The Bank of Nova Scotia - Earnings Call - Q2 2025
May 27, 2025
Transcript
Meny Grauman (Head of Investor Relations)
Good morning. Welcome to Scotiabank's 2025 Q2 results call. My name is Manny Grauman, 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 their comments, we'll be glad to take your questions. Also present to take questions are the following Scotiabank executives: Aris Bogdaneris from Canadian Banking, Jackie 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 two of our presentation, which contains Scotiabank's caution regarding forward-looking statements. With that, I will now turn the call over to Scott.
Scott Thomson (CEO)
Thank you, Manny, and good morning, everyone. In what remains a period of global economic uncertainty, we continue to execute on our strategy, focusing on areas we can control, including strengthening our balance sheet, investing in our business while delivering positive operating leverage, and capitalizing on revenue opportunities as they emerge. We delivered adjusted earnings in the quarter of CAD 2.1 billion, or CAD 1.52 per share. This included a significant performing build in Canada, reflecting a conservative estimate of the potential impact of the evolving macroeconomic backdrop driven by tariffs. This quarter, we continued to invest in our Canadian banking franchise as we execute on our strategy to grow our primary client base and deepen client relationships. We demonstrated strong expense discipline in international banking, grew our wealth earnings, and delivered strong results in our global banking and markets franchise led by impressive growth in fee income.
Underpinning all of this is our continued commitment to strong balance sheet metrics, which positions us well to support clients through this period of uncertainty. Our steady CET1 ratio was 13.2%, up 30 basis points quarter over quarter, and our liquidity metrics remained strong. We built almost CAD 200 million of allowances this quarter for a cumulative build of CAD 1.8 billion since the end of 2022. While we have not seen a meaningful deterioration in credit, our base case forward-looking indicators have worsened. The outlook continues to evolve, and we are operating in a unique environment. Against this dynamic scenario, an overlay of expert credit judgment contributed to our provision approach this quarter. Our strong balance sheet allows us to remain focused on driving forward our key strategic objectives, delivering growth and shareholder value over the long term. Moving to a brief review of our strategic priorities.
First is a continued focus on disciplined capital allocation. We announced a return to growth of our quarterly dividends, increasing our quarterly dividend by $0.04- $1.10 per share. This morning, we also announced the launch of a share buyback program for 20 million shares. This demonstrates our confidence in the trajectory of internal capital generation and strength of our capital ratio. We expect to use the NCIB as one of the tools in our toolkit to allow us optionality to return capital to our shareholders if our valuation remains depressed. Second, we remain focused on our North Star earning client primacy and growing core deposits. The bank continues to improve its loan-to-deposit ratio to 104%, the 10th consecutive quarter of improvement. Clients are cautious in this environment, and we are seeing this in their deposit behavior, with deposits up year over year across most business lines.
Since we launched our strategy, we have added approximately 392,000 new retail primary clients across the bank. Although primary client growth has decelerated in Canada due to the immigration slowdown, we are focused on converting near-primary clients and are seeing improved client retention rates compared to the prior period. International banking continues to execute on its segmentation strategy, and we expect to see primacy accelerate once this is fully deployed. Our primary clients contribute more than five times the revenue of non-primary clients, and we are seeing continued growth in primacy across our priority segments. Our focus on primacy means we are having more conversations with clients, particularly when it matters most. In Canadian retail, our advisors are making 20% more calls to clients compared to the prior quarter.
Our Canadian wealth business delivered over 4,000 financial plans year to date, and we continue to build out our team of retail specialist advisors, up 8% this year. In addition, our small business banking team added 17,000 clients in Q2 alone, contributing to a robust net client acquisition rate of 5% year-to-date, well above the market. Third, we continue to demonstrate operational excellence and return discipline. We delivered positive operating leverage for the fifth straight quarter while continuing to invest in our businesses to drive longer-term sustainable growth and improving client experience. We continue to invest in AI to drive productivity. For example, in Canada, over 70% of commercial client emails received by our business service center are now processed by AI to create structured case files, delivering faster service and at a lower cost.
While year-to-date ROE was down slightly compared to the prior period, this was driven by the significant Q2 performing allowance build. We remain steadfast in our focus to achieve 14%+ ROE over the medium term. We feel good about the momentum we have heading into the second half of the year and are confident that we'll be able to grow EPS by 5%-7% in fiscal 2025. Now, I will briefly turn to highlights from our business lines. Global Wealth Management continued its positive momentum, delivering CAD 405 million of earnings, which is up 17% year over year, with strength across all of our businesses. Our global asset management business continues to expand its offerings by adding new private asset solutions. Our expanding active ETF product suite is resonating with clients, as we are seeing strong asset growth in these solutions despite market volatility.
Our Canadian wealth business saw strong growth in fee-based assets, driven by sales momentum in our advisory channels, while market volatility drove higher trading volumes, particularly in iTrade. Our private bank continues to innovate, and this year we launched our signature banking offering tailored to a wider segment of high-net-worth clients with a service-focused banking solution. We are delivering on our commitment to provide holistic solutions to clients, with closed referrals between our Canadian wealth, retail, and commercial businesses at CAD 6.7 billion year to date, up 6% year-over-year. We are seeing continued momentum on our retail advice strategy in partnership with Canadian banking, with year-to-date net inflows of CAD 1.6 billion compared to the prior year. Global banking and markets delivered earnings of CAD 413 million as we continue to generate better results with less capital. In Canada, we maintain the number one league table ranking in debt capital markets.
Capital markets activity was strong in the first two months, slowing down in April as the tariff uncertainty escalated. Our M&A business generated near-record revenue this quarter. Fees for the first half of fiscal 2025 already exceed the full year of 2024. Despite observing a slowdown in announced M&A due to the market uncertainty, our pipeline remains strong, and we are ready to capitalize when activity resumes. We remain focused on our balance sheet velocity and continue to deliberately grow our capabilities in strategic products such as mortgage capital markets, leveraged finance, and structured credit. Canadian banking continues to diversify its business mix while executing on its primacy strategy. Canadian banking deposits were up 5% year-over-year, and our retail business continues to see strong retention of maturing term deposits driven by advice-led strategy.
We continue to deliver enhancements to our Scotia Smart Investor solution, which helps clients plan and manage their savings and retirement targets. We are also making it easier for clients to bank how and where they want by continuing to grow our virtual advice for clients. While mortgage growth is slowing, our Mortgage Plus solution, a major driver of client primacy, accounted for 88% of our originations this quarter, and mortgage renewal retention rates remain high. We are also seeing traction in our card strategy, with almost 26% of the 15 million CENE Plus members now holding a payment product. CENE+ members are seeing the value of the loyalty program as key metrics such as active users, points issuances, and redemptions grew year-over-year. This engagement should contribute to client acquisition as rewards are amplified for CENE+ members who hold Scotiabank payment solutions.
In partnership with private banking, Canadian banking also launched a new premium credit card tailored to high-net-worth clients, combining the value of CENE Plus with exclusive benefits for cardholders. Moving to international banking, earnings were CAD 681 million, driven by another quarter of strong expense discipline and lower impaired loan loss provisions. Return on equity improved both year-over-year and quarter over quarter as earnings grew while capital attributed was lower. Our productivity ratio improved to 51%, and we remain on track to achieve our medium-term run-rate savings commitment of CAD 800 million, with significant components of our regionalization strategy complete by the end of the fiscal year. We continue to execute on our retail segmentation strategy, with leadership roles for the regional structure largely in place.
Looking ahead, we expect to roll out a tailored value proposition for priority segments by the end of the fiscal year across our core markets. In commercial, our segmentation efforts are complete. Clients have been partnered with relationship managers best suited to their needs, and we are starting to see the benefits. We are also driving an improved client experience and have deployed an enhanced onboarding solution across our key markets, allowing us to onboard clients in one-third of the time. In international banking, GBM, earnings were up 8% year-over-year, driven by capital markets as the bank capitalized on strong market activity. Looking ahead, with the Canadian election now behind us, I am optimistic the country has entered a period of relative political stability and can now focus on a growth-first agenda.
This will require Canada to tackle its underlying productivity issues, address the obstacles that stand in the way of big infrastructure projects, and realize the country's potential as a natural resources powerhouse. It also includes creating the conditions for strong and mutually beneficial economic growth across Canada, the U.S., and Mexico. We intend to work with stakeholders across the country to execute on the growth agenda as the country focuses on supporting its producers, manufacturers, builders, and innovators in creating jobs, building affordable homes, producing what the world needs, and getting those goods to global markets. In summary, while weaker consumer and business confidence is impacting near-term loan growth and capital markets activity, the future looks bright for Canada, and our team remains focused on executing on our strategic priorities.
We remain committed to building deeper, more advice-driven client relationships and positioning ourselves to capitalize on growth opportunities that drive shareholder returns. I will now turn it to Raj for a more detailed financial review of the quarter.
Raj Viswanathan (CFO)
Thank you, Scott, and good morning, everyone. All my comments that follow will be on an adjusted basis, which includes the usual amortization of acquisition-related intangibles. Moving to slide six for a review of the second quarter results, the bank reported quarterly earnings of CAD 2.1 billion and diluted EPS of $1.52. Return on equity was 10.4%, down 90 basis points year over year, primarily driven by higher-performing PCLs. Revenues grew a strong 9% year-ove- year. Net interest income grew 12% year-over-year, primarily from a higher net interest margin and loan growth, which included the impact of the banker's acceptance conversion.
All bank net interest margin expanded 14 basis points year over year. Quarter over quarter, NIM expanded 8 basis points, driven by lower funding costs as a result of rate cuts and higher margins in international banking. Non-interest income was CAD 3.8 billion, up 5% year-over-year, primarily due to higher income from associated corps, fee and commission revenues, and wealth management revenues, partly offset by lower banking revenues. The expenses grew 8% year-over-year, driven by higher technology, personal costs, including performance and stock-based compensation, and professional fees to support strategic and regulatory initiatives. As a result, pre-tax pre-provision profit grew 10% year-over-year. The provision for credit losses was approximately CAD 1.4 billion, and the PCL ratio was 75 basis points, up 15 basis points quarter over quarter, primarily due to higher-performing loan provisions.
Quarter-over-quarter expenses were down 1%, driven by seasonally lower share-based compensation and three fewer days, partially offset by unfavorable impact of foreign exchange and higher professional fees. The bank generated year-to-date positive operating leverage of 2%. The productivity ratio was 55.7%, an improvement of 50 basis points compared to the prior year. The bank's effective tax rate increased to 21.3% from 20.5% last year due to the implementation of the global minimum tax and lower income in lower tax jurisdictions that were partly offset by favorable adjustments related to prior periods. Quarter-over-quarter, the effective tax rate decreased due to lower taxes in international banking. Moving to slide seven, which shows the evolution of the CET1 ratio and risk-weighted assets during the quarter. The bank's CET1 capital ratio was 13.2%, an increase of 30 basis points quarter over quarter.
Earnings, less dividends, contributed 12 basis points, while lower regulatory capital deductions relating to the higher-performing PCL, ACL build, contributed 8 basis points. A decline in risk-weighted asset contributed 4 basis points this quarter, while FX impact was 2 basis points. The total risk-weighted assets was CAD 459 billion, down CAD 1 billion from the prior quarter, excluding the CAD 8 billion impact from foreign currency translation. This was driven primarily by benefits from retail LCD parameter updates, the close of CrediScotia that were partly offset by higher book size, mainly from retail growth and higher operational risk capital. Looking ahead, the bank remains committed to maintaining strong capital and liquidity ratios in 2025. Turning now to the business line results beginning on slide eight. Canadian Banking reported earnings of CAD 613 million, down 31% year-over-year.
The earnings were impacted by significant performing PCLs, while pre-tax pre-provision profit was down only 1% year-over-year. The average loans were up 4% year-over-year, with real estate secured lending that was up 6%, while credit cards grew a modest 4%. We continue to see deposit growth as year-over-year deposits grew 5%, outpacing loan growth, driven by an increase of 8% in non-personal deposits, mostly in demand, and 3% in personal deposits. Net interest income grew 2% year-over-year, primarily from solid asset and deposit growth and the benefit of the BA conversion. The net interest margin, however, declined by 4 basis points quarter-over-quarter and 14 basis points year-over-year, driven by deposit margin compression due to rate cuts.
Non-interest income was up 1% year over year, primarily due to higher insurance income and mutual fund fees, partly offset by lower banking fees, including the impact of the BA conversion. The PCL ratio was 72 basis points, up 32 basis points year-over-year, and 25 basis points quarter-over-quarter, primarily due to higher-performing loan provisions. The expenses increased 4% year-over-year, primarily due to technology costs related to new systems and infrastructure and increased project spend supporting strategic and regulatory initiatives. Quarter over quarter, expenses declined 2% due to three fewer days in the quarter. The year-to-date operating leverage for the segment was negative 2%. Turning now to global wealth management on slide nine.
Earnings of $405 million were up 17% year-over-year as Canadian earnings were up 19%, driven by higher revenues from AUM growth across asset management and advisory businesses, iTrade volumes, and strong private banking loan growth. Revenues were up 12% year-over-year from higher mutual fund fees, brokerage revenues, and investment management fees, and higher net interest income driven by loan and deposit growth. Expenses were up 10% year-over-year from higher volume-related expenses, technology costs, and sales force expansion. Year-to-date, operating leverage was positive 2.4%. Spot AUM increased 9% year-over-year to $380 billion, and AUA grew 6% over the same period to over $710 billion, driven by market appreciation and higher net sales. International wealth management generated earnings of $57 million, up 7% year-over-year, driven by growth in Mexico, partly offset by the impact of foreign currency translation.
Turning to slide 10, global banking and markets. Global banking and markets delivered earnings of $413 million that was up 10% year-overyear. Revenue increased 18% year over year, driven by higher performance in both capital markets and business banking. Underwriting and advisory fees grew a strong 26% year-over-year. Revenues decreased $136 million or 9% quarter-over-quarter from lower trading-related revenues in equities and fixed income. The net interest income increased 49% year-over-year due to higher corporate lending margins, lower trading-related funding costs, and the positive impact of foreign currency. Loan balances declined 16% year-over-year, reflecting market conditions and continued balance sheet optimization. Non-interest income was up $106 million, 11% year-over-year, due to higher underwriting and advisory fees, trading-related revenue from fixed income, equitie, and FX, and the impact of foreign currency translation.
The expenses were up 15% year-over-year, mainly due to higher personnel costs, including performance-based compensation, higher technology costs to support business growth, and the negative impact of FX. The operating leverage was a strong 6.2% year-to-date. Moving to slide 11 for a review of International Banking. My comments that follow are on an adjusted and constant dollar basis. The segment delivered earnings of CAD 681 million, up 2% sequentially and 4% year-over-year. Revenue was flat year over year as non-interest income that was up 12%, driven by higher trading revenues in Chile, Peru, and Mexico. Net interest income was down 4% year-over-year, driven by lower business loan volumes in Brazil and Mexico. The net interest margin expanded by 4 basis points year over year, mainly in Chile and Mexico, driven by changes in business mix.
Net interest margin was up 10 basis points quarter-over-quarter, driven by lower funding costs and inflation benefits in Mexico and Chile. Year-over-year loans were down 3%. Business loans declined 8%, partly offset by 3% growth in retail loans. Deposits were down 2% year-over-year, while personal deposits grew 1%. Non-personal deposits declined 3%. The provision for credit losses was $550 million, translating to 137 basis points, down 9 basis points quarter-over-quarter. Expenses were in line with the prior year and were down 3% quarter-over-quarter, driven by lower depreciation and amortization and seasonality in expenses in Jamaica last quarter. The operating leverage year-to-date was 0.9%. The effective tax rate decreased by 220 basis points quarter-over-quarter to 19.5% due to higher inflationary adjustments in Chile and favorable adjustments related to prior periods in Peru.
GBM International Banking generated earnings of $303 million, up 8% year-over-year, primarily from growth in Peru, Mexico, and Chile. Turning to slide 12, the other segment reported an adjusted net loss of $80 million, an improvement of $97 million compared to the prior quarter. This was mainly driven by higher revenues from net interest income that was higher by $147 million quarter-over-quarter, benefiting from lower funding costs and a full quarter of KeyCorp earnings contribution. I'll now turn the call over to Phil to discuss risk.
Phil Thomas (Chief Risk Officer)
Thank you, Raj, and good morning, everyone. There is still significant uncertainty on the path forward for the global economy and Canada in particular. As a result, we remain thoughtful in our posture and continue to proactively manage our credit exposures.
Against this backdrop of increased uncertainty and a deterioration in our base case economic outlook, all bank PCLs this quarter were approximately CAD 1.4 billion, or 75 basis points, up CAD 236 million quarter-over-quarter. The increase from last quarter was driven entirely by performing provisions as impaired PCLs fell CAD 12 million. This quarter, we had significant performing PCLs of CAD 346 million, or 18 basis points, up 13 basis points from Q1. This performing build was driven by deterioration in our forward-looking indicators and the use of expert credit judgment to reflect trade uncertainty. Compared to last quarter, our base case scenario also incorporates the impact of higher tariffs. In retail, the performing build was driven by weaker FLIs, primarily lower GDP growth and higher unemployment. We used expert credit judgment to increase the allowances further.
In our non-retail portfolio, we conducted a comprehensive review of our portfolio to identify more trade-sensitive industries and again used expert credit judgment to increase our allowances. Turning to Canadian banking, PCLs were CAD 805 million, or 72 basis points, up 25 basis points quarter-over-quarter. In retail, PCLs were CAD 613 million, up CAD 190 million quarter-over-quarter, driven primarily by an increase in performing provisions across portfolios. Retail performing PCLs increased CAD 175 million quarter-over-quarter, driven by a weaker macroeconomic outlook, higher delinquencies, and the ECJ overlay mentioned before. Our retail impaired PCL ratio was up 3 basis points quarter-over-quarter to 45 basis points, driven by higher net write-offs in our unsecured portfolio and auto. 90-day mortgage delinquency remained stable at 24 basis points as delinquency in our variable-rate clients continued to stabilize on the back of central bank rate cuts.
Looking at our Canadian commercial portfolio, PCLs were CAD 192 million, up CAD 77 million quarter-over-quarter, driven by a performing build of CAD 97 million skewed towards industries more likely to be impacted by tariffs such as auto, agriculture, and manufacturing. Impaired commercial PCLs were down CAD 14 million quarter-over-quarter due to elevated PCLs the prior quarter from a single account. Moving to international banking, PCLs were down 9 basis points quarter-over-quarter, resulting in a PCL ratio of 137 basis points. Impaired PCLs fell CAD 52 million quarter over quarter, while performing provisions were flat. Looking specifically at retail, total PCLs were down CAD 55 million quarter-over-quarter, or down CAD 68 million, excluding FX, driven by lower impairments across most of our retail footprint. Performing retail PCLs fell slightly by CAD 2 million quarter-over-quarter due to improved credit quality across Colombia, unsecured portfolios, and Peru portfolios.
However, Mexico saw a performing provision of $17 million to reflect weaker macroeconomic outlook. More specifically, we have increased the total Mexico ACL by $94 million, or 16%, in the last two quarters. Commercial PCLs were $92 million, up a modest $2 million quarter-over-quarter. Looking at GBM, PCLs increased $22 million quarter over quarter, mainly due to a single impaired account. In closing, our outlook at the beginning of the year did not contemplate the current operating environment and associated uncertainty. Since then, trade tensions have further escalated. Given this continued uncertainty, we expect our impaired PCL ratio will remain at or slightly above the Q2 level of 57 basis points for the balance of the year.
In international banking, our impaired ratio has trended down since Q3 2024 from 146 to 131 basis points as we continue to execute our strategy, focusing on client primacy, collections, and helped by the sale of CrediScotia in Peru. In Canadian banking, impaired PCLs continue to rise, but growth has slowed as clients continue to benefit from rate cuts, particularly in variable-rate mortgages, and a similar focus on collections effectiveness and driving client primacy. Our total impaired PCL ratio this quarter was 44 basis points, up just one basis point quarter-over-quarter. This segment-by-segment analysis gives us confidence in the trajectory of our impaired PCL ratio for the remainder of 2025. Our outlook is reinforced by the significant performing provision we took this quarter to address the underlying uncertainty.
Our performing provision build this quarter, we increased our all bank ACL ratio to 95 basis points, up 4 basis points quarter-over-quarter to CAD 7.3 billion. This represents a cumulative build of CAD 1.8 billion since the end of 2022, approximately 70% of which has been into our performing allowances. While there continues to be uncertainty around the macroeconomic outlook, we believe the build in allowances this quarter, combined with a well-capitalized balance sheet and strong liquidity, positions the bank to navigate this challenging period while ensuring we are there to support our clients. With that, I will pass it back to Meny for Q&A.
Meny Grauman (Head of Investor Relations)
Thanks, Phil. Before we open the line for questions, a reminder to please limit yourself to one or two questions and then re-queue. Operator, we're ready for the first question.
Operator (participant)
Thank you. Please press down on it this time if you have a question. There will be a brief pause while participants register for their questions. Thank you for your patience. We will take the first question from Ebrahim Poonawala from Bank of America. Please go ahead.
Ebrahim Poonawala (Managing Director)
Hey, good morning. I guess maybe a question for Phil. Significant performing PCL build, I think you mentioned deterioration in macro indicators, expert judgment. Just if you do not mind, break it down for us around fundamentally. I think you said impaired PCLs could be slightly higher. I think what we are trying to and investors are trying to figure out is what is the fundamental deterioration that has already taken place and what do you see realistically happening over the coming weeks and months as we think about write-offs and where impaired PCLs could be even worse on impaired PCLs than 2025?
Just from a very realistic scenario basis, how do you think about it?
Phil Thomas (Chief Risk Officer)
Yeah, no, I appreciate the question. Thank you. Let me break it down for you, Ibrahim. If I look at Canadian banking, where we've seen the increase in impaired, we're only up one basis points to 44 basis points quarter-over-quarter. If I double-click then on Canadian retail, we're up three basis points to 45 basis points. What we've been seeing over the last three quarters is impaired starting to slow or increasing, rather, at a slower rate. If you go in to look at page, I think it's page 38 of the investor slides, you can see the 90-day delinquency, and you can see there things are looking relatively stable.
As we look out the next two quarters and forecast with our forecast, we're seeing things relatively stable at the current rates that we have in Q2, maybe slightly elevated from here, but we're confident that we're going to be sort of in and around where we are today impaired for the remainder of the year. We're not seeing any major pockets of strain in any of our portfolios, and we're feeling quite confident as I look at the Canadian book that mortgage delinquency has stabilized. I'm seeing auto delinquency stabilize. We're watching credit cards very carefully. With that, as I mentioned in my prepared remarks, a big focus on collections. We've been investing in new tools, technology, and people in that space just to make sure that we were prepared coming into this environment.
Turning to IV, because I think it is important to look at from an all bank perspective, we are seeing some really positive credit trends in International. We saw the sale of CrediScotia coming through this quarter in Peru. I think Francisco and his team are doing a wonderful job on client primacy, which is driving down some of the single product deterioration that we had seen in the past in that portfolio. All that gives me confidence that as I look for the next two quarters, we're feeling good that we can give guidance sort of in and around the current rate for the remainder of the year.
Ebrahim Poonawala (Managing Director)
That's helpful. If I can follow up just on that, maybe Scott for you, as we think about customers picking up activity, what are we looking for?
Is it a positive headline coming out of Mark Carney and the White House around the trade issues? What would get customer activity going in a world where you would feel less worried or your customers would feel less worried about the macro outlook?
Thank you.
Scott Thomson (CEO)
Yeah, sure. Thanks, Ibrahim. I mean, a couple of things. I think making some progress on USMCA would be helpful for sure, and hopefully that happens over the next six months, year. What I would say is we've already seen a little bit more certainty in Canada as we've navigated this kind of prime ministerial transition, and you have Prime Minister Carney now in role with his cabinet in role and a natural resources minister as an example who's out in Calgary last week talking about the need to get things done. That is resonating very well with the business community.
We have seen softness. We have seen uncertainty. As we look to the back half of this year and into 2026, I do think there is a moment here where you are going to see an inflection point with a little bit more loan growth. I am optimistic, particularly as we look out to 2026, that things will be better than where we are today.
Ebrahim Poonawala (Managing Director)
That is helpful. Thank you.
Operator (participant)
Thank you. The next question is from Gabriel Dechaine, National Bank Financial. Please go ahead.
Gabriel Dechaine (Equity Analyst)
Hey, good morning. Just a technical one here. On the condo exposure, if I look at your mortgage portfolio breakdown, I am not sure what slide it is, but it shows 17% of your book is in condos. We are hearing stories about the borrowers backing out of pre-construction and stuff like that. Is there any lending exposure to that type of activity, I guess? Yeah, sure.
Phil Thomas (Chief Risk Officer)
Great question. Yeah, condos represent 20% of our mortgage portfolio. If I look at on the developer side, obviously there's a lot of headlines in the news, and we've been watching it very carefully. I would say over the last number of years, we've been very deliberate focusing on tier one developers with experience through down cycles in tier one cities. We do not feel we're as exposed potentially to some of the headlines that we see there. If I look at it, though, also condo developers only represent about 6% of the commercial real estate portfolio in Canada. It is quite small, and about 80% of that is investment grade. Not to say that we're not monitoring it, but it's not one of my, none of my top concerns right now.
Gabriel Dechaine (Equity Analyst)
Okay, great. While I guess stick with this mortgage business, for one, I saw the or I heard rather, you talk about the credit performance delinquency rate stable in your mortgage portfolio because rates are being cut, and we know your portfolio is a little bit different in that sense. That all makes sense. When I look at the stage two classifications, it was up CAD 9 billion quarter over quarter. More than 100% of that was in the Canadian Resil book, which also in this context makes sense, but it is a divergence. How do you determine when a mortgage goes from the stage one, low risk, no risk, whatever category to, hey, there is a bit more risk there? Is it regional, Southern Ontario? We have looked at the borrowers and what industry they are working in, etc. How does that shift take place?
Phil Thomas (Chief Risk Officer)
Yeah, thanks, Gabriel. You are right.
It is technical. As we looked at coming into this quarter, obviously the models were very focused on kicking out the FLI increases related to unemployment and GDP. We did end up having to build up quite a big ECJ for the quarter, and a lot of that was into the Resil portfolio, or some of that, a significant amount was in the Resil portfolio. As we did that, I want to stress this, we are not seeing any areas of deterioration in any particular postal code. This was sort of a broad addition to the Resil stage two that we decided to do as an ECJ. I think while we are on the topic of stage two, I also want to stress that we have built about CAD 302 million in stage two since Q4.
About $200 million of this was in retail, and about $100 million of this was in non-retail. We are not just focused on that pocket. We have been very focused on where we could potentially see outcome and a negative outcome. Hopefully, and optimistically speaking, it does not come, but we just wanted to be thoughtful and conservative as we built the allowances this quarter.
Gabriel Dechaine (Equity Analyst)
Is there any kind of, I do not know, you look at Toronto, 10% unemployment, that is where your expert judgment comes in? Is that as simple as that, or maybe we could take it offline if that is more practical?
Phil Thomas (Chief Risk Officer)
Yeah, no, happy to chat with you offline. I mean, obviously we have been talking about GVA, GTA for a while now in terms of exposures. For the purposes of what we built in the ECJ here, it was not directed at any sort of geography or region.
Okay. Thanks. Sorry for the three questions.
Gabriel Dechaine (Equity Analyst)
Okay.
Operator (participant)
Thank you. Next question is from Mario Mendonca, TD Securities. Please go ahead.
Mario Mendonca (Managing Director and Senior Research Analyst)
Good morning, Phil. Can we stick with you there? Your comments about credit conditions not curating as abruptly as the slowdown, I think Scott's comments early on that credit still looks good. All of that is in direct contrast to what appears to be a lot of stress for the Canadian consumer. I am referring to the Equifax numbers, any number of articles that I have read about the Canadian consumer. You have got every economist in Canada talking about how unemployment is moving higher, GDP growth is slowing, but we are simply not seeing it in the bank results, not in the two banks that have reported so far. I do not understand that.
I do not understand how the banks that account for, I do not know, 85%-90% of all the lending in Canada could not be seeing the same stress that we are seeing in the aggregate data. Is there something I am missing here?
Phil Thomas (Chief Risk Officer)
No, listen, Mario, I think you are one of the best analysts on the street. You do not miss much. I can tell you what I know and what I am seeing in my portfolio. I look at the TransUnion data the same way you do because it is a good indication of what I am seeing in the economy, but also how my peers are trending. I have to say, coming into this year, we were more optimistic that we would see 2025 being 2024. Obviously, when you have the level of uncertainty that you have, it is going to result in some sort of stress.
What we're seeing at the customer level right now, if I drill down and look at some of the analytics there, is, and maybe related to some of the deposit account growth, we've been seeing we're not seeing the level of spend that we would have probably hoped to. You can see that even in our credit card receivables. We're not seeing foreign travel necessarily. We are seeing customers, and we're also seeing people switch from sort of higher-end to budget groceries. People are being thoughtful about the macro. Talking to some mortgage brokers, they're seeing people being a little bit slower to hit the bid on a new home because they're not sure about how their employment is going. You do see some of that slowing down, but it's not showing up in the day-to-day impact, certainly right now.
Bottom line is this is why we just did an 18 basis point performing allowance build to make sure that we're prepared for an eventuality if it does come about that unemployment continues to spike up and we do see layoffs and it does significantly impact the Canadian consumer.
Aris Bogdaneris (Group Head Canadian Banking)
May I add something, Phil? Can I add something? Aris here. I just wanted to just top up on what Phil said. What I'm seeing in the Canadian bank are two effects, really. You're seeing just a reduction in general demand to take on debt. You see it in the auto business. You see it in the card. You see it in the unsecured. You're seeing diminished demand. That's one aspect. Then you're also seeing on the other side, people starting to hold more cash and not invest in mutual funds. That trend was kind of interrupted.
People are just cautious. They are cautious in their spending, as Phil said, on the discretionary side, in the purchase volumes we are seeing on the card book. You are just seeing hesitation out there, not yet materializing in a lot of additional stress on the delinquencies, but just caution, caution in terms of activity. That is how I would categorize it.
Mario Mendonca (Managing Director and Senior Research Analyst)
All right. Slightly different type of question. Thinking about wholesale and international loan growth now, there has been a prolonged period here where the bank simply is not growing. I get it. I understand the sort of North Star focus. You are going to focus on client primacy. Does there come a time when you can grow those two loan books again? Is it late 2025? Is it 2026? Or is this period of shrinking going to persist much longer?
Francisco Aristeguieta (CEO)
Thank you for the question, Francisco here.
We have been laser-focused and deliberate on the outcome that you're seeing. When you see the trajectory on our reduction on RWA, we have been, number one, extremely selective on how we do it, and, two, being very mindful of how, through that exercise, we create the proper robustness in terms of sustainable results. What you have seen is that in spite of the reduction in RWA allocation to certain clients and the international business, we have been able to maintain strong earnings growth. That is expected to continue. We are moving from being primarily a lender to a relationship bank, client-centric, and where we are introducing the whole bank in every conversation. That brings a very different dialogue with clients, which you are seeing resulting in those relationships that we have been tackling, reducing RWA while we introduce other products into the relationship.
You're going to see growth, but we're not there yet. We see 2025 still as a transitional year where more needs to be done in terms of cleaning up the book from monoline clients, primarily lending, while we grow other components of the GBM portfolio. We are, however, very confident that in every conversation we're having with these clients, they're very open to do more with us, and they want to grow the relationship with us as we ask for auxiliary business around our lending activity. That is what you're seeing across the rest of the products in the portfolio. That is the way we're managing it across IB. We see that, as I said, throughout 2025.
2026, though, you're going to begin to see a more broad deployment, particularly around GTB, as the engine for growth internationally around the GBM portfolio, as well as investment banking and capital markets. Both portfolios, international commercial and capital markets portfolios, could start to grow in 2026. That's the plan. Yes. Yeah. This is Travis. I would just echo everything Francisco said. We're completely aligned on this. I would say there's two other components kind of taking place from a GBM standpoint. One, remember, most of our portfolios, investment grade and utilization still remain really low. They've been trending downwards for the last two years. You see that playing out in the loans outstanding where clients just aren't utilizing their lines as much as there's diminished demand for some of the lending products.
Two, as we transition from a lending-only strategy for some of our clients to that total relationship strategy that Francisco mentioned, we are largely through that. We do expect to start growing our loan portfolio depending on the economic conditions. The last piece I would lay out there is new initiatives like mortgage capital markets. Initiatives like that will continue to help us grow our loan portfolio. Excuse me. We think in a much better economic value proposition for the bank. What I was really pleased with, Mario, is to see the fee growth as an example in GBM. Yes, you have lower capital deployment, but you have significantly higher fees, which is changing that mix. It is the relationship model that we are trying to go after, value over volume.
You're starting to see those results come through in higher ROE in International Bank and better fee income in our wholesale bank.
Mario Mendonca (Managing Director and Senior Research Analyst)
All right. Thank you.
Operator (participant)
Thank you. The next question is from John Aiken Jefferies, please go ahead.
John Aiken (Director of Research and Senior Analyst)
Thanks. Wanted to focus on the buyback. Now, I know in normal times, it's basically level of capital and relative valuation to share price. Considering that our outlook is softer economic growth, some concern about what the full impact is, how much does the economic outlook going to impact how conservative or how aggressive you are on the buyback moving forward?
Scott Thomson (CEO)
Hey, John. It's Scott. Thanks for the question. Obviously, we have to be thoughtful about the economic environment, and that economic outlook will determine pace and magnitude. To put it in perspective, we've said we're comfortable running the bank in that 12.5% capital range.
70 basis points of steady one ratio is CAD 3.5 billion, and 20 million shares is CAD 1.5 billion. There is lots of flexibility to deploy through capital share buybacks to help take advantage of what we think is a depressed valuation multiple. We will use that as part of the toolkit. We have been very consistent on that going forward. Of course, we will keep the macro in mind as we deploy that through the rest of the year.
John Aiken (Director of Research and Senior Analyst)
Thanks, Scott. Very clear. Since I have you on the line, can I just ask you in terms of, I know this is very early days, but in terms of the strategic investment in KeyCorp, any lessons learned or anything that we can expect coming down the pipeline in terms of potential synergies from that investment?
Scott Thomson (CEO)
Yeah.
One, you're seeing the first quarter with the full impact of it. I think we are pleased to see their balance sheet repositioning and their growth in NII going forward, which will contribute. I think it was $68 million in the quarter, so that will contribute going forward. I think what we're learning is the regulatory environment in the U.S. is changing pretty dramatically. I think from a supervisory perspective, from a capital perspective, what we're going to see in the U.S. is tailwinds to the banking sector. I think that will be helpful for KeyCorp, but it will be helpful for our earnings in KeyCorp. It will also, I think, be helpful for the Canadian regulatory landscape because I think the regulators in Canada will be pretty focused on maintaining a level playing field.
I'm optimistic that that's going to create tailwinds for the banking sector across North America, which we will benefit from.
John Aiken (Director of Research and Senior Analyst)
Fantastic. Thanks, Scott. I appreciate it.
Operator (participant)
Thank you. The next question is from Matthew Lee Canaccord. Please go ahead.
Matthew Lee (Director Equity Research)
Hi, guys. Thanks for my questions. Maybe one more on international. PCLs are a bit better than expected, both underperforming and impaired. Can you maybe dig into what indicators you're seeing that make you comfortable in the allowances that you've built in those countries, just particularly given the fact that there's the global macroeconomics and the comments you made about Canada. Is the implication that there's less uncertainty there right now?
Phil Thomas (Chief Risk Officer)
Yeah. I'll start, Matt. Thank you for the question, Phil. It's interesting. Some of us were down in Chile and Peru a couple of weeks ago.
Just speaking to corporate clients there, there is definitely not the same feeling of holding back and angst of the impact of trade and trade uncertainty. You can start to see that in the quality of the portfolio, in the releases that we have had this quarter, and the impaired, both in Colombia, Peru, and in Chile. We have been focusing our build really on Mexico. Since Q4, we have increased ACLs in Mexico by about CAD 89 million. Most of that is in retail. If you look at the last two quarters, in terms of ACL, we have increased by about 16%. This is actually almost more or less in line with what we have done in Canada as well, which was around a 17% increase in Canadian retail.
We're seeing this diversion in Mexico where you have maybe a bit of the trade impact and the trade tensions starting to take hold, but we're seeing a very different situation in Peru, Chile, and Colombia.
Francisco Aristeguieta (CEO)
Thank you, Phil. What I would add, this is Francisco. A couple of thoughts. The first, the power of being diversified in emerging markets is showing in this quarter and will continue to show in the remainder of the year. Where we see how Chile, Peru, the Caribbean are performing in lieu of the uncertainty associated with tariffs is quite different than what you're seeing in Mexico. You're seeing that in economic GDP growth terms. We're seeing Chile very much in line with our anticipated 2.5% for the year, where you're seeing Peru improving towards a 3% growth this year.
You see continued stability in the Caribbean and beyond, while we're seeing Mexico slowing down to a negative growth GDP this year. That significant diversification for us is important and reflected in the way we're showing PCL performance for the remainder of the year. The other element to highlight is that we have worked very diligently and deliberately in segmenting our approach in retail. That segmentation towards bringing a very client-centric strategy around primacy and how we build more products into our relationship that becomes stickier and moves up in the priority wallet of the client is reflected on better performance overall. That is giving us the confidence to continue to see improvement in PCL throughout the remainder of the year in international bank.
It is the combination of those two elements that shows contrast to some other pieces of the portfolio, particularly in North America.
Matthew Lee (Director Equity Research)
Right. And then maybe to that end, I mean, you've mentioned before that you wanted 90% of incremental capital towards the focus geographies. But I mean, if some of these markets end up becoming better opportunities on a risk-adjusted basis more quickly, would you maybe consider investing more heavily in the Peru and the Chile relative to maybe the Mexico or the United States?
Francisco Aristeguieta (CEO)
The strategy remains the same, right? And the power of what we're trying to do is this is a long-term journey of optimizing our performance and generating shareholder value. We are not moving away from that. What you're beginning to see is the execution of the strategy reflected in higher returns.
When you see our return on risk-weighted assets now at 2.15% or ROE at 15%, that is the power of what we're executing against. We are very much at the beginning of the journey. What we explained at Investor Day, and we continue to see it the same way, is that we have the resources we need. We do not need necessarily to divert capital into these countries to deliver the power of our franchise. We have what we need. What we are now, through regionalization, is optimizing the way we spend. That optimization is bringing consistency of the platforms we use, leveraging not only what we do internationally, but also in Canada. That path will continue to deliver more primacy, more competitive solutions, but all at scale.
That is the consistency we're looking for, and we believe that we're properly set up to capture that value over the next three to five years.
Matthew Lee (Director Equity Research)
Okay. That's helpful. Thanks. I'll pass the mic.
Thank you. The next question is from Doug Young, Desjardins Capital Markets. Please go ahead.
Doug Young (Analyst)
Good morning. Hopefully, this will be relatively quick. Raj, on capital, on the CET1 ratio, just two things, just hoping to get a little color. You talked a bit about parameter updates, and that had a decent positive impact on the CET1 this quarter. And then there was a boost in operational RWA. Just curious what that related to. And then maybe if you can round it out with just kind of, is there any other levers you can pull to bolster the CET1 ratio?
Raj Viswanathan (CFO)
Yeah. Sure, Doug. Good morning.
I think on the LGD parameters, I would not call it out as anything different. We update our parameters regularly. If you go back last three, four quarters, we actually put up more capital for PD updates. It can go in our favor. It can go by absorbing more capital. In this quarter, it was updating our loss experience, which gets reflected in LGD and in the results parameters primarily. That is good. The CAD 4.5 billion that you saw. From time to time, it can help us, like I said, or it can go against us from capital ratio. Operational risk-weighted asset improvement is really—I mean, sorry, increase is really not meaningful. It is a little over CAD 1 billion. It is driven by a couple of things, right?
Based on the standardized approach that we have today, it depends on the earnings that we have and some of the operational near misses or losses that we might incur. From time to time, fraud risk, for example, factors into those numbers and so on. Directionally, I would think that as the bank grows and some of the operations become more complicated and the earnings grow, that operational risk arguably will consume a little bit more capital, not meaningfully higher, but a few basis points each quarter. That is what you are seeing this quarter. As far as levers go, we always have lots of levers, right? We used synthetic risk transfer twice, as you know, in the last two years. It will be opportunity, but it will always be driven by what is the utilization of that capital.
If you believe it's a good trade of how we can deploy that capital and make a superior return, we'd always be happy to do that. That's the benefit of having a very high-quality corporate loan book. It has the ability to be securitized and produce a capital which is economically meaningful. At 13.2%, I don't think we need any of those. We're actually looking to see how we can deploy capital so that we can improve the returns of the company.
Doug Young (Analyst)
Just to follow up, Scott, you said you're comfortable taking the ratio down to 12.5%. Is that kind of the bottom end of the range?
Scott Thomson (CEO)
Yeah, I think so. I mean, I think that's the right capital ratio for this bank. As we started this journey, we were at 11.3. We're now at 13.
We've been able to execute on the Colombia transaction and the KeyCorp transaction and now a share repurchase. Obviously sensitive to the macro, but running in that kind of 12.5%-13% range is the right capital ratio for this bank, in my opinion.
Doug Young (Analyst)
Can I just lastly, Phil, can you quantify the total expert credit judgment tariff or trade overlay that you have in your ACL and that you've done the last two quarters or in whatever way you want to kind of portray it?
Phil Thomas (Chief Risk Officer)
Yeah. If I maybe just focus on this quarter, if I look at—look at—I'll do both quarters. It's north of 60% would be ECJ. So north of 60% of the performing build in the last two quarters would be ECJ. Correct. ECJ.
Doug Young (Analyst)
Yeah. Okay. Perfect. Thank you very much.
Operator (participant)
Thank you. The next question is from Paul Holden, CIBC.Please go ahead.
Thank you. Good morning. A couple of questions on Canadian PNC banking. I guess first off, in terms of the investments the bank is making in digital and technology, understand the requirement for them. Just want to get a better understanding of the cadence of how we should be thinking about the productivity ratio. Is this something that can improve in 2026 following the investments in 2025, or is this sort of maybe a little bit of a longer-term game plan here in terms of the ultimate efficiency improvements?
Phil Thomas (Chief Risk Officer)
Hi. Let me address here. So let me take you back quickly to what we committed to during Investor Day. We committed to two things. We committed to, one, strengthening our balance sheet. And the second thing we committed to was driving more customer depth.
On strengthening the balance sheet, since that time, we've added CAD 36 billion in deposits in AUM compared to a more modest CAD 14 billion in lending. That has vastly improved our loan-to-deposit ratio. Next, we've also really enhanced our pricing governance over the period. You see that reflected in the higher asset NIMs for most of our product lines. Third, and you heard it earlier from Phil and Raj, we've also increased our balance sheet ACLs, adding CAD 600 million again to improve the coverage ratios in our retail and commercial banking books. On the customer depth side, we've added 375,000 primary customers, 75,000 in the first half year alone this year. You start to see those depth metrics play out in the number of customers with 3+ products. You see attrition coming down. You see the mortgage volume.
66 billion in mortgage volumes that we've originated have come with 3+ products since the program began. You see day-to-day balances increasing sequentially. Annually, you see saving balances increasing. This whole idea of debt and balance sheet strengthening is continuing to materialize. That said, we're cognizant of the challenges on the revenue side where we see, obviously, with falling rates, the deposit NIMs getting compressed and revenues structurally coming down, and you also have sluggish loan demand. We have to react to a certain extent on the productivity side. Here's where we're working very hard. We've actually not added FTEs over the last 12 months to drive productivity in this environment. That said, we want to continue to invest in our primacy strategy.
Here you see investments in cloud technology, what I call the channel mix of trying to shift from the assisted channels physical to digital, as I talked about also on Investor Day. Those investments are critical to getting that primacy strategy in place. In terms of the loan-to-deposit ratio and in terms of the cost of income, we manage it, but we also manage our strategy. In terms of going forward, we'll continue to invest, but we'll continue to be very prudent in how we add people and where we add people and how we manage the cost base. That's what I would say.
Paul Holden (Stock Analyst)
Given the current macro outlook, roughly when would you expect the efficiency ratio to stabilize or inflect higher?
Phil Thomas (Chief Risk Officer)
I think, as Raj might have mentioned, we expect the NIM compression to probably stabilize by year-end.
Starting next year, as things start to materialize, we can expect the productivity ratio to start to come back down. You are going to see that in 2026.
Paul Holden (Stock Analyst)
Perfect. Thank you. One other quick question on the CET1 ratio. Maybe this is a question for Raj. Just want to better understand that impact coming from the PCLs or the credit impact that boosted the CET1 this quarter. Maybe you can kind of walk me through how that worked.
Raj Viswanathan (CFO)
Sure, Paul. Happy to do that. Expected losses for capital purposes are based on what we call through-the-cycle PDs. It is like a 30-year average. The loss given default or the LGD is a downturn LGD. You are supposed to take the worst case. ACL, as you probably know, works on point-in-time PDs, and LGDs are based on our own loss experience. Different basis.
What Basel Rule requires is if the expected loss calculation is greater than the accounting losses that we have, it's a deduction from common equity tier one. If the converse is true, it's an add-back to tier two capital. We have had a deduction for some time. Last quarter was CAD 535 million. The bill, like Phil was talking about, and the ACL this quarter is all based off expert credit judgment or 60%, as he talked about. It doesn't come through the parameters. It's a lot of overlays to the parameter outcomes. Essentially, what it does for capital is the CAD 535 million deduction we had last quarter is now down to about CAD 153 million. The increase in the ACL gets absorbed by the capital that is already suffering from the CAD 535 million. The delta between the two is 8 basis points because.
What we gave up on earnings, we had only 12 basis points of capital generation. Really, 8 basis points of it we get back through the CL versus ACL deduction. That is the 20 basis points. That is typically what we would generate in a quarter. I see.
Paul Holden (Stock Analyst)
I got it. Okay. That is helpful. Thanks for that.
Operator (participant)
Thank you. The next question is from Lemar Persaud, Kermark. Please go ahead.
Lemar Persaud (Financials Equity Research Analyst)
Yeah. Thanks. My first question is for Raj. Can you talk about the outlook for margins at the all-bank level and then at the segments? I guess negative trend in domestic retail. International looks like it is towards the upper end of what we should expect. And then the other segment, NII approaching neutral. Would it be fair to say that perhaps we are approaching the end in terms of all-bank NIM expansion, or am I kind of thinking about this wrong?
Raj Viswanathan (CFO)
No, I think, Lemar, you have it mostly right. I think the all-bank margin has gone up 16 basis points in these last two quarters. A lot of it, almost all of it, benefiting from lower funding costs because of rate cuts in Canada. As you probably know, we are not exposed to the U.S., so whether the rates move there or not, it does not have an impact to our net interest margin. At 231 basis points, it is closer to the top end for this time. As you know, there is a big mortgage portfolio, fixed-rate mortgage portfolio that is coming up for renewal. We have about CAD 25 billion for the remainder of fiscal, and then we have twice that amount in 2026 and 2027. Those are all going to be accretive to the margin as we think about 2026.
What does that do to us from an earnings perspective? You heard Scott say it has prepared the marks 5-7%, I think is kind of there, and a lot of it is coming through the margin benefits that you've already seen in the other segment reflected. Of course, double-digit EPS expansion we still expect in 2026 for all the reasons that 2025 was impacted by in the first half of the year. Segment margins, I think Eric mentioned it just now that the Canadian banking margin should be at its trough, in my opinion. A basis point or two doesn't matter, but it'll start expanding back again to the mortgage expansion and as well as the deposit margin compression stopping. International banking margins at 450 basis points, it's really good. We like it between 445-450. Some inflation benefits helped us. That's very healthy.
All the rate cuts, if you look at Chile, for example, it is at terminal rates. Peru is at terminal rates. There are no more rate cuts that are expected, maybe a little bit in Mexico. I think segment margins should be fine. We have done for the FTP, as you know, when we restated it. Going forward, all the benefits in the margin, you should see it in the segments, and that should translate to margin expansion for the bank as a whole.
Lemar Persaud (Financials Equity Research Analyst)
That is perfect. My second question, maybe for Scott, I noticed a change in verbiage in how you talk about the 5-7% EPS growth for 2025. I guess last quarter, you mentioned it was towards the upper end of that 5-7% before KeyCorp. Is that 5-7% now inclusive of KeyCorp? Did I hear that right? Yeah.
Scott Thomson (CEO)
I mean, if you think about our projections at the start of the year and then last quarter, we said 5-7% before key and before tariffs. Now what I'm telling you is 5-7%, including everything. So including the PCL build that you saw this quarter and including key. Essentially, the key benefits are offset by the big performing build that we were not expecting at the start of the year through tariffs. Start first half of the year, we are kind of flat earnings. You are going to see that accelerate in the third quarter, fourth quarter to get us to 5-7%. As you look at a normalized PCL environment, the benefits of rate cuts, the business momentum that we are seeing across all of our businesses, you get to the consensus type analyst estimates for 2026 at double-digit EPS growth.
We're feeling good about the momentum that we have here in the back half of the year in 2026 and offset by the PCL build we had today associated with tariffs and uncertainty.
Lemar Persaud (Financials Equity Research Analyst)
Not to put too fine a point on it, but that 5-7, is that including buyback activity?
Scott Thomson (CEO)
No. Is that on top? Okay. No, that was not including buyback activity. That's a good call-out.
Lemar Persaud (Financials Equity Research Analyst)
Okay. I appreciate the time.
Operator (participant)
Thank you. The next question is from Darko Mihelic, RBC. Please go ahead.
Darko Mihelic (Stock Analyst)
Hi. Thank you. Good morning. Thanks for squeezing me in here. I have two questions for Aris on Canada. I'm going to get a little bit granular here. I apologize, but I really want to understand the trend that I'm seeing. The first is on the asset side within Canada.
Quarter over quarter, there's only one place where I see you doing really well, and that's in mortgages. You're up 1.4%. TD is actually down 80 basis points. In every other category, I see you doing markedly weaker. The question arises from when I think about that, I think about things that have changed. One is President Trump. Possibly this is a deliberate strategy to move towards mortgages and sort of not necessarily grow other more risky, call it loan categories in the face of tariff uncertainty. A second thing that also happened at Scotia was you changed your funds transfer pricing mechanism. I'm wondering if possibly that is also at play here, and if that's causing sort of pricing changes and therefore you're losing share in other categories.
All of this aimed, Aris, at understanding if this kind of trend should continue, where I should continue to see Scotia diverge from peers and simply grow mortgages at a higher pace and everything else at a lower pace relative to peers.
Aris Bogdaneris (Group Head Canadian Banking)
Hi, Darko. Thanks for the question. Let me just walk through. Starting with, so mortgages. In mortgages, what we are seeing, as you correctly pointed out, we had solid year-on-year growth, I think 6%, and quarterly growth 1%. A lot of what we are seeing in the mortgage market now, we are seeing the purchase volume coming down, and it is more refi and more switches. We are dealing with a massive increase, as you know, of the renewals. We have done well. The portfolio renewal rate is over 90%. We are holding the margins on those renewals. We are also managing these renewals digitally.
I think 20% now of these renewals are coming through digital channels. That is a productivity play. Given that renewals will increase 70% in the third quarter, it is going to continue to climb. On the other lending products, I think, and I alluded to it earlier, in terms of the tariffs and the uncertainty, we are starting to see a flattening of the growth, which could be expected in commercial, in auto, in cards. That is more market-driven, not any strategic thing, nothing to do with pricing, nothing on that front. It is just what the market is giving us. That said, on the deposit side, I would say that we are actually making good progress as our term book is coming up for renewal. 90% plus of that volume is staying within the bank. We are managing the day-to-day accounts, and the day-to-day balances are growing, which has been a primary strategy for us.
Savings balances are also growing substantially. We are actually executing on our plan. Our plan has been to maintain the margins on the asset side, which we have been doing, and to grow the primacy business, which comes with all the deposits that I have mentioned. I think we are on track in what we are doing. Again, a lot of what is being driven in terms of the volumes you are seeing is actually market-driven. We are not going to chase volume. We are going to stay disciplined on our margins.
Scott Thomson (CEO)
Yeah. A couple of things, Darko, that I would add. I mean, business mix is one of the biggest opportunities for us in our Canadian bank to improve the total return and the ROE of the bank. That has not changed at all in terms of the North Star.
If you look at the last eight quarters, we've grown our credit card revenue higher than peers. This quarter, a little bit weaker, but higher than peers. In small business, we're significantly higher than peers. That's a good thing. I think on the mortgage piece, if you go back to 2022, which we had the high volume of mortgages coming through relative to peers, and now we're seeing that renewal. That is why we're growing and others may be shrinking because we have that big bubble coming through. That's actually good news. If you can actually renew those mortgages at a lower acquisition cost associated with three-plus products, we should be growing a little bit higher.
I think that business mix description of what's going on on the asset side, along with the deposit growth on the loan side, both day-to-day savings and overall P&C deposits, is a good news story that we need to continue to execute on.
Darko Mihelic (Stock Analyst)
Okay. Great. Thank you. I appreciate the time. I do have a question on deposits, though, Aris. I understand that you're really focused on them, but it still seems like there's a bit of a struggle here with term versus demand. What is it that you intend to do in the back half of the year, if anything, to really focus on the demand side of the deposit equation? I ask this again just because relative to peers, you may be doing better than you used to do at Scotia, but still relatively weaker than peers. Right.
Aris Bogdaneris (Group Head Canadian Banking)
You correctly point out the structure of our deposit book has always been a bit higher in terms of the GIC versus the non-interest bearing. That is true. What we are focusing on is, of course, end-to-end. When you want to raise deposits and you want to raise the core deposits, you have to work end-to-end. That means frontline. We have changed the incentives at the frontline in terms of driving more deposit growth with our clients and more cross-sell. The second thing is the marketing. You have to increase awareness and share of voice out there to drive more traffic into your channels. Third is the investments we are going to make in the product shelf.
Part of the investments that have been materializing is how do we improve our savings products and not only improve the product features, but improve them so they can be acquired digitally from our clients. I have talked about mortgage plus. When I say that 90% of our mortgages originating are coming with multiple products, this includes day-to-day. That is very critical for us also to get this depth in our lending business through this mortgage plus program. All these things put together, retention is another one and how we retain those deposits. I mentioned that 90% of the deposits that are coming off are staying within the bank. 60% are going back into term. It is a multiplicity of many things that we are working on to catch up, of course.
I'm very encouraged by what we've seen in the last quarter and over the last months. It's a constant battle, especially when rates come down. It becomes harder, but this is the focus of the organization and where we're going to continue to press. Therefore, mostly a 2026 kind of story on deposits, or do you think this could accelerate even in Q3? I think it will continue to accelerate. Again, Darko, this is a number one priority for this organization, for the Canadian bank. We have everyone on deck from front to back working on improving our deposit mix. This is a critical piece for us.
Darko Mihelic (Stock Analyst)
Okay. Thank you for that.
Scott Thomson (CEO)
Thank you. Jackie, did you have something to add? Yeah.
Jackie Allard (Group Head, Global Wealth Management)
I would like to just add, Darko, you recall as well at Investor Day, we talked about retail investment advice and mutual fund penetration also being a key part of the strategy. I think you're seeing that play out as well as we focus on primary clients. First half of the year, we saw year-to-date net sales increase by 285%. Our penetration from Investor Day has also improved to almost 200 basis points in terms of the proportion of retail clients who invest with us. I think you're seeing that playing out as well. Okay.
Scott Thomson (CEO)
Thank you for that too, Jackie. I'll come back to you on more recent developments in the marketplace given the volatilities. Anything changed?
Jackie Allard (Group Head, Global Wealth Management)
It's a good point. Certainly, if you think of the quarter that we've had, it's been a very volatile quarter in terms of the markets.
We sort of entered in February with really strong retail flows, really good markets. That obviously weakened in March with basically the tariff announcements in the U.S. You saw us rally back in the latter half of the quarter at really bottoming out early in April. Notwithstanding that, we've seen, notwithstanding the market volatility, we still grew earnings in wealth management by 17% year-over-year. Net-net, I think what you saw is a bit of a moderation in terms of fee-based earnings in the second quarter, offset by really strong growth in private banking, in cash balances, and in trading volumes in iTrade. Looking ahead, of course, I think we're going to continue to see volatility in the markets until we see some stabilization from U.S. tariff activity.
We're going to continue to focus on what we can control, which is getting out with clients, supporting them through these volatile times. I'm really confident that we're going to continue to see strong growth in wealth advisory and private banking.
Darko Mihelic (Stock Analyst)
Okay. Great. Thank you very much. Appreciate that.
Scott Thomson (CEO)
Operator, we have time for one last question.
Operator (participant)
Thank you. Our last question is from Sara Movaiti, BMO Capital Markets. Please go ahead.
Hopefully, it's got a quick answer. Scott, lots of reference back to the Investor Day. At Investor Day, you had talked about probably more of a 12%+ CET1 ratio. Now you're talking about 12.5%, understandably so. Environment has changed. What sort of bearing does that have on the ROE target that you had communicated at Investor Day? Yeah, it does. The higher capital ratio.
Scott Thomson (CEO)
Yeah. Thanks for that.
I mean, as you recall from Investor Day, we said 14%+. Actually, the capital that had been embedded in our plans was significantly in excess of 12%. We built in buffer not only on that 14%+, but also in the amount of capital that we would deploy. That 14% that we talked about at Investor Day is still what we're trying to achieve. I feel confident about that. If you think about where we are as a bank, wealth is exceeding expectations and international banking exceeding expectations. We said this was going to be a transition year, and they're essentially flat. When you look into 2026, you're going to see growth there as you listen to Francisco. I think our wholesale bank is also ahead of schedule.
As we look at the Canadian bank, more work to do for sure around deposits that we talked about, the primacy strategy, and also around productivity. If we can address the productivity, execute on collections to see the impaired loans come down, you're going to see a great outcome for this bank in 2026 and getting closer and closer to that 14%+ ROE target.
Thank you for squeezing me.
Operator (participant)
Thank you. I would now like to turn the meeting over to Raj Viswanathan. Please go ahead.
Raj Viswanathan (CFO)
Okay. 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 Q3 call in August. This concludes our second quarter results call. Have a great day.
Operator (participant)
Thank you. The conference has now ended.
Please disconnect your lines at this time, and we thank you for your participation.