The Bank of Nova Scotia - Q3 2024

Transcript

John McCartney (Head of Investor Relations)

Good morning, and welcome to Scotiabank's 2024 third quarter results presentation. 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'll 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 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, John, and good morning, everyone. We are pleased to share our Q3 results, which demonstrate another quarter of progress and focused execution against our strategy. Through a challenging market environment, we achieved quarter-over-quarter EPS growth and continued positive operating leverage. Our results reflect the strength of our balance sheet while demonstrating revenue acceleration led by performance in our Canadian Banking business and ongoing positive momentum in Global Wealth. Importantly, we are seeing the profitability benefits of our shifting focus from volume to value. Let me take a moment to recap a few key enterprise initiatives. Personal and commercial deposit growth. We remain laser-focused on developing primary client relationships, and while we expect this to be an ongoing and incremental journey, we are well underway with P&C deposit growth across our Canadian and international retail businesses, up 7% on a year-over-year basis.

Since we started this journey eighteen months ago, deposits on our Canadian Banking business are up CAD 43 billion. Capital discipline. We are deploying our incremental capital to our priority businesses in line with our medium-term objectives. We are starting to see the benefits of this repositioning with strong revenue and earnings growth in Canadian Banking and wealth, and a sharpened focus on returns in GBM and International Banking. Today's results demonstrate our ability to generate earnings growth while focusing on disciplined capital deployment to priority client segments. Cost and process efficiencies. Our efforts to increase our productivity will be an important contributor to meeting our medium-term profitability metrics. All-bank positive operating leverage, driven by cost discipline in Canadian and International Banking, will be an important driver of results going forward. And finally, maintaining a strong balance sheet remains a high priority.

Through the challenging rate environment over the past eighteen months, we have strengthened our balance sheet with CET1 capital, ACL coverage, and liquidity metrics, all at significantly improved levels. Turning to our Q3 results, the bank reported adjusted earnings of CAD 2.2 billion or CAD 1.63 per share in the quarter. The bank delivered solid top-line revenue growth again this quarter, driven by higher net interest income and non-interest revenue. We are realizing on the productivity initiatives that are already underway at the bank. Specifically, in our international and Canadian retail businesses, our productivity ratios improved by two hundred and ten basis points and a hundred and thirty basis points, respectively, on a year-to-date basis. Credit costs are at the high end of our previously communicated range as we see the impact of sustained higher rates on our retail portfolios.

In our international markets, we expect to see credit conditions begin to stabilize in response to the monetary easing over the past few quarters, and we remain focused on delivering favorable risk-adjusted margins and returns. Despite higher credit costs, it is important to note that risk-adjusted margins have trended higher year to date in both Canadian and International Banking. Loans grew sequentially in the Canadian bank, in line with our strategic objective to deploy capital to our priority businesses and with our profitable primary relationships. Loan balances trended lower in International Banking and GBM. This lending discipline, coupled with early success in what will be a relentless, ongoing effort to strengthen our deposit franchise, is already showing clear progress. Our wholesale funding requirement has been reduced over the past year by CAD 33 billion, resulting in a 250 basis points reduction in our wholesale funding ratio.

A few performance highlights across each of our businesses. We were pleased with the strong performance of our Canadian Banking business, which delivered CAD 1.1 billion of earnings in the quarter, up 6%. Pre-tax, pre-provision earnings grew 11% year over year. We're making good progress towards our medium-term 1 million new primary client growth objective in domestic retail and 500,000 primary client growth target in Tangerine. Year to date, we've added 143,000 net new primary clients in our Canadian retail and Tangerine franchises. Although balances in the Canadian residential mortgage portfolio are down slightly year over year, we have clearly reached an inflection point as we've seen the success of our multi-product Mortgage Plus offerings result in sequential residential mortgage growth.

Specifically, 82% of mortgage originations in Q3 were Mortgage Plus offerings, with new clients averaging an additional 3.1 products. Mortgage portfolio retention rates have also improved 190 basis points year over year to over 90%. Enhancing the profitability of our Canadian Banking franchise will be a key driver of shareholder value creation. I was encouraged by the sequential 150 basis point improvement in Canadian Banking return on equity this quarter. Global Wealth delivered a very strong contribution of CAD 415 million this quarter as a result of continued franchise momentum in our Canadian wealth business, led by growth in our advice channels, as well as double-digit growth from international wealth. Our Canadian wealth management advisory businesses saw a 19% increase in earnings year-over-year, led by very strong performance from ScotiaMcLeod and private banking.

We continue to invest in advisor growth and technology within ScotiaMcLeod, and have recently achieved our record assets managed in that channel. Our total wealth approach to providing full client solutions is driving growth in assets and relationship depth with new and existing clients. Financial plans in place, for example, which we know reflects stronger relationships and importantly, better outcomes for our clients, are up 29% year-over-year. Stronger collaboration and client cross-sell were highlighted as a clear priority for our domestic businesses at our Investor Day. We've seen good success in terms of the partnership between our businesses, driving a 21% year-to-date increase in closed referrals from the Canadian Retail Bank to our wealth business. These are tangible, measurable metrics that confirm our advisors are working more successfully with their clients and with partners across our organization to bring more value to those clients.

We expect to see similar significant benefits from the partnership between Global Wealth and our commercial banking business going forward. In our Global Banking and Markets business, we reported solid earnings of CAD 418 million this quarter, despite lesser activity in the capital markets business, offset by stronger corporate banking and U.S. business results. I have been impressed by GBM's ability to substantially earn through the headwind created by the elimination of the dividend received deduction this year. We were encouraged by strong growth in our fee businesses. Underwriting and advisory fees were up over 30% on both a year-over-year and year-to-date basis, benefiting from the continued build-out of our product capabilities in the U.S. capital markets business. A critical component of our client primacy strategy is a more connected transaction banking capability across our primary markets to generate higher deposit growth.

ScotiaConnect, our new cash management platform, will elevate our capabilities in both Mexico and Canada, with our focus now squarely on enhancing capabilities in the U.S. to make it easier for our multinational, corporate, and commercial clients to do business with us. In our International Banking business, we delivered strong earnings, up 6% or 9% PTPP growth year-over-year, representing a solid 14% return on equity, despite elevated credit costs and more normalized GBM LatAm results compared to prior quarters. We continue to reposition capital deployed within our international footprint. Customer deposits grew 4% year-over-year, while loans were managed 2% lower. The resulting loan-to-deposit ratio in International Banking was down 9 points to 126% over the period. We are pleased with the early results of our productivity efforts, expense control, and capital repositioning in this business.

We are confident that the retail client segmentation initiatives underway and our plans to develop a more regional, standardized operating model will position our International Banking business well for improved efficiency and greater profitability going forward. Our International Banking business is doing more with less, generating impressive earnings growth with lower capital deployed. Since the beginning of the year, risk-weighted assets deployed by the region are lower by CAD 6.7 billion. Turning to the current economic environment, interest rate increases over the past two years are now weighing on consumers and to a lesser extent, on our commercial and corporate clients. In Canada, we expect the economy to improve modestly in response to further monetary easing, but remain below average historical growth rates for the foreseeable future.

We do expect policy rates in Canada to trend gradually lower into mid-next year, providing welcome early relief to the Canadian consumer and driving a likely rebound in home and vehicle sales activity. U.S. data in recent weeks has resulted in a repricing of the entire yield curve, suggesting much lower policy rates in the near term than were expected a few months ago. This will be a benefit to our earnings in 2025. The larger economies in our Latin American footprint are all now well into a period of monetary accommodation. Central bank policy rates in Chile at 5.75% and Peru at 5.5% have continued lower from double-digit levels last year, and Mexico and Colombia have more recently lowered policy rates as well.

The LatAm region has experienced relative political stability and stronger growth than anticipated this year because of proactive policy action this cycle, and should benefit further going forward from a strengthening global economy. We are not anticipating recessionary conditions in any of our key operating geographies in the foreseeable future. In closing, I would like to provide a few additional thoughts on the recent announcement of our agreement to purchase an approximately 14.9% interest in KeyCorp, a leading U.S. regional commercial-focused banking franchise. This investment is consistent with our commitment to reallocate capital from developing to developed markets with a focus on the North American corridor. Our investment in KeyCorp represents a low cost, low risk approach to deploying capital in the U.S. banking market at a time when valuations are favorable and as the regulatory and competitive environment evolves.

The additional primary capital will allow KeyCorp to optimize their balance sheet and be more front-footed in growing their business, which will also result in increased income to Scotiabank over time. This capital-efficient transaction is expected to add greater than CAD 0.25 to EPS in the first full year of ownership and approximately 45 basis points to Scotiabank's return on equity. Given both confidence in our capital plan and greater clarity on future capital requirements, we evaluated a range of capital deployment options, including share buybacks. The investment in Key is 65% more EPS accretive than the buyback alternative, and 20 basis points better from an ROE perspective. The capital impact of a full transaction will be approximately 50-55 basis points.

We believe that in the current environment, a 12.5% CET1 ratio represents an appropriate capital level at which to run the bank, one hundred basis points above the regulatory minimum. Therefore, shareholders need not be concerned about Scotiabank holding excess capital as we continue to execute on our North American corridor strategy. Our investment in Key is financially attractive to our shareholders in the near term and adds strategic value in terms of optionality on future U.S. platform growth in the long term. It is also important to note that our organic growth plans within our well-established U.S. Global Banking and Markets business remain unchanged. We continue to enhance our U.S. capital markets product offering in highly rated market segments. Our recent mortgage capital market team hire within our structured credit business is the most recent example.

In summary, I am pleased with the bank's results this quarter in terms of delivering positive earnings progression, while at the same time building balance sheet strength despite a challenging economic backdrop. We are making measurable progress against our strategic plan, and our performance in twenty twenty-four sets a strong foundation for the resumption of organic earnings growth in twenty twenty-five, in line with our Investor Day commitments. With that, I will turn it over 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 exclude the following items: the loss, mostly relating to goodwill associated with the sale of CrediScotia, our consumer finance business in Peru, which the bank expects to receive regulatory approval in fiscal 2025. A legal provision related to certain value-added tax assessed amounts relating to certain client transactions that occurred prior to the bank acquiring the Peruvian subsidiary, and the usual acquisition-related intangible amortization amounts. Moving to slide 6 for a review of the third quarter results. The bank reported quarterly earnings of CAD 2.2 billion and diluted earnings per share of CAD 1.63. Return on equity was 11.3%, and return on tangible common equity was 13.7%.

Revenues were up 5% year over year, as net interest income grew 6%, driven by net interest margin expansion, while non-interest income grew 4% year over year. The all bank net interest margin expanded 4 basis points year over year. Margin was down 3 basis points quarter over quarter, driven mainly by lower margins in International Banking and Canadian Banking, as well as higher levels of low-yielding liquid assets. We expect the margin to modestly improve in Q4 and expand beyond Q4 as the benefits of the rate cuts are fully realized. Non-interest income was CAD 3.6 billion, up 4% year over year, primarily from higher wealth management revenues, underwriting and advisory fees, and the positive impact of foreign exchange.

The provision for credit losses was approximately CAD 1.1 billion, and the PCL ratio was 55 basis points, up 1 basis point quarter over quarter. Expenses grew 5% year over year, driven by higher personal costs from inflationary adjustments and amortization and other technology-related costs that support business growth. Quarter over quarter, expenses were up a modest 1%, driven by amortization and other technology-related costs and professional fees. The productivity ratio is 56% this quarter, in line with the prior quarter, and year-to-date operating leverage was a positive 0.9%. Moving to slide seven, which shows the evolution of the CET1 capital ratio and risk-weighted assets during the quarter. The bank's CET1 ratio was 13.3%, an increase of 10 basis points quarter over quarter and 60 basis points year over year.

Total risk-weighted assets was CAD 454 billion, up from CAD 450 billion in the prior quarter, driven by growth in balance sheet assets and undrawn commitments, book quality changes that were partly offset by lower market risk. Earnings contributed 16 basis points, the DRIP contributed 11 basis points, and the revaluation of securities through OCI contributed a further seven basis points. This was offset partly by higher risk-weighted assets, consuming 11 basis points and effects on other impacts of another 11 basis points. As a reminder, the Q3 dividend that the bank announced this morning will be the last dividend eligible for the DRIP discount. Turning now to the business line results beginning on slide 8.

Canadian Banking reported earnings of CAD 1.1 billion, an increase of 6% year over year, as higher revenues were partly offset by higher loan loss provisions and expenses. The business generated another quarter of positive operating leverage, resulting in year-to-date positive operating leverage of 3.1%. Average loans and acceptances were up 1% quarter over quarter and roughly in line with the prior year. Business loans grew 7% year over year. Credit card balances grew 16%, while residential mortgage balances declined 2%. We continue to see deposit growth as year-over-year deposits grew 8%, including an increase in personal deposits of 5%. The loan to deposit ratio improved to 120%, compared to 129% in Q3 2023.

Net interest income increased 11% year-over-year, primarily from solid deposit growth, margin expansion, and the benefit from conversion of bankers acceptances due to the cessation of CDOR. Net interest margin expanded sixteen basis points year-over-year, driven by higher loan margins and favorable changes to business mix. Margin was down four basis points quarter over quarter, as asset margin expansion was more than offset by lower deposit margins, reflecting the impact of rate cuts and mix shifts. Non-interest income was down 1% year-over-year, primarily due to lower banking fees impacted by the bankers acceptances converting to loans, partially offset by higher deposit and mutual fund fees and insurance revenue. The PCL ratio was thirty-nine basis points, down one basis point quarter over quarter. Expenses increased 5% year-over-year, primarily due to higher technology, professional and personnel costs.

Quarter-over-quarter expenses grew a modest 1%, primarily due to the impact of two more days in the quarter, higher professional fees that were offset by good expense management controls. Turning now to Global Wealth management on slide nine. Earnings of CAD 415 million were up 11% year-over-year, driven by higher brokerage revenues and net interest income in Canada, and higher mutual fund fees across the Canadian and international wealth businesses, partly offset by higher expenses, largely volume related. Quarter-over-quarter earnings were up 7%, primarily due to higher brokerage revenues and mutual fund fees, and net interest income, partly offset by higher expenses. Revenues of CAD 1.5 billion were up 10% year-over-year, driven by higher brokerage revenues and net interest income, as well as higher mutual fund fees driven by AUM growth.

Expenses were up 9% year-over-year, due to higher volume-related expenses, salesforce expansion, and higher technology costs to support business growth. The spot AUM increased 10% year-over-year to CAD 364 billion, as market appreciation was partly offset by net redemptions. AUA grew 10% over the same period to CAD 694 billion from market appreciation and higher net sales. International wealth management earnings of CAD 68 million were up 11% year-over-year, driven by higher mutual fund fees, primarily from Mexico, and strong deposit and loan growth across Latin America. Turning to slide 10. Global Banking and Markets generated earnings of CAD 418 million, down 4% year-over-year, significantly impacted by the denial of the dividend received deduction. Capital markets revenue was down 8% year-over-year, primarily from lower fixed income revenues that were partly offset by higher FX.

Quarter over quarter, capital markets revenue was down 5% from lower fixed income revenues, partly offset by higher equities and foreign exchange revenues. Business banking revenues grew 8% year-over-year and 9% quarter over quarter, due to higher corporate and investment banking, including higher underwriting and advisory fees. Loans and acceptances were down 5% quarter over quarter to CAD 109 billion, reflecting market conditions and management's continued focus on balance sheet optimization. Net interest income increased 16% year-over-year, primarily due to higher corporate lending and deposit margins and higher loan fees. Non-interest income, however, was down 4% year-over-year due to lower trading-related revenue, including the impact from dividend received deduction, partly offset by higher fee and commission revenues.

Expenses were up 5% year-over-year, due mainly to higher personal costs and technology costs to support business growth, as well as the impact of foreign exchange. Quarter over quarter expenses were up a modest 2%, largely driven by higher personal costs. The US business generated strong earnings of CAD 244 million, up 12% year-over-year, driven by higher corporate and investment banking revenue, equities revenues, and lower funding costs, partly offset by higher expenses. GBM Latin America, which is reported as part of International Banking, reported earnings of CAD 285 million, down 9% compared to the prior year and down 2% compared to the prior quarter. 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 674 million, that was up 6% year-over-year. Revenue was up 6% year-over-year, as net interest income was up 7%, mainly in Chile, Mexico, and Peru. Net interest margin expanded 33 basis points year-over-year. NIM was down 5 basis points quarter over quarter, mainly due to lower inflation benefits in Chile and the impact of rate cuts that reduced asset margins in excess of lower cost of funds. Year-over-year, loans were down 2%, primarily in Chile and Peru. Total business loans declined 7%, partly offset by 5% growth in residential mortgages. The deposits grew 4% year-over-year, primarily in Mexico, Chile, and Colombia. Non-personal deposits grew 5%, while personal deposits grew 1% year-over-year, mostly term.

The loan-to-deposit ratio improved to 126% from 135% in the prior year. The provision for credit losses was CAD 589 million, translating to 139 basis points, up only 1 basis point quarter over quarter. The expenses were up 4% year-over-year, driven mainly by higher salaries and employee benefits and technology costs. Quarter over quarter, expenses were flat as the business continues to see the benefits of restructuring, prudent expense management, and the focus on regionalization that offset the challenges of operating in a high inflationary environment. Year-to-date operating leverage was a very strong positive, 4.6%.

Turning to slide 12, the other segment reported an adjusted net loss attributable to equity holders of CAD 465 million, compared to a loss of CAD 421 million in the prior quarter. Net interest income was in line with last quarter and is expected to improve going forward, benefiting from rate cuts. The non-interest revenue declined, mainly due to lower non-interest revenue and higher expenses. I'll now turn the call over to Phil to discuss risk.

Phil Thomas (Chief Risk Officer)

Thank you, Raj. Good morning, everyone. All-bank PCLs were 55 basis points, slightly above last quarter, and are expected to remain around this level for Q4. As we look to finish 2024, we continue to maintain our prudent approach and respond to the evolving macroeconomic landscape, but we are encouraged by the following trends: Stable delinquency rates in Canada, despite elevated unemployment and household expenses. Flat net write-offs in GILs, quarter over quarter in International Banking, despite a mixed macroeconomic environment. Healthier balance sheet for our borrowing clients, with both quarter over quarter and year over year deposits growing faster than loans. The resulting all-bank PCL of approximately CAD 1.1 billion was up CAD 45 million quarter over quarter. We continue to maintain sufficient allowances for credit losses.

Over the last four quarters, we have increased total allowances by approximately CAD 800 million, of which CAD 500 million was for performing loans, bringing our ACL coverage ratio to 89 basis points, up 11 basis points from last year. Canadian Banking PCLs of CAD 435 million were up a modest CAD 7 million, but down 1 basis point quarter over quarter, as increased provisions for performing loans were partially offset by lower impaired provisions. Canadian retail PCLs were flat quarter over quarter, with decreased impaired provisions offset by a CAD 84 million performing build. Canadian retail clients continue to show resilience and are managing their budgets prudently, as discretionary spending hovered around 20% of total spending for the last six quarters. Expected rate relief will serve as a tailwind. Product performance remains strong in the meantime.

The number of tail risk clients in our mortgage portfolio continue to improve sequentially and represents less than 1% of our total retail loan balances. The bank has set aside allowances to cover expected losses on these accounts. Ninety-day delinquency in our variable rate mortgage portfolio has increased by a modest 2 basis points quarter over quarter. Our fixed rate mortgage portfolio has maintained a stable ninety-day delinquency rate of 15 basis points, and our variable rate mortgage performance gives us confidence in our books' credit quality. We are comfortable with the amount of allowances for the fixed rate mortgage portfolio. Turning to International Banking. International Banking PCLs were CAD 589 million, translating to a PCL ratio of 139 basis points. Total retail PCLs were stable and in line with expectations.

We are encouraged by the performance in our retail portfolio as delinquency remained flat quarter over quarter for the first time in two years. Our clients remain resilient, given the macroeconomic environment in the region. We remain confident in our clients' resilience as central banks continue managing inflation across our footprint. The overall portfolio continues to perform as expected, and we continue to remain within the top end of our outlook for the full year twenty twenty-four. With that, I'll pass it back to John for Q&A.

John McCartney (Head of Investor Relations)

Great. Thank you, Phil. Operator, could you please queue up questions?

Operator (participant)

Thank you. The first question is from Ibrahim Poonawala, please, from Bank of America. Please go ahead. Your line is open.

Ebrahim Poonawala (Analyst)

Good morning. I guess maybe, Raj, for you, just around the net interest margin outlook. So I heard your comments earlier. If we get a series of rate cuts from the Bank of Canada, which is expected at this point, give us a sense of the trajectory of where you see both the Canadian NIM playing out over the next four to six quarters and the consolidated NIM. And I'm assuming the corporate segment has to play a role somewhere in there with wholesale funding costs coming down. Thanks.

Raj Viswanathan (CFO)

Yeah, good morning, Ibrahim. Happy to do that. A couple of points before I start on you, where this would go. So we disclosed in our analyst deck saying every twenty-five basis points is about CAD 100 million of benefit in the NII.

... over the full fiscal year. To be clear, it doesn't go as, you know, equal each month, you know, a little bit back-ended because of how our assets and liabilities reprice. The second thing is, you know, we have seen two rate cuts in Canada, and the full quarter benefit of it shows through our wholesale funding, benefits that come from cost of funds reductions over there. As you know, most of these are on a ninety-day repricing schedule, so we'll see some benefits in Q4 in the other segment, but we'll see the full quarter benefit starting from fiscal, you know, first quarter in fiscal twenty twenty-five and through. And likewise, for every rate cut, that will happen both in Canada and the United States.

Our current forecast is we should have two more rate cuts in Canada before the end of the calendar year, and likely, you know, starting in the United States in September, two rate cuts for the remainder of the calendar year and four more rate cuts for 2025 and so on in both countries. So all of these benefits should show up in the other segment, as you point out. Even this quarter, if you look at the other segment, Ibrahim, the NII number, the loss, is exactly the same as last quarter. So it's plateaued in our opinion, and the benefit should start showing up starting next quarter.

The Canadian banks division NIM will continue to show some level of decline because deposit margins will go down in a declining rate environment, as you know, but it'll pick up as the asset repricing starts happening in line with, you know, the fixed rate mortgages, the schedulers, you know, 2025 and 2026, but likely towards the latter part of 2025. So that's the dynamic you will see in the business line. The International Banking NIM, I suspect, will be around the range that we operated this quarter, and as you know, it moves around a little bit, you know, multiple factors, different countries, inflation, many things that impact IB NIM, but I think it'll be around the levels that you saw this quarter.

The summary would be, we should start seeing NII and NIM benefits modestly in Q4, and then see it accelerate through 2025.

Ebrahim Poonawala (Analyst)

Got it. I guess maybe a separate question, maybe for you, Scott. The investment you made, I think, caught folks by surprise. Just, I think to me, the fact that Scotia was back to playing offense, and just was wondering if you could give us an update, like the two core pieces in terms of the strategic sort of priorities. One, give us a mark to market on where we are in improving the deposit franchise within Canada. Like, early signs of success, like, outside of rates coming down, what's actually happening from an execution standpoint? Then, with Travis coming on in the capital markets business, is there kind of a heightened focus in terms of growing the U.S. dollar business, going forward? Thanks.

Scott Thomson (CEO)

Sure. So there's three parts to that. I'll start with the key investment. I'll give it to Aris on the deposit franchise, and then Travis, maybe you can talk about the fee business in the US. So on the key investment, you know, we've gotten increased confidence over the last quarter in terms of the capital side, you know, the capital stack, in terms of what we need to run from a CET1 ratio with the Basel deferrals and frankly, the strength of our balance sheet. And so we evaluated a whole bunch of redeployment options to capital, and the investment in Key was the most financially attractive and the best for our shareholders. And there's a page in the investor day, which highlights the differences relative to a share repurchase. So that's first and foremost.

I think, the second aspect of that, however, is it's a low cost, low risk way to get into the U.S. market, in a market that's very uncertain right now, both from a political, regulatory, and economic perspective, and so the ownership interest in Key, which you know, has a five-year standstill, allows us to, you know, dip our toe in the water, learn about the market, and actually get the benefits of NII from developed market earnings over time, which has been part of the strategy in the North American corridor. We are going to continue to focus, and Travis will come to this, on growing our U.S. GBM business, particularly through the fee side, of that business, so with that, maybe Travis, you can start on outlook for the U.S. business, then we'll come to Aris on the deposits.

Travis Machen (Head of Global Banking and Markets)

Sure. Hey, Ted, this is Travis. Thanks for the question. You know, as Scott mentioned, we see great opportunities in the US. Obviously, it's one of the largest markets. We see increased net connectivity between our Canadian and US clients, where we can capitalize on some of the fee opportunities that they come across. And you saw a week or so ago, we did announce an investment in a new team there. So as we start to build our expertise and our products, I think you'll see, you know, a continued growth in the US above some of our other markets within GBM.

Scott Thomson (CEO)

Aris, do you want to talk about the deposit?

Raj Viswanathan (CFO)

Sure. We grew, and Scott alluded to this, in the last year, we've added more than CAD 28 billion in deposits to the Canadian business, and you see it primarily in the loan to deposit ratio has gone down, I think, from 130 to 128 or 129 points. This is something I mentioned back at Investor Day about building a more balanced business, and we start to see that now quarter on quarter. I think what I particularly want to highlight is in the third quarter, we actually saw day-to-day banking balances grow, and that is a new development, but is an offshoot of all the work we've done, whether it's booking our mortgage, originating our mortgages, and getting the Mortgage Plus, and driving deposit-first strategies and day-to-day banking strategies when we lend.

We see it in the commercial banking business, small business, retail. And so you're starting to see day-to-day balances despite the difficulty in the market. In the consumer, we're seeing these balances grow. We added, I think, 60,000 net day-to-day banking clients in the third quarter. So the strategy is working, and it's a continuous focus of ours in all our channels to build this deposit day-to-day banking muscle and then lend on the back of it. I think today, 56% of our mortgage customers have a day-to-day banking account. And conversely-

... 46% of our term deposit holders have a day-to-day banking account. This continues to be the focus and will continue to be a focus going into next year. And we'll build more product muscle. We'll build more incentives in the branch network. We're also, of course, focusing, as I mentioned, also during Investor Day, to get more mutual fund sales out of our branch network, and that also is showing early signs of success. The mutual fund sales coming out of our branches increased on a growth basis 44% year on year. So again, this balanced business model, we continue to push, and we're seeing success, and we'll continue going into the following quarters.

Ebrahim Poonawala (Analyst)

Thank you very much.

Operator (participant)

Thank you. The next question is from Gabriel Dechaine from National Bank Financial. Please go ahead. Your line is open.

Gabriel Dechaine (Analyst)

Hey, good morning. On the international segment, I think you were saying that the margin is going to be, you know, kind of in and around this level for the foreseeable future. I don't know if you said anything similar about the loan loss ratio?

Phil Thomas (Chief Risk Officer)

Gabe, it's Phil. Hope you're well. Good to hear you. We are, as I said earlier, really encouraged by what we're seeing in IB. GILs flat-

Gabriel Dechaine (Analyst)

Mm-hmm.

Phil Thomas (Chief Risk Officer)

Yeah, net write-offs flat. So that's an early positive sign. I'll give you guidance into Q4, and then happy to come back next quarter and sort of give more clear guidance into twenty-five. But we're generally seeing things as I look into next quarter, in line with this quarter.

Gabriel Dechaine (Analyst)

Okay. Now, if I look further ahead, and, you know, your loss rate now is kind of in line-ish with, you know, historical levels. There's been obviously some volatility there over the years, but kind of eyeballing it looks, you know, at a normalized level, if you will. Yet your consumer portfolio, not the mortgage, but the mostly unsecured consumers, is still, you know, nearly 20% below where it was, in, you know, the pre-COVID days. Just wondering why maybe, you know, beyond next quarter, if you factor in the rate cuts, you factor in the portfolio, the change to the portfolio mix, why that loss rate couldn't actually trend lower, in the segment, or is there some other factor I'm not considering?

Phil Thomas (Chief Risk Officer)

No, I think I mean, listen, you've done a thorough analysis there. You know, Francisco and I have been very focused on developing high quality in our portfolios. We've been very focused on primary customer acquisition. We're focusing on sort of our mass affluent and top of mass segments. And so, you know, we're encouraged by what we're seeing, Gabe.

Gabriel Dechaine (Analyst)

Mm-hmm.

Phil Thomas (Chief Risk Officer)

And I think, you know, there's more to come from me next quarter on outlook.

Gabriel Dechaine (Analyst)

Okay. I wasn't that thorough, actually, but thanks for that. Have a good one.

Phil Thomas (Chief Risk Officer)

Thanks.

Operator (participant)

Thank you. The next question is from Paul Holden from CIBC. Please go ahead. Your line is open.

Paul Holden (Analyst)

Thank you. Good morning. A couple questions, maybe just continuing with international. I think if you look at the macro backdrop, particularly in Chile and Peru, seems to be improving. And then also, you know, there's a focus on the client primacy. So what I'm trying to figure out is, as the demand environment improves for loans, but put that against sort of your strategy, how should we think about balance sheet growth for international in 2025? So is this somewhere where balance sheet will still be flattish, or can we expect some decent growth next year? Thank you.

Francisco Aristeguieta (Head of International Banking)

Thank you for the question. It's Francisco here. A couple of thoughts. The first is 2025, going back to our commitment in Investor Day, was part of our transitional year. You're going to see throughout 2025, as you've seen in 2024, the combination of a refocusing of our targeted penetration effort on existing relationships on particularly top of mass, emerging affluent and affluent, while an exercise of client deselection drives a reprofiling of our balance sheet. The net effect has been an overriding reduction of RWA, all deliberate, all intended towards focusing on the right clients and the right returns.

That exercise will continue throughout 2025, where we're going to be very deliberate on where we place balance sheet, both on retail, commercial, and GBM, ensuring that we have a balanced relationship where lending is not the driver or the anchor, but rather the ability to transact on a day-to-day basis with our clients. So you will see on the commercial and GBM side, a deliberate focus on cash management penetration, and on the retail front, it will be about a balanced relationship where payroll, investments, insurance, and ultimately transactional credit drive the relationships. So you will see 2025 as a flattish balance sheet year, just because of the net effect of deselection and refocusing of our portfolio.

Paul Holden (Analyst)

Understood. That's a helpful answer. Thank you for that. Second question, and I guess it's for Phil. If I look at slide thirty-four, it shows Canadian retail, PCL trends. And what I see here is sort of, I think it's suggesting that, you know, the impaired are actually starting to improve, while I think you're pretty conservative still on total provision. So does that suggest that at a point in time when macroeconomic forecasts start to improve, there's potential for, performing allowance releases? Would that be, a correct assessment? Thank you.

Phil Thomas (Chief Risk Officer)

That's a great question, Paul, and obviously, it's something we're spending a lot of time thinking about, right now. I have to say, You know, the numbers came in as we had expected, quarter to quarter, but I continue to be impressed by how resilient the Canadian consumer has been through this period, the trade-offs that they continue to make. You know, we see that coming through our VRM, our VRM portfolio for sure. You know, I think I've been signaling auto stress in the auto portfolio for about a year now, and I was really encouraged this quarter to see we're finally stable as it relates to net write-offs and, in that portfolio. So have we turned a quarter?

I mean, you know, one quarter is not a trend, but I'm really encouraged by what I'm seeing for this quarter. Even as I look into next quarter, I see stability in these portfolios moving forward.

Paul Holden (Analyst)

Okay, that's it for me. Thank you.

Operator (participant)

Thank you.