Earnings Call Transcript
Bank Of Nova Scotia (BNS)
Earnings Call Transcript - BNS Q4 2024
John McCartney, Head of Investor Relations
Good morning, and welcome to Scotiabank's 2024 Fourth Quarter Results Presentation, and apologies for our late start this morning. My name is John McCartney, and I'm Head of Investor Relations here at Scotiabank. 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 will be glad to take your questions. Also present to take your 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'll refer you to Slide 2 of our presentation, which contains Scotiabank's caution regarding forward-looking statements. And with that, I will now turn the call over to Scott.
Scott Thomson, President and CEO
Thank you, John, and good morning, everyone. 2024 was a foundational year for the bank. Nearly one year ago, we held our Investor Day and shared with you our new enterprise strategy to deliver sustainable, profitable growth and maximize shareholder value. We also committed to transparently sharing our progress as we entered into our first year of execution against our plans. Our results reflect a year of transition as we focused on our enterprise-wide priorities, aligned our capital allocation to each of our business lines, and started our shift to a value over volume strategy. Our results demonstrate both early progress and areas where more work needs to be done. Overall, earnings grew marginally in 2024, consistent with our expectations and Investor Day guidance. Recapping our areas of focus. First, our North Star, increasing the number of primary clients. We continue to focus on growth in client segments where we have the scale and product capability to compete and win lead relationships. In our Global Wealth business, we are relentlessly focused on growing our advice channels and providing holistic wealth solutions to attract high-value primary clients to the bank. This is driving strong growth in the business. We are ranked number two amongst peers in earnings growth in the most recent five-year period and delivered record net income in 2024. We’ve increased personal and commercial deposits by 7% year-over-year. In Canadian Banking, 30% of our clients now meet our primacy definition, up 1.5 percentage points year-over-year. And across our retail markets, we have increased total primary clients by 280,000. While this progress is meaningful, in order to meet our 2 million incremental primary client target by 2028, we need to accelerate our progress in 2025 and beyond. Next, we have focused on capital allocation to grow and scale across North America. Today, all incremental capital is being allocated to our priority businesses. This has been an example of enterprise-wide thinking at work as our business lines have made trade-offs to support the all-Bank strategy. One of the most rewarding outcomes of this past year has been witnessing the International Banking team deliver better results with less capital and generating impressive earnings growth with improved returns. We are delivering on our commitment to remix our portfolio to accelerate growth in fee income. We are deemphasizing our indirect lending-only channels in domestic mortgage and auto. And in our Global Banking and Markets business in the US, we are optimizing capital and building out our ancillary business capabilities. We have embarked on select inorganic initiatives to support our North American strategy, including our agreement to sell CreditScotia in Peru and our investment in KeyCorp, which is an opportunity to profitably deploy capital into the US market. Finally, and importantly, we have strengthened our balance sheet. We have a solid Tier-1 capital ratio of 13.1%, and we have grown our allowance for credit losses on the balance sheet by approximately 22% since the end of fiscal 2022, including a performing allowance build of approximately $800 million. We are well positioned to fund our growth agenda in 2025 and beyond. Turning to our business line results and fiscal 2025 priorities. Our wealth business had a very strong finish to the year, delivering net income of $426 million this quarter and record annual earnings of $1.6 billion in 2024, as well as continued ROE expansion to 15.7%. Our Canadian wealth management business delivered double-digit earnings growth, led by a 25% increase in ScotiaMcLeod, which is a strong source of recurring fee-based earnings, as well as 15% growth from the private banks. We continue to invest in developing talent, as well as adding established teams to our ScotiaMcLeod, MD Financial, and Private Investment Counsel advice channels. Our wealth management businesses in Canada reached an all-time high in client satisfaction scores and delivered 30% more financial plans. We saw growth in our asset management business, as overall assets under management grew to over $370 billion, up 18% this year. Importantly, we have seen a strong rebound in fund sales, with a particular focus on distribution through our own bank channel. Gross retail and mutual fund sales increased 54% on a year-over-year basis, with strong momentum expected in 2025. Growth in our international wealth business is very strategic for us in terms of delivering highly ROE-accretive growth. International wealth earnings were a record $261 million in 2024, up 17% year-over-year. Our Canadian Bank delivered solid revenue-led earnings growth of 7% in a year of modest loan growth and higher loan losses as the realities of a slowing economy and the impact of peak interest rates made for a challenging operating environment. Expense discipline in the Canadian Bank contributed to positive operating leverage for the year, and deposit growth outpaced loan growth. Segments where we saw asset growth include commercial, small business, and credit cards through focused initiatives like Scene+ and Mortgage+ which target deeper, more solutions-based relationships with our clients. Primary client growth, diversification of our portfolio mix, and growth in our fee income remain high priorities for fiscal 2025 as stronger profitability in our domestic P&C business is essential to achieving our financial objectives. Looking ahead, we have initiatives in place to accelerate primacy, including focusing on core day-to-day retail deposits and deepening relationships through personalized value propositions and marketing programs, optimizing assets like Scene+, which in our view remains a very large and underexploited opportunity for us to deepen primary data-rich relationships. Scene+ membership continues to expand rapidly with over 15 million members and is on pace for record point issuance. Over 37% of Scene+ members have a Scotiabank relationship and we believe further penetration of the Scene+ member base can meaningfully contribute to our primacy objectives. We are also delivering on our Canadian real estate secured lending strategic repositioning. Our Mortgage+ offering, a customizable offering with an everyday account, preferred mortgage rate, and other retail products, continues to drive strong growth and primary relationships with penetration of greater than 75% among our new mortgage originations in 2024. The early results of these initiatives suggest improved relationship depth with our clients. The number of clients holding three or more products with us increased to 46%, up 2 points from last year and our annual client attrition rate was lower by 40 basis points. 44% of our clients with term deposits are now primary clients, which is up 4.4 points this year. Importantly, 85% of clients with term deposits renewals this year stayed with the bank as a direct renewal or redeployment to investments or other products. We continue our positive momentum in Tangerine. Net primary client growth of 19% year-over-year with our new acquisition offers driving two times higher payroll penetration. Sales through the mobile channel reached a record high at the end of 2024 at 49%, which is an increase of 7 full percentage points year-over-year. Turning to our International Banking business. Considering the portfolio repositioning and capital reallocation activity, we were pleased with the performance of this business, which delivered solid 7% year-over-year earnings growth. We meaningfully reduced our overall capital deployed to the region, in line with our capital optimization strategy, as risk-weighted assets in the international business were lower by 6% or over $9 billion in 2024. Importantly, we saw margin expansion throughout the year to 442 basis points and an improvement in risk-adjusted margins to over 325 basis points. The international banking productivity ratio improved over 200 basis points to 50.9% on the path to our objective of 45% over the medium term as we realize the benefits of a more regional operating model. Operating leverage was an impressive 5% for the full year. Fiscal 2024 return on equity in International Banking improved to 14.4% from 13.1% the year prior. We will remain focused on deploying capital prudently to improve the profitability of this segment over the medium term, as communicated at our Investor Day. In Global Banking and Markets, our results this year reflect the impact of continued balance sheet optimization as we redeploy capital and resources into the product and client segments, where we envision more optimal returns on our capital over time. Fiscal 2024 earnings of $1.7 billion were a modest 5% below last year, or up 9% excluding the substantial impact of the elimination of the Canadian dividend received tax deduction. Our GBM loan balances are lower year-over-year, the result of lower utilization rates as corporate clients paid down bank lines from free cash flow and financed in the capital markets, given the more constructive market environment. Our underwriting and advisory fees increased by 27%, suggesting franchise growth and the benefits of our balance sheet optimization efforts and product capability builds. We have added specialized teams within the CLO, private credit, and mortgage capital markets businesses to participate in higher capital velocity segments of the US structured credit markets. Enhancing our cash management capabilities is essential to growing our share of primacy with commercial, corporate, and multinational clients. In 2024, we continued to invest in talent, products, and client servicing, including in our cash management portal, ScotiaConnect. Our investment in enhancing our cash management capabilities, including in the United States, will allow us to better support clients throughout the North American corridor. In summary, while I am pleased with our financial results in 2024, which demonstrate progress against our strategy, they also reflect our transformation as an organization and the significant work ahead of us in the coming years to increase returns for our shareholders. Looking ahead, the economies in which we are operating are also in transition from both an economic and geopolitical point of view. The Bank of Canada's policy rate action in recent months should lead to a rebound in economic activity next year. We anticipate additional easing through the first half of the year, which we expect will be stimulative to activity in the domestic housing and mortgage markets and buoy consumer and business confidence after a period of relative restraint. We are closely monitoring policy actions from the new administration in Mexico, as well as the incoming US administration. While new governments often bring initial uncertainty with respect to trade policy and relations, we believe policy will ultimately support a cooperative environment that encourages capital investment and continued regional growth. We continue to believe in the long-term economic growth potential of the North American corridor and the strategic value that connectivity among Canada, the US, and Mexico will provide to our clients and to the long-term success of the bank. Central banks in Latin America are well along on the easing path to stabilize interest rates, but the pace of interest rate cuts has slowed from first half of 2024 expectations. Growth is expected to remain positive, but more modest than previously forecasted in our larger markets, with less certainty on near-term growth, particularly in Mexico through the period of Presidential transition. As we navigate this period of uncertainty, we will be thoughtful with our capital allocation into the country. I would now like to draw your attention to our enhanced disclosure, which provides performance updates against critical strategic metrics shared last year at our Investor Day. These select metrics are representative of the many underlying strategic and operating metrics being monitored and measured. Progress in primary client growth, deposits, digital delivery, enterprise-wide cross-sell, and growth in fee income will position us well to achieve our financial goals. Reflecting on the first year performance and sharing our Investor Day five-year plan, we are confident in and committed to delivering against our stated medium-term financial objectives, progress towards achieving 14%-plus return on equity within our five-year strategy period, a commitment to ongoing positive operating leverage, and operating with Tier-1 capital levels with a sufficient buffer above regulatory minimums. Our earning expectations have not changed. We continue to expect earnings growth between 5% and 7% in 2025, prior to incorporating any benefit from our minority investment in KeyCorp. In summary, I am pleased with the progress we have made in our first year of delivery against our strategy. We remain focused on disciplined capital allocation and execution, primary client growth, improving productivity, and maintaining a strong balance sheet. Our teams are rallied behind our strategy, execution, and commitments, and are living our core values and key behaviors as part of our cultural transformation to drive high performance and support the execution of our strategy. Importantly, starting this fall, we rolled out ScotiaBond, our new culture framework, which includes refreshed values and behaviors that will help drive our strategy forward. Our updated performance management metrics go beyond measuring results and evaluate the how in terms of the leadership behaviors that we believe lead to great outcomes. This new framework is being embedded in all aspects of our organization, from goal setting to how we reward performance and recognize our cultural catalysts throughout the bank. I would like to thank our global team of Scotiabankers for their support and commitment to the bank and to our clients this year. Our momentum is a result of their efforts to deliver on our shared vision and collective objectives. I will now turn it over to Raj for a more detailed financial review of the quarter.
Raj Viswanathan, Chief Financial Officer
Thank you, Scott, and good morning, everyone. This quarter's net income was impacted by $430 million of after-tax adjusting items or $0.35 of earnings per share and approximately 5 basis points on the common equity Tier-1 ratio. This consisted of a $379 million after-tax impairment charge related to the write-down of our investment in Bank of Xi'an and certain intangible assets, including software, and after-tax severance provisions of approximately $38 million, both recorded in the other segment. The Q4 results also reflect our usual adjustment for amortization of acquisition-related intangibles. All my comments that follow will be on an adjusted basis. Starting on Slide 6 for a review of the fiscal 2024 results. The bank ended the year with adjusted diluted earnings per share of $6.47, a return-on-equity of 11.3%, and return on tangible common equity of 13.7%. Revenue was up 6% year-over-year, while expenses grew 4%, resulting in positive operating leverage of 2.3% for the year. Notably, fee and commission revenue was up 5%. The provision for credit losses was $4.1 billion in 2024, $629 million higher, driven by higher impaired PCLs. Phil will speak to this later. Canadian Banking earnings were $4.3 billion, up $290 million or 7%. Revenue grew 7%, driven by deposit growth and margin expansion, partly offset by higher expenses and PCLs. The business generated positive operating leverage and achieved a return on equity of 20.8%. International Banking earnings were $2.7 billion, up 10% year-over-year. Revenues were up a strong 9% or approximately $950 million, while expenses were up only 4%, resulting in positive operating leverage of 5%. Global Wealth Management earnings of $1.6 billion were up 10% year-over-year, benefiting from strong assets under management growth of 18%. Revenues were up 9%, driven by higher fee revenue and net interest income across the Canadian and international wealth businesses. Global Banking and Markets reported earnings of $1.7 billion, down 5%, impacted by the denial of dividend received deduction. Excluding this, the earnings grew 9% during the year, while optimizing risk-weighted asset growth. The Other segment reported a loss of $1.8 billion, compared to a loss of $1.4 billion in 2023. The higher loss was due to lower revenues, primarily from increased funding costs, and higher taxes, partly offset by lower expenses. Now, a few comments on the outlook for 2025. 2025 earnings growth is expected to be within the range of 5% to 7%, in line with the Investor Day outlook. This does not include any earnings pickup benefits if the second stage of the KeyCorp investment were to be approved during fiscal 2025. Revenues are expected to benefit from strong net interest income growth, driven by lower funding costs and growth in loans and deposits. Earnings are expected to be impacted by a higher tax rate of between 23% and 24%, driven by the implementation of the global minimum tax of 15%, and a reduction in the inflation benefit in certain International banking markets, as well as higher provision for credit losses. Expense growth is expected to be modest as investments in strategic initiatives are partly offset by productivity benefits, resulting in positive operating leverage for the year. The bank remains committed to maintaining strong capital and liquidity positions in 2025. From a business line perspective, we expect strong earnings growth in Global Wealth Management and solid growth in Canadian Banking and GBM. International Banking earnings are expected to be lower, in line with our Investor Day presentation, impacted by weaker Latin American currencies, slow growth economies, and a higher tax rate. The Other segment losses are expected to improve as net interest income continues to benefit from the 2024 rate cuts and further rate cuts expected in the first half of fiscal 2025. Moving to Slide 8 for a review of the fourth quarter. The bank reported quarterly adjusted earnings of $2.1 billion and a diluted EPS of $1.57. Return on equity was 10.6% and return on tangible common equity was 12.8%. Net interest income was $4.9 billion, up 6% year-over-year and 1% quarter-over-quarter. Year-over-year NII growth was driven primarily by loan growth. Quarter-over-quarter, net interest income grew in Canadian Banking and the Other segment, while it declined in GBM, impacted by a 7% decline in loan balances. International Banking net interest income decline was impacted by the weaker Latin American currencies. Net interest margin grew 1 basis point quarter-over-quarter, mostly from lower funding costs, partly offset by lower margins in Canadian Banking and lower levels of higher-yielding international banking loans. Deposits were up 2% year-over-year, mostly in term, while loans were down 2% year-over-year, mainly in corporate. P&C deposits were up 6% year-over-year. Non-interest income was $3.6 billion, up 11% year-over-year, mainly due to higher trading revenues, wealth management revenues, and other fees and commissions. These were partly offset by lower fees related to the conversion of bankers' acceptances to loans due to the cessation of CDOR. The provision for credit losses was $1 billion, down $22 million quarter-over-quarter. The PCL ratio was 54 basis points this quarter. Year-over-year expenses were up a modest 1%, driven by higher performance-based compensation and technology-related costs, partly offset by the favorable impact of foreign currency and lower communication costs. The productivity ratio was 56.1% this quarter, an improvement of 360 basis points year-over-year. The effective tax rate was approximately 22% this quarter, compared to 15% a year ago and 18.6% last quarter, driven by lower tax-exempt income, prior-year taxes, and lower income in lower tax jurisdictions. Moving to Slide 9, capital. The bank's CET1 capital ratio was 13.1%, a decrease of 20 basis points quarter-over-quarter and an increase of 10 basis points year-over-year. Earnings less dividends contributed 13 basis points to CET1 and the DRIP contributed 11 basis points. As a reminder, this quarter was the last dividend eligible for the DRIP discount. This was offset by 27 basis points from the $10 billion RWA growth, 8 basis points from the closing of the initial KeyCorp investments, 5 basis points from the write-down of our investment in Bank of Xi'an, and 9 basis points from other items, mostly relating to foreign exchange. The $10 billion increase in risk-weighted asset was driven primarily by book quality changes from correlation changes and PD/LGD parameter recalibration that increased the result and corporate commercial loan book's RWA density.
Operator, Operator
All participants, we are sorry for the delay. We are currently experiencing technical difficulties. The conference will resume momentarily. Thank you for standing by. All participants, please stand by. Your conference will resume momentarily. Once again, please continue to stand by.
Raj Viswanathan, Chief Financial Officer
I will continue from Slide 6 to review the fiscal 2024 results. The bank ended the year with adjusted diluted earnings per share of $6.47, a return on equity of 11.3%, and a return on tangible common equity of 13.7%. Revenue increased by 6% year-over-year, while expenses rose by 4%, resulting in positive operating leverage of 2.3% for the year. Importantly, fee and commission revenue grew by 5%. The provision for credit losses amounted to $4.1 billion in 2024, a $629 million increase driven by higher impaired provisions for credit losses. Phil will address this later. Canadian Banking earnings reached $4.3 billion, an increase of $290 million or 7%. Revenue increased by 7%, driven by deposit growth and margin expansion, slightly offset by rising expenses and provisions for credit losses. The business generated positive operating leverage and achieved a return on equity of 20.8%. International Banking earnings of $2.7 billion rose by 10% year-over-year, with revenues climbing 9%, approximately $950 million, while expenses rose by only 4%, producing positive operating leverage of 5%. Global Wealth Management earnings of $1.6 billion were up 10% year-over-year, benefitting from strong assets under management growth of 18%. Revenues increased by 9%, driven by higher fee revenue and net interest income across the Canadian and international wealth sectors. Global Banking and Markets reported earnings of $1.7 billion, down 5%, due to the denial of a dividend received deduction. Excluding this factor, earnings actually grew by 9% during the year, while optimizing risk-weighted asset growth. The Other segment posted a loss of $1.8 billion, compared to a loss of $1.4 billion in 2023. This higher loss was due to decreased revenues primarily from increased funding costs and higher taxes, partially offset by reduced expenses. Moving on to the outlook for 2025, earnings growth is anticipated to be in the range of 5% to 7%, consistent with the Investor Day outlook. This projection does not factor in any potential earnings benefits from the second stage of the KeyCorp investment, should it be approved in fiscal 2025. Revenue growth is expected to be supported by strong net interest income growth, attributable to reduced funding costs and increased loans and deposits. However, earnings may be adversely affected by a higher tax rate of 23% to 24%, resulting from the implementation of the global minimum tax of 15% and a decrease in inflation benefits in specific international banking markets, alongside higher provisions for credit losses. Expense growth is predicted to be modest as investments in strategic initiatives will be somewhat counteracted by productivity benefits, leading to positive operating leverage for the year. The bank remains focused on upholding strong capital and liquidity positions in 2025. From a business line standpoint, we foresee robust earnings growth in Global Wealth Management and solid growth in Canadian Banking and Global Banking and Markets. International Banking earnings are anticipated to be lower, consistent with our Investor Day presentation, influenced by weaker Latin American currencies, sluggish economic growth, and an elevated tax rate. Losses in the Other segment are expected to improve as net interest income benefits from the 2024 rate cuts and further cuts anticipated in the first half of fiscal 2025. Regarding the fourth quarter, the bank reported quarterly adjusted earnings of $2.1 billion and a diluted EPS of $1.57. The return on equity was 10.6%, and the return on tangible common equity stood at 12.8%. Net interest income reached $4.9 billion, up 6% year-over-year and 1% quarter-over-quarter, largely driven by loan growth. On a quarterly basis, net interest income increased in Canadian Banking and the Other segment but decreased in Global Banking and Markets due to a 7% decline in loan balances. The drop in International Banking net interest income was affected by weaker Latin American currencies. The net interest margin edged up by 1 basis point quarter-over-quarter, primarily due to lower funding costs, partially offset by reduced margins in Canadian Banking and lower levels of higher-yielding loans in international banking. Deposits increased by 2% year-over-year, primarily in term deposits, while loans decreased by 2% year-over-year, chiefly in corporate lending. Personal and Commercial banking deposits rose by 6% year-over-year. Non-interest income totaled $3.6 billion, rising by 11% year-over-year, mainly due to higher trading revenues, wealth management revenues, and other fees and commissions, though partly offset by reduced fees from the conversion of bankers' acceptances to loans following the end of CDOR. The provision for credit losses was $1 billion, a decrease of $22 million quarter-over-quarter. The provision for credit losses ratio was 54 basis points this quarter. Year-over-year, expenses rose modestly by 1%, driven by higher performance-based compensation and technology-related costs, partly counterbalanced by beneficial currency effects and lower communications costs. The productivity ratio improved by 360 basis points year-over-year to 56.1% this quarter. The effective tax rate was approximately 22% this quarter, compared to 15% a year ago and 18.6% last quarter, driven by declines in tax-exempt income, prior-year tax adjustments, and reduced income in lower tax jurisdictions. Finally, regarding capital, the bank's Common Equity Tier 1 capital ratio was 13.1%, down 20 basis points quarter-over-quarter but up 10 basis points year-over-year. Earnings less dividends contributed 13 basis points to the CET1 ratio, with the Dividend Reinvestment Plan contributing 11 basis points. This quarter marked the last dividend eligible for the DRIP discount. The decrease was offset by a 27 basis point impact due to a $10 billion increase in risk-weighted assets, 8 basis points from the closure of initial KeyCorp investments, 5 basis points due to a write-down of our investment in Bank of Xi'an, and 9 basis points from various other items, mainly related to foreign exchange. The $10 billion rise in risk-weighted assets was primarily driven by changes in book quality from correlation adjustments and recalibrations of probability of default and loss given default parameters, which increased the risk-weighted asset density for the corporate commercial loan book.
Phil Thomas, Chief Risk Officer
Thank you, Raj. Good morning, everyone. All bank PCLs were 54 basis points this quarter and the full year total PCL ratio was 53 basis points. Looking forward to 2025, we expect our full-year total PCL ratio to be in the mid-50s basis point range, remaining elevated in the first half of the year, with a more positive trend toward the end of 2025. PCL performance throughout the year was driven by an uncertain macroeconomic environment that saw elevated unemployment levels and higher-for-longer interest rates. Looking at Q4 specifically, all bank PCLs of approximately $1 billion were down $22 million or 1 basis point quarter-over-quarter, primarily driven by lower-performing provisions in Canadian retail as recent rate cuts will lessen the payment shock experienced by fixed-rate mortgage clients at renewal, increased impairments in Canadian retail, and one account in Canadian commercial, improved client performance across most of our international retail portfolios. We remain comfortable with our ACL coverage at $6.7 billion or 88 basis points, down 1 basis point quarter-over-quarter. Over the last two years, we have built $800 million of performing allowances in anticipation of potential impacts from higher-for-longer rate environment, and we are now seeing some migration as expected. Turning to Canadian Banking. PCLs were $450 million or 40 basis points, up 1 basis point quarter-over-quarter. Retail PCLs were down $10 million quarter-over-quarter, driven by lower-performing allowances as recent rate cuts lessened renewal risk faced by our fixed-rate mortgage clients. Impaired retail PCLs were up quarter-over-quarter, as higher impairment was observed across most products, but mainly driven by expected formations in mortgages and HELOCs. Despite increased impairments, we're encouraged by mortgage tail risk remaining stable and comfortably below 1% of outstanding retail balances. Furthermore, our mortgage clients' deposits have trended upwards for the second consecutive quarter after falling from pandemic highs. Overall, we remain comfortable with our portfolio, as they continue to perform as expected. Moving to International Banking. PCLs were $556 million in Q4, resulting in a PCL ratio of 137 basis points, down 2 basis points quarter-over-quarter. Retail PCLs improved $27 million quarter-over-quarter as Stage 3 improved in most markets. Performing retail PCLs were down $40 million, driven by lower delinquency, some migration to impaired, and an improved macroeconomic outlook across our international markets. We continue to monitor our portfolio closely, but we are encouraged by improved performance in our retail portfolio with overall 90-day delinquency declining quarter-over-quarter. Looking at our international commercial portfolio, PCLs improved quarter-over-quarter, down $6 million. As I mentioned earlier, we expect our full-year total PCL ratio to be in the mid-50s basis-point range. We expect it will remain slightly elevated in the first half of the year and trend positively through the end of 2025. Our outlook is guided by clients continuing to manage the higher-for-longer rate environment, until expected benefits from lower interest rates work their way through client balance sheets and a mixed macroeconomic environment, across our markets despite expected stabilization of inflation and unemployment. We continue to monitor our portfolios closely given the macroeconomic uncertainty and remain mindful of potential geopolitical risks. With that, I will pass the call back to John for Q&A.
John McCartney, Head of Investor Relations
Great. Thank you, Phil. Operator, please queue the line for questions. Please limit yourself to one question and re-queue if you have another.
Operator, Operator
Our first question will be from Ebrahim Poonawala from Bank of America. Please go ahead.
Ebrahim Poonawala, Analyst
Good morning. Scott, could you elaborate on your summary regarding the strategic execution of the turnaround? Looking at the big picture, what is your level of confidence in achieving the 5% to 7% earnings growth this year? What factors could lead us toward the higher end of that range or even exceed it, considering the macroeconomic conditions outlined in your forecast? Additionally, regarding the ROE improvement, which is projected at 11.3% for the full year, do you anticipate we will finish 2025 with a rate above 13%? Thank you.
Scott Thomson, President and CEO
Great. Thanks, Ebrahim. As we look through '25 and then, importantly, '26, I think we have a high level of confidence in the 5% to 7% in '25 and then, frankly, double digits in '26 and its earnings growth, and I think it's driven by a couple of factors. Obviously, if you look at the PTPP growth here, it's strong across all businesses. And what could determine higher or lower on that 5% to 7% and then longer term is obviously the PCL outlook, and Phil highlighted, we think it's going to get modestly better through the back half of the year, and that's an important assumption. I think the second piece is just the rate environment, and as you know, we are well positioned for a declining rate environment. You're starting to see, it was really nice to see in the fourth quarter, the $114 million improvement in the Other segment, unfortunately offset by the one-off tax. But you're going to see it in the first quarter come through and you're going to see it accelerate through the back half of the year. And so, that is the underpinning of that 5% to 7% growth. As I look to one year out, you also have the addition of Key, and we're hopeful that that happens in the first quarter. That's a meaningful NII contributor, and that is a component of the double-digit growth into 2026 that we talked about. The 5% to 7%, to be clear, does not include any contribution from Key in that '25 outlook. In terms of ROE expansion, I'm not going to give you a target, but that is the key metric that we're driving towards, right? You can see the capital discipline, you can see the cost discipline. The operating leverage in the bank was really encouraging. I can feel it across all of the business lines, they're really taking this cost discipline seriously. And then on the capital allocation, to see us move capital among the bank into this North American corridor strategy was really encouraging. And I called out international in my opening comments, but $9 billion reduction in RWA and record earnings growth in that business. Similarly, in GBM, we're optimizing that balance sheet as well. And those types of attributes are going to rise to or drive higher ROE in the enterprise. And the first instance of that is international. We saw an international ROE uptick between '23 to '24 that was meaningful. So, we'll continue to see that progress and that will lead to the 14% plus ROE we have in the five-year plan.
Ebrahim Poonawala, Analyst
Got it. I'll take leave. Thanks, Scott.
Operator, Operator
Thank you. The following question is from Gabriel Dechaine from National Bank Financial. Please go ahead.
Gabriel Dechaine, Analyst
Hi, good morning. I would like to inquire about the international business, specifically the property and casualty component and the global banking and markets component. We have seen loan balances declining in both the mortgage and commercial sectors. In terms of global banking and markets, while there is a year-over-year increase, we are witnessing a steady decline in revenues and earnings throughout the year following an unusual peak in the first quarter. I'm curious about your overall outlook for international business, which didn't seem too optimistic, and whether you foresee lower earnings next year. Has your perspective become more cautious in light of the recent US election? Are there expectations for reduced capital expenditures or investments in certain countries when considering the effects of dollarization and other factors? I would appreciate an updated viewpoint on this.
Francisco Aristeguieta, Chief Executive Officer of International Banking
Thank you for the question. Francisco here, and good morning, everyone. A couple of things. Let me try to tackle the question in two fronts. One is what are we doing deliberately to improve our performance, and the other one is the environment that we expect will prevail in '25. We have been deliberately working on returns, and that has led to the reduction or reallocation of RWA out of IB into higher returning opportunities. And that's the $9 billion that Scott and Raj mentioned earlier in the call. That has been a deliberate effort to improve our returns, and that has tackled both GBM commercial banking, as well as retail. And that is an integral part of the transformation period that ends at the end of 2025, which we are very much on track to complete by the end of the next calendar year. Now, the environment around us is something we're adapting to. And what we expect in 2025 is that Mexico, Chile, and Peru, all economies will grow slower in '25 than they grew in '24. We don't believe that it will be a massive slowdown, but it will be slower. For example, in the case of Mexico, we expect it to grow at 1% or less. In the case of Peru, we expect it to grow maybe 0.2% less. And in the case of Chile also, 0.2%, 0.3% less than DC. So that is an element that we need to adapt to, and we got to be very nimble in making sure that we continue to improve our productivity on the back of our regionalization effort. So, that path continues strong. And as you see, the expense performance this year, we see that continuing in 2025, preparing us to maximize returns in '26 and beyond. So that's a little bit of how we're tackling these two avenues of deliberate work to improve returns, while adapting to a potentially slower growth environment in '25 that should recoup in '26.
Gabriel Dechaine, Analyst
Okay. Aside from your cost and productivity gains, how else can you adapt?
Francisco Aristeguieta, Chief Executive Officer of International Banking
There are several initiatives underway. Reflecting on our commitments from Investor Day, our main focus is on achieving primacy, which drives our efforts across all segments. For our Global Banking and Markets division, we are enhancing our transaction banking business by shifting from a lending-only model to a comprehensive transaction banking relationship. We’ve made significant advances in our global transaction banking platform in various markets, with plans to continue this growth in 2025. For commercial banking, we have regionalized our model and are implementing a unified segmentation and value proposition across all markets. This approach not only enhances our scale but also ensures a disciplined allocation of our balance sheet, while strengthening our transaction banking capabilities. In retail banking, we have fully regionalized our operations, consistently segmenting across affluent, emerging affluent, top of mass, and mass markets. We now have profit and loss statements for each of these segments, leading to a consistent value proposition that has allowed us to achieve scale previously unattainable. This restructuring has also streamlined our expense management. Currently, we have transferred all budgeting authority to regional offices for both operations and technology, enabling us to prioritize investments for growth. We are transitioning to a unified application and standardized processes, which is facilitating scale that we could not reach before. This strategic approach is intentional and plays a crucial role in how we progress toward our cost-roadmap efficiency targets for 2028. This process will persist into 2025 as we aim to maximize benefits in 2026 and beyond.
Gabriel Dechaine, Analyst
Okay. Thank you.
Operator, Operator
Thank you. The following question is from Matthew Lee from Canaccord Genuity. Please go ahead.
Matthew Lee, Analyst
Hi, guys. Thanks for taking my question. Maybe a clarification on the RWA growth this quarter. I think you guys mentioned book quality changes. It seems like exposure you're seeing is expanding pretty much every quarter, but sort of jumped this one. So I know part of it's recalibration, but are there any changes in the risk of the book to call out and how should we think about RWA growth impacting capital for '25?
Raj Viswanathan, Chief Financial Officer
Sure, Matthew. It's Raj. I'll address that question. You're correct that there was some migration in the corporate book, amounting to about $2 billion of the $8 billion. The remainder relates to the calibration I mentioned earlier. I expect RWA growth for us in 2025, compared to 2024, will primarily be driven by organic growth. Occasionally, we might experience migration, which is just part of our business across multiple countries. Different portfolios, whether retail or corporate commercial, can cause migration. It's challenging to predict, but we’re not anticipating it will significantly increase our RWA consumption in 2025. We might see some minor fluctuations at the beginning of the year. However, I believe organic growth will lead to some internal capital generation, which we will allocate towards quality growth, in line with your comments about primary customers. This should yield better returns than we’ve seen in the past. Regarding our capital ratio, as we’ve stated before, we feel comfortable operating slightly above 12.5%, which we believe is appropriate as we consider ways to enhance the company’s return on equity.
Matthew Lee, Analyst
Okay. That's fair. Then could we potentially see a reversal of that increased exposure or that growth if macro environment gets better?
Raj Viswanathan, Chief Financial Officer
Yeah, absolutely. I think credit quality is always a factor. It moves around every quarter, as you probably know. Multiple portfolios drive it up or down. Depending on the outlook, I would say, in the first half of the year, little less probability, Matthew, the way we see it, because you just heard from Francisco about some of our low-growth economies as well. So, we're going to be cautious. And capital, as you know, PDs, LGDs are always conservative. PDs through the cycle, LGDs are downturn LGDs. So it factors into our models and our metrics that come about. But I would say, the second half, we might likely see some benefits, but I don't think there should be any major deterioration in the first half, but it could be a few basis points.
Matthew Lee, Analyst
Okay. That's helpful. Thanks.
Operator, Operator
Thank you. The following question is from Paul Holden from CIBC. Please go ahead.
Paul Holden, Analyst
Good morning. I have a question for Phil regarding the Canadian residential mortgage portfolio. We noticed a slight increase in impairments this quarter, and while I understand you anticipated this, could you share more insights on what contributed to it? Was it primarily due to interest rate pressures? Additionally, with fixed mortgage renewals approaching in 2025, can you clarify why this won't pose a greater challenge? Or was there a specific segment of mortgages this quarter that experienced more stress than the overall portfolio?
Phil Thomas, Chief Risk Officer
Thanks for your question, Paul. Across our retail book in Canada, we are noticing some effects from prolonged higher interest rates. This quarter was softer from a GDP perspective, and there was some unemployment, so that wasn't entirely unexpected. However, in our mortgage portfolio, we're beginning to see some positive signs related to interest rates. Specifically, regarding the 91-plus segment you mentioned, about 250 customers, primarily in Toronto and Vancouver, are contributing to the increase this quarter. In terms of fixed-rate mortgages, we're seeing some improvement as customers come in for renewals in that segment. So, there's optimism there. Additionally, from a deposit perspective, we noticed some interesting trends this quarter. Fixed-rate mortgage customers have increased their deposit account holdings by about 6% quarter-over-quarter, while variable-rate mortgage customers have done so by about 5.5%. This suggests some early signs of improvement. It's important to note that one period does not signify a trend, but there is some optimism. On the credit card side, there was an uptick in delinquency. We anticipate that this portfolio will remain elevated likely into the first half of 2025, as I indicated in my outlook. Therefore, we expect continued deterioration in that area, and we will manage it as we progress.
Paul Holden, Analyst
Got it. Got it. Can I squeak in one really quick one for Scott? You said, hopeful, Key closes Q1. Is that calendar or fiscal?
Scott Thomson, President and CEO
Calendar.
Paul Holden, Analyst
Thank you.
Operator, Operator
Thank you. Our following question is from John Aiken from Jefferies. Please go ahead.
John Aiken, Analyst
Good morning. In the MD&A, you talked about some pressure from Brazil negatively impacting top and bottom line in international. A little surprised that this got called out because did not think that the Brazilian operations were that meaningful to have an overall impact on international. Can you describe what happened in the quarter and try to give us some sort of quantification in terms of what the scale of the operations are in Brazil?
Raj Viswanathan, Chief Financial Officer
Sure, I can assist with that, John. You’re correct; our operation in Brazil is quite distinctive. It primarily serves high-quality corporate clients and has been developed over many years. Brazil typically contributes around $50 million each quarter, although this can fluctuate. In the last quarter, one of our anticipated transactions faced a delay due to the currency effects from the US elections and related volatility. The client opted to finalize the transaction about ten days later, which affected our Q4 performance. Additionally, we are assessing whether we are achieving adequate returns on the capital we have invested there as part of our capital optimization efforts. Nevertheless, Brazil remains a robust segment for us as it solely focuses on corporate banking, contributing consistently in the $50 million range per quarter, albeit at a lower rate this quarter.
John Aiken, Analyst
Great. Thanks. Appreciate the color, Raj.
Raj Viswanathan, Chief Financial Officer
Thanks, John.
Operator, Operator
Thank you. Our following question is from Mario Mendonca from TD Securities. Please go ahead.
Mario Mendonca, Analyst
Good morning. First for Phil. Phil, when you offer the mid-50s guidance on total PCLs, could you give us any insight into what that implies on the performing side? Like, what I'm getting at here is, are we at the stage now where the allowances have been sufficiently built up that we can actually see the releases come through the way IFRS 9 was sort of intended?
Phil Thomas, Chief Risk Officer
I believe that’s a reasonable point, Mario. As I mentioned in my prepared remarks, we have built up over the last two years with the expectation that we would reach this point, and now we are starting to implement it. As I stated earlier, everything is performing as anticipated.
Mario Mendonca, Analyst
Can you discuss the expectations for dividend growth in 2025? Will it resume? Additionally, is there potential for Scotia to begin returning capital to shareholders through other means, such as buybacks, in line with your outlook for ROE improvement over time? I understand this may not apply to this year specifically.
Scott Thomson, President and CEO
That's a great question, Mario. We didn't grow the dividend this year because our earnings were flat. However, as we start to see earnings growth in the 5% to 7% range and potentially accelerating beyond that, I expect the dividend to resume. I anticipate that we will grow into the payout ratio over several years, which should lead to modest improvements in the dividend. Regarding share repurchase, we aren't ready for that yet, but it's something we're considering. As we move through 2025, close the Key acquisition, and begin generating earnings, I believe this will become a topic of discussion with shareholders in the latter half of the year and into 2026.
Mario Mendonca, Analyst
That's helpful. Thank you.
Operator, Operator
Thank you. Our following question is from Lemar Persaud from Cormark. Please go ahead.
Lemar Persaud, Analyst
Thank you for taking my question. I would like to ask Scott or Raj about the situation regarding the 5% to 7% EPS growth excluding KeyCorp for 2025. Given the higher tax rate, issues with primary client growth, and a more challenging economic environment internationally, what explains this growth projection? Is it mainly due to the reduction in interest rates compared to the guidance you provided at Investor Day last year? Please discuss the key factors driving this 5% to 7% growth. Thank you.
Raj Viswanathan, Chief Financial Officer
Sure. Happy to do that, Lemar. It's Raj. I'll break it down by business line, so it makes it easier and related back to the Investor Day comments that we made. We were clear in the Investor Day on International Banking that it would be lower in '25, compared to '24. One of the drivers is the tax rate. The other driver is everything that Francisco talked about. This is about how we want to optimize the capital deployed and that's the short-term right decision. So it's playing to our Investor Day plan, frankly, and that's what we expect in 2025. Canadian Bank earnings will grow. I called it solid, which is another way of saying it will be low-to-mid single-digits from our perspective on earnings. That's going to come primarily from perhaps stable PCLs, because like Phil said, we have built a lot, so, hopefully, it doesn't require more PCLs, as well as loan and deposit growth, both of which are expected to start accelerating in '25, compared to '24, again, in line with Investor Day. Wealth management. Wealth management, you saw this year pretty close to 10% growth in earnings. That's what it should do in '25 as well, again, in line with what we thought at Investor Day, as AUM starts growing, markets are helping as well. But we also have the initiative to sell retail mutual funds through the branches and so on, part of the strategic initiatives in wealth. So we're quite confident about the growth in wealth management is going to help us. And finally, like what you said, the rate situation is a big contributor. You've already started seeing it in the Other segment, over $100 million NII improvement this quarter. That should continue into Q1 and then start accelerating as well, as the full benefit of the rate cuts start playing into. GBM, this was a tough year for them because of the dividend received reduction, but excluding that, they grew 9%. So, mid-single-digit growth in GBM is what we expect. Again, as they start rationalizing capital, I think they're in the back half of that to see how we can continue to improve the profitability, all of which, Lemar, what I'm telling you is consistent with what we said at the Investor Day and what we expected in 2025. That's why the confidence, the 5% to 7%. Macro will always be a factor. We estimate it as best as we can, whether it's FX rates or macro, but I don't think that should have a serious impact on the 5% to 7%, maybe push it closer towards the midpoint of 5% to 7% from what we thought at the beginning of the year when we talked to you at the Investor Day.
Lemar Persaud, Analyst
And then if I could squeeze in just a really quick one here, just Scott, for you. When you mentioned the double-digit EPS growth for 2026, does that include KeyCorp or is that ex-KeyCorp?
Scott Thomson, President and CEO
Yes, it includes KeyCorp, as we anticipate the benefits from the PTPP growth and a slightly improved macro environment, which is moderating the PCL. Additionally, we expect to benefit from the rates, along with KeyCorp's contribution. So, we are looking at mid-digit to double-digit growth for 2026 if these factors unfold as we anticipate.
Lemar Persaud, Analyst
Appreciate the time.
Operator, Operator
Thank you. Our last question is from Jill Shea from UBS. Please go ahead.
Jill Shea, Analyst
Thank you for taking my question. Raj, regarding the Other segment, we noticed an improvement in the NII number this quarter. Could you provide more details about the NII trajectory as we move into 2025 with potential rate cuts, as well as the bottom line results in the Other segment, considering the impact of the tax rate? Any insights would be appreciated.
Raj Viswanathan, Chief Financial Officer
Yeah. Absolutely, Jill, and nice to take your call. The NII improvement, like you said, it's primarily from lower funding costs. That should continue. So the $100 million are expected to be something consistent next quarter as well, as we see the benefits coming from rate cuts that have happened. And to be clear, we are most exposed to the Canadian rate cuts. Our US book tends to be floating on both sides. So it's not a huge differentiator whether rate cuts happen or not. But the Canadian book will certainly benefit as rate cuts come through, and that will show up in this segment. This quarter, there was some noise in the expense line when you look at it. So, bottom line, $453 million this quarter, I think it will get to the low-400s next quarter and then get into the 300s as the year goes by. The tax rate in this segment, if you just calculate it, it's about 35%. And that's what I expect for the rest of next year as well. This segment should have a tax rate around 35%. That's the right tax rate. As you know, this segment has got a lot of components, Group Treasury being one of the big components, which we have our investment book, as well as our funding books. And then we do operate in multiple countries, which are all aggregated in some of these smaller segments as we call it, non-related to the business. So, 35% is the right tax rate. Global minimum tax is coming up, so 1% is going to increase for the bank as a whole. So this segment, like I said, should get down to the low-400s and then get into the 300s for the rest of the year, mostly driven from NII improvement. The investment gains, which goes through NIR, that can be lumpy, as you know. Some quarters, we might have some gains, other quarters, we may not. I'd focus on the NII line, and that should start reflecting in the bottom line.
Jill Shea, Analyst
Okay. Thank you.
Operator, Operator
Thank you. Our last question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.
Sohrab Movahedi, Analyst
Okay. Thank you. I just wanted to clarify something with Phil. Phil, for '25, I think, you said, let's call it, mid-50s PCL. Like, do you expect '25 PCLs to be higher than '24 PCLs?
Phil Thomas, Chief Risk Officer
Right now, we're indicating that we will likely remain where we are, and as I mentioned in my prepared remarks, we expect to see a slight increase in the first half of the year, with better performance anticipated in the second half. This is our current forecast.
Sohrab Movahedi, Analyst
I mean, I don't want to put too fine a point on it, Phil. But in your sub pack, you have 2024 total bank PCLs 53 basis points. That seems to me to be mid-50s. And you finished the second half with 55, 54. So, when you say first half of next year might be a little bit elevated, it could be higher than how the second half of this year has gone. Is that what you're implying to us?
Phil Thomas, Chief Risk Officer
I would think about it flat to slightly elevated and then starting to come down in the second part as we head to Q3 into Q4.
Sohrab Movahedi, Analyst
But I mean, you've got one of the smallest relative credit card books. So, what's causing this degradation in the first half of next year?
Phil Thomas, Chief Risk Officer
Yes. Keep in mind that we have the SDA portfolio, which is focused on near-prime auto loans. This portfolio functions similarly to a credit card portfolio with the other Canadian banks, particularly regarding the credit performance we are currently observing. As I mentioned in my earlier remarks, we have established allowances anticipating this situation for some time. If you refer to the investor presentations regarding some of the international portfolios, you will notice a 91-plus delinquency in the Mexican portfolio. This is contributing to some fluctuations as we approach this period, particularly for customers who had payment deferrals during the pandemic and are now transitioning off these plans due to our write-off policy in that region. We are also examining some non-core international portfolios, including our holdings in Chile. Therefore, there are several dynamics at play that we are carefully monitoring within the overall retail portfolios.
Sohrab Movahedi, Analyst
Okay. And maybe a quick one for Raj. I know I hear the 14% ROE. Do you have the equivalent number from a return on asset perspective that you're targeting?
Raj Viswanathan, Chief Financial Officer
Yeah. ROE, as you know, is slightly lower now. It's around the 60 basis points. We expect that to continue to improve, Sohrab. I would say, around 2026, we should be closer to the 80 basis points. Eventually, we want to get to 100 basis points, which might be in the second half of the five-year plan.
Sohrab Movahedi, Analyst
I appreciate that you taking my call. Thank you.
Operator, Operator
Thank you. We have no further questions registered at this time. I would now like to turn the meeting back over to Raj.
Raj Viswanathan, Chief Financial Officer
Thank you very much. And on behalf of the entire management team, I want to thank everyone for participating in our call today. We look forward to speaking again at our Q1 call in February. This concludes our fourth quarter results call. Wish you all a great day.