that. So we're going to continue on that journey. In terms of your question on capital allocation, the focus is on organic. We've got so many opportunities with organic deployment. You saw what GBM is doing in terms of new product capabilities and opportunity there. You see this new economic trajectory in Canada, where I do think there's going to be a demand for capital. We have a pivot to growth. In IB, which will start to come in the back half of this year. And then our Canadian commercial business as well, I think in the back half of this year, we will start to attract some capital in segments that we haven't historically been in. So that would be priority one. Priority 2, given the relative valuation and given our confidence in our plan, we will continue to be repurchasing shares. And you've seen us do that in the last year. You'll continue to see us do that in 2026. And then lastly, if there's some product capabilities or some capabilities that we can fill via tuck-ins in the U.S., I'm thinking Wealth here, as we've talked about that, relatively small tuck-ins that help Jacqui broker business or help Travis close a couple of gaps, and we'll think about that, but that would be sort of on the priority list. And there's nothing in the hopper right now for us to be thinking about in that regard.

Your next question comes from the line of John Aiken with Jefferies.

Phil, I understand the outlook for credit next year. However, when we consider the domestic retail formations and the impact of 90-day delinquencies this quarter, is the messaging indicating that what we're observing is more about seasonality rather than an underlying weakness that could be a continued trend?

Thanks for the question, John. As I mentioned earlier, what we're observing in the GILs in Canada is primarily related to mortgages, particularly in the Greater Toronto Area. Looking at the Canadian retail portfolio as a whole, I am quite confident that the trends we are seeing are not indicative of systemic issues. We are still experiencing strong FICOs around 790 in the portfolio. Even when examining the 90-plus delinquencies, the loan-to-values are still in the low 60s, which shows that these mortgages are well-collateralized. Overall, I feel comfortable with the trends in the Canadian portfolio. While there are some weaknesses, as I pointed out earlier, I am confident that as we move into 2026, we will start to see GILs normalize in the latter half of the year, similar to the trends we see in PCLs.

And then just as a follow-on, you did mention that the commercial performance in the quarter domestically was very strong. Again, can I take this as a potential positive indicator that we may actually see a bit of a rebound in that segment?

Yes. I was very happy to see that commercial GILs and PCLs normalized this quarter. I think that's a lot due to the resilience and the lending quality standards that we have in the Canadian bank and frankly, the good management that I'm seeing both from the business and from the risk team. As you know, these portfolios can be a bit lumpy, and you may have 1 or 2 files that jump up every now and again, but I'm confident in the outlook for next year and particularly in the Canadian bank that will probably be sort of flat to where we are today in the commercial space.

Your next question comes from the line of Gabriel Dechaine with National Bank.

I was wondering, Scott, Raj, if you can just walk me through or maybe confirm some of my high-level conclusions here on your double-digit EPS growth outlook for next year. So on a segment basis, double digits in Canada, probably the same for Wealth, mid-singles for Capital Markets and International from the sounds of it. Corporate, I mean at least the back half will be flat probably, but who knows. So overall, high single digits plus the buybacks to get you into the double digits. Is that how you're thinking about it?

Yes, Gabe, it's Raj. I think you got it mostly right. I'll just make one correction on Wealth. I think it might be high single digit. That's probably the one I would say. And for IB and GBM, I'd call it modest growth is the term we use, and that I would equate to like a low single-digit growth rather than mid. Now obviously, right, markets play a role because we do have a GBM business in IBM and GBM is always subject to markets. And of course, the other segment, like you point out, the whole year loss is $347 million. The most recent quarter is $30-odd million. So that's got to give us back roughly about $200 million. And of course, repurchase, right? But we don't need to have repurchases to get to double digit. I think it's a contributor. I think the businesses themselves will get to double digit.

Just a finer point on Capital Markets, the implication there is that your earnings in that business are going to be above the run rate? Which the guidance run rate is $425 million to $450 million of earnings per quarter, and that may be stale at this point? Is that...

Yes. I mean you heard Scott talk a lot about the investments we have done both in product capabilities and people, particularly in the U.S. I think this quarter, $519 million, I'd probably say $475 million to $500 million is probably the business contributing and some part of it is markets for sure that's helping. Markets remain constructive. This business is ready to capitalize on it.

Okay. Great. We often discuss buybacks lately for clear reasons. But what would happen, Scott, if you own 15% of KeyCorp and they choose to engage in the M&A consolidation trend in U.S. regional banking? If you like the deal, would you be okay with being diluted or would you prefer to maintain your position? What's your thought process?

Yes. I mean I think we're really happy with the KeyCorp stake. Jacqui is sitting on the Board now. I think we're getting a lot of good insights into the kind of the overall environment. It's contributing now from a dividend perspective on a very attractive basis given it's in the significant investments bucket. There's not a plan here to increase beyond our current 15%. And I think we'll just have to see what KeyCorp does from a strategic perspective and then deal with it at that time. But I think we're pretty comfortable with the stake we have, and I'll leave it at that.

Your next question comes from the line of Doug Young with Desjardins Capital Markets.

Just something on capital, Raj, organic capital generation of CET1 generation 9 basis points. Is this around what we should expect for Scotia net of dividends? And can you maybe talk a bit about the puts and takes that maybe take you higher over the next few years, if that's something that you think? And then, Scott, can you remind us what the minimum CET1 ratio target is for the bank and what you're comfortable going down to?

Sure, Doug. I think fee income will always contribute to higher capital generation, and we're starting to see improvements in the fee income, as we talked about earlier. So that should help. 9 basis points, I would say, is at the lower end, frankly, Doug. I think this should progressively improve each quarter. I think 10 to 15 basis points by the time we get to the end of 2026. For the quarterly contribution after dividends is likely the run rate we're looking for. Obviously, if businesses like Wealth and GBM, if they perform well, they just contribute directly to capital generation. So we'll see how the year goes in '26. But fee income is a big component. And as far as the capital levels go, I think we'll be around 13%. We'll be north of 13% first couple of quarters. We'll see how the loan growth evolves. And the X factor, Phil talked a little bit about from a PCL perspective, as you know, capital also gets impacted when we see migration. Like even this quarter, you see this $2 billion of RWA on migration, which equates to roughly 5 to 6 basis points of capital. So we'll see how that evolves. That could be the only drag I can think of, which potentially is very hard to estimate, but could be small. But capital ratio is 13% plus. Funding all the organic requirements as we see in the profit plan, I think, is a good position to be in to capitalize on other opportunities that may come along.

The only thing I'll add is tying it into Ebrahim's question around ROE. I mean the strategic journey we're on is business mix, right? And that's around increasing fee income, increasing capital velocity. It's really encouraging to see what Aris' plans are next year in terms of insurance, cards, et cetera, driving fees. You see outsized growth from our Wealth business. You see outsized growth from a fee perspective from Travis' business. So I think this 9 basis points is kind of the floor. And from here, we will grow, which will contribute to the ROE contribution of the overall bank.

Okay. Regarding the guidance, Phil, I want to confirm the PCL you provided is for the total. If that's correct, could you break it down between impaired and performing? Also, about the modest earnings growth in International Banking, I assume that figure is based on the fiscal '25 excluding Colombia. I just wanted to confirm those two points.

Yes, I'll start on PCL. The guidance I gave is on impaired PCL.

And as far as your IB assumptions, you're right. I think we have disclosed on Slide 25 and 26, the foregone income relating to the divested operations as it relates to lines because the bottom line is not big, but there's a lot of changes that happen on revenue, expenses, PCL. So you have all the numbers by quarter and the growth rate of modest growth is after excluding the foregone income in 2025.

Your next question comes from the line of Matthew Lee with Canaccord Genuity.

Maybe a bigger-picture question. You've highlighted in the past the importance of U.S. presence or an expanding U.S. presence for the North American corridor strategy. But now you've sort of mentioned that M&A is not a priority for this year. Does that imply that you can run the corridor strategy with a larger U.S. footprint? Maybe through partnerships or maybe through Key? Or is the U.S. acquisition still on the wish list, but down the road?

Yes. So let me start, and then Travis, maybe talk to you about what you're building in GBM. But as we've always said, the corridor strategy is primarily focused on Wealth and our GBM business. And we do need to, as I talked about, potential capability enhancement, we do have to have a U.S. offshore booking point for our Latin American wealth clients and our Canadian wealth clients. So that's something that we'll continue to look for. But in terms of what Travis is building, it's been an organic build over time, and you're starting to see the results from that. And so maybe Travis give a sense of what you're trying to add from a product capability.

Yes, absolutely. Everything we're doing is very intentional. We're trying to build an Americas connected bank, really starts on the GTB side, on the cash management and then follows through, through our corporate investment banking business and our markets business and trying to help our clients navigate both North and South America. And so some of the capabilities that we're building and that Francisco is leading on the GTB side are going to be very, very important to providing that client connectivity and that durable franchise is the word we use a lot. And so we're quite excited. We think we can do organically. We have a lot of talent that wants to join the bank. And we've been building organically and been very successful at it.

And Francisco, GTB, I mean we had our pilots this quarter for the first time. And this is essentially connecting Canada, U.S., and Mexico. Maybe just give the group an overview of where we are in GTB.

Absolutely. Thank you, Scott. I think the important element to understand is what makes us different and how can we gain wallet share in the journey. And geographically, North America is the core. The tool is connectivity, like Travis just said. And I think the tool of connecting clients through cash management is essential. So we're very focused on it. Super excited that in October, we rolled out for the very first time, our basic cash management capabilities. We have a very clear rollout schedule throughout '26 to continuously enhance that proposition on a connected basis. So we now have a global transaction banking organization for the very first time, and we have a consolidated sales effort that allows us to manage centrally our pipeline and onboarding and roll out new capabilities, allowing us to prioritize investment and keep track with that investment. So it is really about how effectively do we cover global clients. And I think Travis has done an amazing job in bringing leaders that understand how you connect global clients and using the right tools in terms of bringing a differentiated value proposition. And as we see in the core countries in which we operate, other global banks leaving that footprint, we now stand in a very important position to capture share as we connect the countries on behalf of our clients.

That's helpful. So what I'm hearing is that you don't necessarily need a traditional P&C or commercial bank to kind of do your strategy?

I think right now, we have so many organic opportunities in front of us but that's going to be the focus area.

Your next question comes from the line of Paul Holden with CIBC.

First question is for Francisco. So just going back to the 2026 growth guidance of low single digits or modest growth. I think that's probably a little bit lower than what was originally in the plan, which would have been, I think, high single digits for this year. So maybe talk about some of the factors that are contributing to it. I'm assuming it's macro, but maybe we can understand better just the intended pivot to balance sheet growth. I know that was an important part of the plan for '26 and if that's still part of the plan.

Thank you. It's important to recognize our current position of strength. We have successfully completed the full regionalization of our business lines and support functions, which allows us to centrally manage investments and returns effectively. The significance of this transaction cannot be overstated, as it simplifies our operating model and enables us to function efficiently across all the countries where we operate. This presents a substantial advantage moving forward. As we shift focus towards growth, you can expect to see GBM, for instance, which has been selectively withdrawing from low-return loans and clients, start experiencing loan growth in the double-digit range for the first time in a couple of years. Our return on resources was above 2% in GBM, marking a positive change after a long duration. This aligns with Travis's organization, which is making a concerted effort to enhance penetration with multi-country clients and drive GTV, which looks promising for 2026. We have recently appointed a new leader for capital markets, bringing in capabilities that previously were absent, thus enhancing our ability to capture client wallet share in activities where we did not participate before. In commercial banking, we have regionalized strategies to prioritize cash management. This means we will not extend loans without ensuring cash management, which represents a significant shift aimed at increasing returns and better serving our clients. Regarding retail, we are very enthusiastic about having launched a cohesive multi-country value proposition for our key clients, the affluent and emerging affluent, under one unified brand. This is a crucial step in executing our 2023 strategy. Taking all these developments into account, we are anticipating mid-single-digit PTPP growth in 2026, which aims to counterbalance the increasing PCLs and higher taxes, as Phil noted. While 2026 is set to be a strong year in terms of performance, we do have some challenges to navigate. This is occurring amidst modest geographic GDP growth, with Mexico barely achieving positive GDP growth for 2026 and countries like Chile, Peru, and Colombia not seeing benefits from political changes due to elections in '26. Overall, we are on track with the strategy and timeline established for 2023.

Got it. Okay. That's helpful. And then a question for Travis. I guess it's almost kind of along a similar vein because we've talked about a number of drivers for your business, Travis. Maybe you could highlight, I don't know if it's the top three or whatever the right number is, what would you say are the main drivers that will contribute to that revenue and earnings growth in 2026? In other words, what should we be tracking for success in '26?

Sure, that's a great question. I'm quite pleased with our performance in 2025 and the key factors that I believe will carry on. We experienced considerable net interest margin growth, all due to our unwavering focus on our balance sheet, optimizing our capital velocity, managing how we price our deposits, increasing our core operating deposits, and reviewing our loans. While we haven't altered the risk profile of our lending practices, we've been very selective with our loan portfolio. Our loans have actually decreased, yet our return on equity has significantly increased, and we've managed to sustain both fee growth and net interest margin expansion despite the decline in loans. This really underscores the discipline we have regarding our balance sheet. Strategically, there are many opportunities ahead. As Francisco mentioned, the global connectivity of our franchise is remarkably strong, unlike any bank I've come across. We can link clients from Canada, the U.S., and Latin America in a way that no other bank can match. There are great opportunities, especially given the relatively low penetration rates among some clients and the abundant cross-border activities. As we enhance that connectivity and develop our capabilities in products, services, and advisory, I expect our fee income and noninterest income to continue growing. On the market side, we are maintaining a strong level of discipline. We've had some positive movement this quarter, with the markets performing well, spreads reaching historic lows, and capital markets being very inviting. Many of our clients are accessing these markets, in which we're taking a leading role. As we improve our coverage and advisory offerings, I anticipate further growth in these areas. Overall, we are diligently working on all aspects of the Global Banking and Markets business, and our strong performance reflects the effectiveness of these initiatives. We aim to keep this momentum going, and our pipelines are looking quite healthy at this moment.

Your next question comes from the line of Mario Mendonca with TD Securities.

Can we start by discussing the deposit strategy, particularly in Canada? Could you talk about the decline in term deposits we observed this quarter and the growth in retail deposits? Please describe your experiences during the quarter and your outlook for domestic deposits.

Sure. Thank you for the question. Before I dig into that question, just to remind everyone on the strategy in the Canadian bank. And it's threefold. It's driving the primacy of our clients' debt. That's the first, and that's continues. The second one is the business mix, changing the business mix and changing the operating model, improving them both, and that feeds into the deposit question. And third is a very intentional deployment of capital and marginal costs in our business, and that's what we continue to do. Now getting back to the deposit question. Since Investor Day, we've added $22 billion in deposits and $15 billion in mutual funds. So we've become a money in bank. This is very different from the way this bank operated in the past. More importantly, as rates have come down and people have gotten out of term, we've been managing to capture that in our day-to-day savings and investment fund business. And we've had a record amount of sales in mutual funds in the quarter in the Canadian bank. And this idea of getting primacy is driving across the whole value chain, whether it's scorecard improvements in the branches, focus on payroll and focus on very deliberate pricing and personalization strategies to drive more deposits from our existing base, but also what we call competitive steel. That is up 13% quarter-on-quarter as we get more clients from outside into the bank. So all this is driving what you saw in the fourth quarter, improved NIM in our deposit book. And this continued focus on deposits is what we count on doing quarter after quarter. We're seeing it every quarter and also linking it to the day-to-day savings growth you saw in the quarter. I think we're up in the retail side, 7% on day-to-day and 17% on the savings. So it's materializing. We're seeing it in the numbers. This will continue quarter-on-quarter. But I think it's also important to talk about how we're getting longer-term relationships to our investment fund sales in the branches, something that we were historically not very strong at, but now we're seeing record levels. And I would pass it on to Jacqui, who is working very closely wealth in the Canadian bank in creating this connection and getting the right banker in front of the client to ensure we get the wealth of the client. So Jacqui?

Yes. Thanks, Aris. I actually think that's the best marker of our strategy execution of the net sales growth momentum that we have built together between Wealth and Canadian Banking. Obviously, markets have been really constructive for us, both in the quarter and the full year. But together, we saw $4.8 billion in net sales in the quarter between retail and wealth that to put it in perspective, that was a 16-quarter high for us. It's also a record quarter 4. And I'd say also, this isn't a quarter 4 story alone. This has been a consistent trend for us for the whole year. Our whole year net sales, I think, Scott, as you said, is up $11.5 billion versus the prior year, while $7 billion of that improvement came in Canadian retail channels alone. Just to pile on to Aris' point, since Investor Day, we've seen an 850 basis point improvement in our retail client base for investments, which is quite remarkable. The rest of the growth is coming from our Wealth businesses. Full year net sales in Canadian Wealth Management is up 54%. International Wealth is up 76% from the prior year. And I said that we would expect this momentum to carry into F '26.

All right. If we could move over to mortgages, again, domestic. Could you help me understand that the origination dynamics this quarter, like 30% up in the GTA, it was down sort of meaningfully last quarter. So obviously, something changed in mortgage originations in the GTA. And then also help me understand that the extent to which mortgage growth is emerging in the broker channel versus, say, Scotia Advisors or the branch channel. Those are the 2 mortgage questions I have.

In the quarter, we experienced some softening in the Greater Toronto Area and the Greater Vancouver Area, particularly within the condo market. However, mortgage applications have increased by 13% compared to the previous quarter, driven by lower home prices in Toronto and Vancouver and decreasing interest rates. This trend indicates a slight rebound in demand, which we expect to continue into 2026 as affordability improves. There's also a significant refinancing market developing, due to a rise in maturities anticipated next year, similar to what we experienced this year. Our growth has been supported by strong renewal performance; our portfolio renewal rate exceeded 90% in the fourth quarter. We have made substantial investments in virtual advisers, which are contributing to our renewal volume. Additionally, we're seeing solid margins for new mortgage business in the fourth quarter. Regarding Mortgage+, nearly all originations in our broker channel—including 99%—are coming with a mortgage bundle. In terms of our originations, about 60% are from the broker channel, 35% from our Housing Finance Agency channel, and the remainder from our branches. Total originations in the Toronto area have increased from $3.5 billion to $4.5 billion year-on-year. As lower home prices and improved affordability have taken effect, we're starting to see a rise in originations in the GTA.

Your next question comes from the line of Darko Mihelic with RBC Capital Markets.

My question is for Aris. I'm trying to better understand your comment about fee revenue being stronger in 2026, specifically regarding private equity and how it has benefited your Canadian business. This is the second quarter where you've mentioned private equity gains impacting this area, so I would like to know the annual impact of these gains and their sources. I'm a bit unclear on this, and I would appreciate your expectations for 2026 regarding private equity.

Darko, I'll start on private equity and then pass it on to Aris on the fee. I'll be quick. Private equity earlier this year in Q1 was over $30 million. I think it was $33 million, if I remember right. And this quarter, it is like a little over $10 million. So it is a reason when you look at year-over-year, which is the comment I made on private equity gains helping us with the noninterest revenue. And private equity is something that's hard to forecast, Darko. It comes down to our folks who manage that. It's a small portfolio. It's not very big. It's primarily through the Roynat business that is part of the Canadian Banking portfolio. And there from time to time, if they believe that the investments that they made and sometimes many years back, when they realize the full potential value or they end up going public, we realize gains. So it's not something that we look forward to forecasting, but it does create some noise when you look at noninterest revenue when you look at it quarter-over-quarter or year-over-year. So would it be another $50 million a year? Unlikely, I would say, in 2026. But then it's also very hard to predict if the valuations are there, they will make the decision to take the gains.

Aris, do you want to talk about fees?

Sure. On fees, as I mentioned earlier, there's 4 important fee components in the Canadian bank that we'll see acceleration in F '26. Mutual fund fees as we continue to drive mutual fund sales in the branches, we're starting to really build up momentum there. You see it quarter-on-quarter. I think card fees will also increase as we now reposition the card portfolio to more premium cards, we're seeing the spend per account go up and the actual value of our card business increase as the premium clients take up a greater proportion. Third is insurance. Of course, insurance is an important part of our business linked not only to our lending business but also stand-alone. We've invested and continue to invest in our insurance business, we'll start to see some pickup there. And then finally, cash management in commercial and small business. That's another growing component where we're investing a lot of money and effort and sales people in the field to drive transaction banking in Canada to strengthen primacy. So between these 4 drivers, we're going to see close to double digit, if not double-digit fee growth in the Canadian Bank year.

Thank you, Aris. I appreciate your input. For this call, I will keep my final question simple and direct. This is directed at Travis, but Phil, feel free to weigh in as well. I'm receiving numerous inquiries about private credit. Specifically, we want to assess Scotia's exposure to private credit compared to others that have a call report. Travis, could you provide insight into the on-balance sheet exposure to private credit, as well as any off-balance sheet or noncommitted lines? Phil, I'd also like to know what potential losses might look like for this type of business during a stress test.

And Darko, this is Travis. That's an excellent question. There are indeed broader market concerns regarding private credit, and those concerns are quite understandable. If you take a moment to reflect on it, there has been significant growth in nonbank financials, with many estimates suggesting that they represent nearly two-thirds of all assets in the U.S. This trend is primarily a consequence of Dodd-Frank, and it has led to changes in the market. Consequently, it's challenging for banks to operate without some connection to the nonbank financial market. Now, if we look at our role in nonbank financials, we have around $31 billion in loans outstanding. To break that down a bit, roughly half of that is in subscription finance, while the other half is in the private credit market. Further dividing that half, one portion goes to subscription finance and the other half is related to the CLO business. Importantly, the assets we manage in these sectors are highly rated, with our average effective rating falling between A and A+ or AA. We are not engaging in equity or lower-quality tranches. Thus, we believe we are involved in a premium A+ rated segment of the capital structure within our portfolio, which gives us confidence. Additionally, we have brought in several experts with strong backgrounds in risk and banking. I’m open to any further questions you may have on this subject. Phil, we conduct regular stress tests, and we can discuss that in detail if necessary.

I'll jump in quickly, Darko. We've been involved with Travis and his team on this journey and have been increasing our risk team. We conduct thorough stress tests, and even in extreme scenarios where all exposures are downgraded to non-investment grade, the projected losses would still be a small fraction of the net revenue generated by this business. This really highlights the strength of our structures and the underwriting processes we have in place.

The other half would be just traditional insurance companies, pension funds and some other holding companies. Again, all highly rated.

Your next question comes from the line of Jill Shea with UBS.

Perhaps just piggybacking on Mario's earlier question on deposits. You already addressed some of the nice progress you're seeing on your deposit strategies. But perhaps just tying that to your net interest margin outlook, like when we look at the year-over-year margin that's improved with lower funding costs. I'm just curious if there's any more room to go with funding costs continuing to come down or a favorable mix shift away from term?

Sure. I can start this at the all-bank level, Jill. Absolutely, deposits are a big component of where we see the net interest margin expansion coming from, apart from the repricing that we have, it's going to happen in the fixed rate mortgages that I mentioned and we've disclosed it in the 2026 year. So both are going to contribute. 240 basis points NIM this quarter expanded 4 basis points. We see that continuously expanding each quarter at more modest levels to be completely clear. So it's not going to come from the funding cost benefit that we saw in 2025, which is our wholesale funding costs coming down because we're not forecasting any more rate cuts in Canada. Obviously, if it happens, it's going to help us. But it's primarily going to come from the Canadian bank. It's going to come from our GTB operations. Like this quarter, we have started disclosing GBM's NIM for purpose because GTB has contributed to GBM's NIM expanding 14 basis points in 1 quarter. It's worth a little over 2 basis points for the all-bank. And that's going to continue. We talked a lot on this call about the investments we're making on the GTB front. So it's going to come from good quality deposit growth in the Canadian bank, margin expansion on the mortgage book and from the GTB deposits. You should see this happening incrementally each quarter. Like I said, modestly, not 4 basis points each quarter, to be totally candid with you, Jill, but I think you should see expansion happen throughout 2026.

And there are no further questions on the line. I would now like to turn the meeting over to Raj Viswanathan.

On behalf of the entire management team, I want to thank everyone for participating in our call today. We look forward to speaking to you again at our Q1 call in February. This concludes our fourth quarter results call. Have a great holiday season and a great day.