The Bank of Nova Scotia - Earnings Call - Q4 2025

Transcript

Meny Grauman (Head of Investor Relations)

Good morning and welcome to Scotiabank's Q4 results presentation. My name is Meny Grauman, and I'm Head of Investor Relations. Presenting to you this morning are Scott Thomson, Scotiabank's President and Chief Executive Officer; Raj Viswanathan, our Chief Financial Officer; and Phil Thomas, our Chief Risk Officer. Following our comments, we'll be glad to take your questions. Also present to take questions are the following Scotiabank executives: Aris Bogdaneris from Canadian Banking, Jacqui Allard from Global Wealth Management, Francisco Aristeguieta from International Banking, and Travis MacHen from Global Banking and Markets. Before we start, and on behalf of those speaking today, I will refer you to slide two of our presentation, which contains Scotiabank's caution regarding forward-looking statements. All the remarks today will be on an adjusted basis. With that, I will now turn the call over to Scott.

Scott Thomson (President and CEO)

Thank you, Manny. Good morning, everyone. Our Q4 results cap off a year of strong and consistent financial performance, and we have entered into fiscal 2026 from a position of strength. 2025 was a year of execution. We did what we said we were going to do, despite the emergence of unexpected trade-related economic challenges. We accomplished this by focusing on what we can control and delivering our strategic plan. Overall, EPS grew by 10% for the full year. We also ended Q4 with an ROE of 12.5%, up 190 basis points year over year, and an efficiency ratio of 54.3%, an improvement of 180 basis points versus the prior period. These results demonstrate clear and measurable progress against our medium-term financial targets. Recapping our strategic objectives, our focus on client primacy is yielding results as we drive strong cooperation across the bank.

Closed referrals between Canadian retail, commercial, and wealth were CAD 15 billion for the year, up 18% over last year. Our emphasis on deposit gathering is also paying off as we increased our mix of P&C deposits for the second year in a row. We have added 400,000 primary clients since we launched our new strategy, and I am confident we will continue to accelerate client acquisition as we enhance our client experience and build out our data and personalization capabilities. We also remain disciplined in our approach to reallocating capital to key growth areas and continue to strengthen our balance sheet and maintain a strong capital position. We reduced our wholesale funding ratio by 60 basis points this past year, while our loan-to-deposit ratio closed the year at 104%. On capital, we ended the year with a steady CET1 ratio of 13.2% after repurchasing 10.8 million shares in fiscal 2025.

Turning to our Q4 results, we delivered earnings of CAD 2.6 billion, or CAD 1.93 per share, up 23% year-over-year. Our quarterly results exclude a restructuring charge, with the majority related to actions taken to simplify our Canadian operations. While these types of decisions are always difficult, they are nevertheless necessary as we work to boost the value of the Canadian bank. The actions simplify and streamline our organizational setup, which will free up capacity to further invest in technology and revenue-generating sales staff to propel future revenue growth. We do not anticipate additional charges but will remain focused on running our bank as efficiently as possible, including taking full advantage of emerging technologies.

Our technology spend in 2026 will be concentrated in the following key areas: further building out our global transaction banking platform, enhancing our technology platforms, including AI investments, balancing security and client experience with a continued focus on fraud and transaction monitoring, and adding new product capabilities to drive client primacy. Moving to our operating segments, fiscal 2025 stands as a pivotal year for our Canadian banking unit as we laid the groundwork to drive stronger earnings growth in the years ahead. We did this by improving client primacy through growth in core deposits and increased in-branch sales of mutual funds, improving our channel mix with a focus on increasing our sales capacity and improving efficiency. Performance in Canada has improved sequentially over the past two quarters, setting this business up for strong earnings growth in 2026.

Our Mortgage+ program remains a key contributor to the growth we are seeing in multi-product banking relationships, with over 90% of all mortgage originations, including a product bundle, helping drive both deposits and cards growth. We are capturing an increasing share of money in motion, especially in the retail bank, where day-to-day and savings deposits rose by 6% year-over year, and closed referrals between retail banking and wealth management came in at CAD 8.1 billion, or up 20% from fiscal 2024. In commercial banking, full-year pre-tax pre-provision earnings were up 21%, even as average loan balances declined by 1%, evidence that our focus on value over volume is delivering tangible results.

Our commercial bank is an important and growing source of referrals with our Global Wealth Management unit, with closed referrals up 35% this year and a growing source of revenue for our Global Banking and Markets unit, especially in the FX business. Global Wealth Management continued its positive momentum with record earnings across Global Asset Management, Canadian Wealth Management, private banking, and ScotiaMcLeod. Rising markets are helping drive assets under management higher, and we are also seeing strong underlying performance as full-year net sales improved by CAD 11.5 billion versus fiscal 2024. In Canadian Wealth Management, we are seeing strong momentum in our differentiated private bank offering, including double-digit loan and deposit growth.

At the same time, we onboarded 5,000 households to our recently launched signature bank offering, and our full-service ScotiaMcLeod brokerage unit saw double-digit growth in fee-based assets, helped by net sales of approximately CAD 6 billion in fiscal 2025. In our Global Asset Management business, retail net sales improved by almost CAD 7 billion in fiscal 2025, led by our own branch channel. This past year, we launched four new private asset funds, delivering compelling private asset solutions tailored for our wealth and institutional investors. We continue to see strong growth within the liquid alternatives asset class and remain a market leader in this space. In our international wealth business, earnings are up 14% for the year, with 20% growth in Mexico. We also delivered continued progress in our international banking segment, with results in fiscal 2025 coming in ahead of what we committed to at our investor day.

This happened in what is still a challenging economic environment as we demonstrated the benefits of our geographic diversification and executed to our plan. Performance in our international banking segment continues to be driven by solid execution, including strong expense management and improved profitability metrics as we shift our business mix to deeper and more profitable client relationships. We recently launched our singular retail brand and value proposition across Mexico, Peru, and Chile, which highlights the work we are doing around both regionalization and client segmentation. For the year, expenses were flat, and ROE came in at almost 15%, up 110 basis points versus the prior year. We look to maximize shareholder value across all the markets we operate in. The Davivienda transaction that closed yesterday is a prime example of that.

This deal creates additional scale in Colombia and is immediately accretive, with further upside from the benefits of scale and diversification, as well as from future collaboration. Finally, Global Banking and Markets delivered another strong quarter as we continue to benefit from constructive markets, but also from our organic investments in new capabilities, particularly in the U.S. Our Prime Services business, where we believe we have a competitive advantage relative to our Canadian bank peers, is a growing contributor to GBM's earnings, and we will continue to build on our relationships with top-tier U.S. managers. Fiscal 2025 was the best year for underwriting and advisory fees in our history, rising 35%. Looking ahead, we have a strong pipeline to execute in 2026, and the federal government's Grow Canada initiative, with a focus on energy and mining, is well-suited to our core capabilities.

The U.S. contributed 50% of GBM earnings in fiscal 2025, and we will continue to invest in our U.S. capabilities in fiscal 2026 to increase this contribution over time. Part of that investment is going to the build-out of our U.S. cash management business. After a successful pilot, we officially launched this fall. Across all business lines, we increased the number of enterprise-wide cash management clients by 15,000 in fiscal 2025, exceeding our own internal targets. Success here will help us grow primary client relationships, further reduce our reliance on wholesale funding, and drive fee income. Our focus on accelerating the velocity of our balance sheet and growing fee income is delivering results. For the year as a whole, GBM loan balances were down 13%, but earnings in this division were up 30%, and ROE increased by 320 basis points.

Looking ahead to our strategic priorities for fiscal 2026, we will continue to improve our business mix as we further deepen our client relationships. In Canada, mortgage growth is outpacing growth in commercial loans and cards, but nevertheless, we are making progress in deepening client relationships thanks to our success in growing core deposits and investments. Looking ahead, we aim to accelerate card growth by further tapping into our C+ loyalty program and building on the momentum of our Mortgage+ proposition. In commercial, the pipeline is growing as we target markets and regions that we've historically been less focused on, which should gradually improve loan growth in 2026. We will continue to build on the strengths of our business lines.

In Canadian banking and international banking, this means building a more efficient, digitally forward bank that seamlessly integrates our branch network with mobile customer service capabilities, meeting our clients where it is most convenient for them. In global wealth management, we will continue to build on our strong sales momentum, as well as grow the number of relationship managers in both our private bank and ScotiaMcLeod. In global banking and markets, we will focus on accelerating our balance sheet velocity as we further optimize our use of capital. In the U.S., this includes pursuing a thoughtful organic growth strategy by expanding our product offering while avoiding areas where we do not have scale to compete. Finally, we are focused on further improving connectivity across the North American corridor.

We are pursuing deeper connectivity as we continue to build out our global transaction banking business and optimize the value of our international footprint. In closing, we feel good about our earnings momentum heading into 2026 and the ability to continue to execute on our strategic priorities and deliver our medium-term financial objectives, including achieving an ROE of 14% plus. Improved revenue growth, coupled with positive operating leverage, should help us deliver double-digit annual EPS growth in fiscal 2026, despite what remains an uncertain operating environment. Canada's renewed focus on natural resource development will drive higher GDP growth and improve national prosperity over the medium term. The recent memorandum of understanding on energy between the Canadian federal government and the province of Alberta is a very significant development in our view and proof that Canada truly is on a new economic trajectory.

This renewed focus also plays into our bank's strengths as a trusted provider of capital and advice to key sectors such as mining, energy, and critical infrastructure. We are well-positioned to contribute to the ambitious plans of the Major Projects Office by helping our clients drive forward large-scale infrastructure projects. This includes pipelines that will enable Canadian oil and gas producers to access global markets, strengthen export opportunities, and support Canada's energy competitiveness. We will continue to advocate for those measures that will unlock greater economic prosperity within our markets. Our results this year have truly been an enterprise-wide team effort, and I would like to thank our entire Scotiabank team for their many contributions in 2025. Two years into our strategic journey, we head into 2026 with momentum and excitement about all that we will accomplish in the year ahead.

I will now turn it to Raj for a more detailed financial review.

Raj Viswanathan (CFO)

Thank you, Scott, and good morning, everyone. This quarter's net income was impacted by CAD 299 million of adjusting items after tax and non-controlling interest, or $0.28 of earnings per share, and approximately 7 basis points on the common equity tier-1 ratio. The adjusting items include a CAD 268 million after-tax charge to simplify the Canadian banking organization, right-size Global Banking and Markets operations in Asia, and regionalize activities in International Banking in line with the bank's strategy. Legal provisions of CAD 54 million, a CAD 43 million credit related to the Colombia and Central America transaction, and our usual amortization of acquisition-related intangibles. All my comments that follow will be on an adjusted basis and on a constant dollar basis for the International Bank.

Starting on slide 7 for a review of the fiscal 2025 results, the bank ended the year with adjusted diluted earnings per share of $7.09, up 10% compared to the prior year, and a return on equity of 11.8%, up 50 basis points, and a return on tangible common equity of 14.3% that was up 60 basis points. Revenue was up 12% year-over-year, while expenses grew 9%, resulting in positive operating leverage of 3% for the year. The provision for credit losses was $4.7 billion, driven mainly by higher-performing PCLs. Canadian banking earnings were $3.4 billion, down 9%, impacted by higher PCLs of approximately $600 million and lower margins due to rate cuts. Revenue grew 3%, driven by solid asset and deposit growth, while expenses were up 5%. Global Wealth Management earnings of $1.7 billion were up 17% year-over-year, benefiting from strong AUM growth of 16%.

Revenues were up 15%, driven by higher fee revenue and net interest income across the Canadian and international businesses. Global Banking and Markets reported earnings of CAD 1.9 billion, up 30%, driven by higher trading-related revenues, fees and commissions, underwriting and advisory revenues, and higher net interest income. International banking earnings were CAD 2.7 billion, up 1% year-over-year. Revenues were up 2%, while expenses were up 1% year-over-year, resulting in positive operating leverage. The other segment reported a loss of CAD 347 million compared to a loss of CAD 815 million in 2024, benefiting from significantly lower funding costs. As disclosed on slide 25, excluding the foregone income from the sale of Colombia, Central America, and CrediScotia in Peru, 2025 adjusted earnings were CAD 9.3 billion, up 9% year-over-year. Now, a few comments on the outlook for 2026.

Our outlook commentary normalizes fiscal 2025 to exclude the contribution of the now divested operations. The bank expects to generate strong earnings growth in 2026, underpinned by growth in both net interest income and non-interest revenue. The earnings are also expected to benefit from lower provision from credit losses, mainly performing, partially offset by a higher tax rate that is expected to be around 25%. Net interest income is expected to grow from both loan and deposit growth and benefit from margin expansion. Non-interest revenue is expected to grow across all business segments. Expenses are expected to grow from increased technology spend to strengthen and strategically grow the bank. The bank is expected to generate positive operating leverage in 2026. From a business line perspective, Canadian banking is expected to generate double-digit earnings growth, driven by good revenue growth and moderating loan losses.

The business will continue to maintain strong expense discipline with a focus on generating positive, full-year operating leverage. International banking earnings are expected to be modestly higher, adjusting for the impact of divestitures. Good growth in pre-tax pre-provision earnings is expected to be offset by slightly elevated loan loss provisions and a higher tax rate. Global Wealth Management is expected to generate strong earnings growth in 2026. Global Banking and Markets earnings are expected to grow modestly after a very strong fiscal 2025. Moving to slide 8 for a review of the fourth quarter results, the bank reported quarterly earnings of CAD 2.6 billion, which is up 21%, and diluted earnings per share of CAD 1.93, an increase of CAD 0.36 compared to last year. Return on equity was 12.5%, up 190 basis points year-over-year, driven by strong pre-tax pre-provision growth of 19%.

Net interest income grew 13% year-over-year from higher net interest margin and loan growth. The all-bank NIM expanded significantly, up 25 basis points year-over-year, mainly from lower funding costs. Quarter-over-quarter, NIM expanded 4 basis points from business line margin expansion. Non-interest income was CAD 4.2 billion, up 16% year-over-year, from higher wealth management and underwriting and advisory fees and the contribution from the KeyCorp investment. Expenses grew 11% year-over-year and 4% quarter-over-quarter, driven by higher personnel costs, including performance-based compensation and technology costs. The PCLs were approximately CAD 1.1 billion, mostly impaired, and the PCL ratio was 58 basis points. The bank's effective tax rate increased to 23.6% from 21.8% last year, due primarily to lower income in lower tax jurisdictions and the implementation of the global minimum tax.

Moving to slide 9, which shows the evolution of the CET1 ratio and risk-weighted assets during the quarter. The bank's CET1 capital ratio was 13.2%, down approximately 10 basis points quarter-over-quarter. Internal capital generation was 9 basis points, while gains from higher fair values of OCI securities contributed 5 basis points. This was offset by the allocation of capital to share repurchases of approximately 12 basis points and 7 basis points from the impact of adjusting items. Risk-weighted assets grew CAD 6 billion, excluding the impact of FX, to CAD 474 billion, from book size and book quality changes of CAD 4 billion. The impact of model updates and higher operational risk partly offset by lower market risk. The bank remains committed to maintaining strong capital and liquidity ratios in 2026.

Turning now to the business line results beginning on slide 10, Canadian banking reported earnings of CAD 942 million, up 1% year-over-year, as pre-tax pre-provision profit growth of 3% was mostly offset by a substantial increase in loan loss provisions. The average loans were up 2% year-over-year, as mortgages grew 4% and credit cards 1%, partly offset by lower personal and commercial loans. Although deposits were down 1% year-over-year, retail savings deposits grew 7%, and the retail day-to-day balances grew 6%. This was offset by an 8% reduction in retail term deposits and a 2% decline in non-personal deposits that improved the deposit mix in line with our strategic objectives. Net interest income grew 1% year-over-year, due primarily to loan growth, while year-over-year net interest margin was down 2 basis points due to business mix changes.

Quarter-over-quarter, net interest margin expanded 1 basis point from higher asset and deposit margins, partly offset by the impact of changes in business mix. Non-interest income was up 8% compared to the prior year due to elevated private equity gains, higher mutual fund distribution fees, and insurance income. The PCL ratio was 43 basis points. Expenses grew a modest 2% year over year and 1% quarter-over-quarter from higher investments in technology that support our strategic initiatives. The fiscal 2025 operating leverage was negative 1.6%. Turning now to Global Wealth Management on slide 11, earnings of CAD 453 million were up 17%. Canadian earnings grew 16% year-over-year to CAD 390 million, driven by higher brokerage revenues, net interest income from private banking, and strong mutual fund fee growth, driven by assets under management growth of 15%.

International Wealth generated earnings of $63 million, up 30% year-over-year, driven by higher net interest income and higher mutual fund fees as AUM grew 25%. The full-year operating leverage was positive 1.6%. The spot AUM increased 16% year over year to $430 billion, and AUA grew 13% year over year to almost $800 billion, driven by market appreciation and higher net sales. Turning to slide 12, Global Banking and Markets delivered earnings of $519 million, up 50% year-over-year. Revenue increased 24% year-over-year as capital markets revenues were up 43%, driven by strong growth across both FICC and global equities. Quarter-over-quarter revenues were up 3%, driven by higher business banking revenues. Year-over-year, net interest income was up 29% from higher lending margins and deposit volumes. Quarter-over-quarter net interest income was up 4% from higher deposit margins and volume growth.

Loan balances declined 8% year over year and were in line with last quarter. However, deposits were up 4% quarter-over-quarter and year-over-year. The non-interest income was up 23% year-over-year, driven by higher fee and commission revenues and underwriting and advisory fees. Expenses were up 11% year-over-year, mainly due to higher personal costs, including performance-based compensation and higher technology costs. Operating leverage was a strong 7.7% in fiscal 2025. Moving to slide 13 for a review of international banking, the segment delivered earnings of CAD 638 million, up 3% year-over-year, but down 7% quarter-over-quarter. Revenue was up 3% year-over-year as non-interest income grew 7% from higher capital markets revenues, while net interest income increased 2% year-over-year from margin expansion of 12 basis points, mainly from lower funding costs.

Deposits were up 4% year-over-year, with personal deposits growing at 1% and non-personal up 5%. Loans were down 2% year-over-year as business loans declined 7%, while retail loans grew 4%. The provision for credit losses was 144 basis points, up 5 basis points quarter-over-quarter. Expenses were up a modest 2% compared to the prior year and prior quarter from continued disciplined expense management, resulting in full-year operating leverage of positive 1.6%. The effective tax rate increased to 22.9% from 20.7% in the prior year due to global minimum tax implementation and earnings mix changes. The GBM business in international banking generated earnings of CAD 295 million, up 19% year-over-year, or up 13% on a constant FX basis, driven by good performance in Brazil and Mexico.

Turning to slide 14, the other segment reported an adjusted net loss of $34 million, an improvement of $22 million compared to the prior quarter. With that, I'll now turn the call over to Phil to discuss risk.

Phil Thomas (Chief Risk Officer)

Thank you, Raj, and good morning, everyone. This quarter, we continue to operate in what remains a highly uncertain macroeconomic environment. Shifting tariff policy and an unclear path forward on trade negotiations are muting economic activity, even as some indicators are showing signs of resilience. Looking at this quarter's results, All Bank PCLs were approximately $1.1 billion, or 58 basis points, up $72 million, or 3 basis points quarter over quarter. Impaired PCLs were approximately $1 billion, or 54 basis points, up 3 basis points quarter over quarter, and in line with the outlook we provided in Q3.

The increase in impaired was mainly driven by our retail portfolios across both Canadian and international banking. Now, turning to the business lines. In Canadian banking, PCLs were CAD 494 million, 43 basis points, up 3 basis points quarter over quarter. In retail, PCLs were CAD 354 million, or CAD 34 million, up CAD 34 million quarter-over-quarter. Performing retail PCLs were CAD 21 million, primarily driven by negative migration that was partially offset by improvements in Prime Auto and releases as performing mortgage allowances migrated to impaired. Impaired retail PCLs were 36 basis points, up 2 basis points quarter-over-quarter, driven primarily by unsecured lines and Canadian mortgages. Although clients are showing some signs of stress, partially due to elevated unemployment, these remain isolated and not systemic. Overall, 94% of our Canadian retail exposure is secured with an average FICO score above 790.

90-day plus mortgage delinquency ticked up 4 basis points quarter-over-quarter. Increased delinquency was seen across both fixed-rate and variable-rate clients, driven primarily from weakness in Ontario and more specifically in the GTA. On unsecured, we continue to see some weakness with delinquency driven mainly by non-primary and younger clients. In our Canadian commercial portfolio, PCLs totaled CAD 140 million, up CAD 4 million from Q3. Notably, new formations slowed quarter-over-quarter. Moving to international banking, the PCL ratio was 144 basis points, up 5 basis points quarter-over-quarter, driven primarily by impaired PCLs. In international retail, total PCLs were 239 basis points, up CAD 21 million quarter-over-quarter, excluding FX. Performing retail PCLs were CAD 32 million, driven by portfolio growth and continued credit quality deterioration, primarily in Chile consumer finance.

Impaired PCLs were $468 million, up $17 million, excluding FX, driven by Chile consumer finance and increased net write-offs in Mexico. On a full-year basis, our All Bank PCL ratio was 62 basis points, of which 54 was impaired. The significant performing build in Q2 contributed to an increase of performing allowances by $630 million in fiscal 2025. That helped increase the total ACL ratio by 10 basis points year-over-year to 98 basis points. Looking ahead to fiscal 2026, we expect the full-year impaired ratio to be in the high 40s to mid-50s basis point range. The outlook reflects the expectation that we will continue to operate in an environment of elevated global macroeconomic uncertainty in fiscal 2026. In Canada, the absence of a trade deal with the U.S. and elevated unemployment continue to weigh on sentiment.

However, we are cautiously optimistic that the federal budget will contribute to greater economic growth and improved consumer and business sentiment that will benefit the performance in the latter half of the year. In international banking, the outlook across the region remains mixed, characterized generally by subdued economic activity and evolving political dynamics in Peru and Chile. Looking across our markets, in Mexico, trade negotiations continue to weigh on overall sentiment, but GDP forecasts are being revised upwards, suggesting some resilience amid ongoing uncertainty. Chile's forecast remains stable, supported by strong commodity prices. However, unemployment remains elevated, and as a result, we are seeing continued softness in our consumer finance portfolio. Peru's GDP outlook remains stable. However, the benefit of the pension fund withdrawals and client liquidity is tapering, and political uncertainty will linger until we get past next year's presidential and parliamentary elections.

It is important to note that we are seeing the early signs of our primacy strategy in international banking driving improved credit outcomes across the region. While these benefits are observable in the behavior of our newer vintages since 2023, overall credit performance is still being impacted by older vintages. In closing, the credit picture remains stable. The trade uncertainty continues to be a factor across our markets. We remain comfortable with the adequacy of our allowances and the overall quality of our portfolio. With that, I will pass it back to Meny for Q&A.

Meny Grauman (Head of Investor Relations)

Operator, can we have a first question, please?

Operator (participant)

If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you'd like to withdraw that question, again, press star one.

We also ask that you limit yourself to one question and one follow-up. For any additional questions, please re-queue. Your first question comes from the line of Ebrahim Poonawala with Bank of America. Please go ahead.

Ebrahim Poonawala (Managing Director)

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

Raj Viswanathan (CFO)

Yeah, sure, Ibrahim. Good morning. I think the growth will come from what I would call mid-single-digit PTPP growth.

There is going to be a combination, not just from loan growth, Ibrahim, to be very clear, you have seen the deposit growth that we have been showing quarter-after-quarter in the Canadian bank, and more importantly, the right deposit growth. That is contributing to margin expansion, which even this quarter was one basis point up quarter-over-quarter. It is going to come from margin expansion driven both by the repricing of the loans. There are a lot of fixed-rate mortgages that are coming up for repricing in 2026, improvement in our deposit margin as we continue to build out through primacy some of our very valuable deposits and take down some of the term deposits, which naturally also move towards the wealth segment as we know. It is a combination of that.

Expense management is going to be more disciplined, including the benefits of some of the restructuring charge that they're expected to get. Not all of the restructuring charge benefits are likely to fall to the bottom line because we are going to invest in our product capabilities and our frontline people so that we can continue to grow the business. That's kind of the composition of the PTPP growth. You're absolutely right. PCL is expected to normalize is probably the way I would call it. Like this quarter was 43 basis points. We think that will be somewhere in the high 30s next quarter. I mean, you just heard next year, you just heard Phil talk a little bit about his outlook. Slightly elevated impaired perhaps in the first couple of quarters and then normalize down is our expectation at this time.

PCL will be a meaningful contributor to the bottom line growth. I think Aris might have a couple of more comments.

Aris Bogdaneris (Group Head of Canadian Banking)

Hi, Ibrahim. Aris here. I just wanted to add one thing to what Raj said. I think it's important also on the fee line. We're going to see very good fee growth, almost double-digit next year across insurance, mutual fund fees as we grow, and also card fees. This is something we've been investing in and working on very hard, and we'll start to see that impact in F 2026, which will also help us drive positive operating leverage.

Ebrahim Poonawala (Managing Director)

Got it. Thank you for that. I guess maybe one, Scott, for you. You made significant progress over the last two years as we think about the ROE journey from year two.

Questions, one, structurally, like a lot of your peers are targeting a 15%-16% ROE. Structurally, are there any reasons why Scotia cannot attain a 16% ROE? Number one. Second, in terms of capital deployment, talk to us in terms of priorities. Could M&A, you've talked about U.S. being obviously the second most important market. Is there any tactical M&A that you would look to do over the course of the next year? Thanks.

Scott Thomson (President and CEO)

Right. As we said when we rolled out the investor day two years ago, we said 14% plus, and we thought 14% was a conservative estimate. We are tracking ahead of that plan to date. Seeing good ROE expansion in our international bank, good ROE expansion in our GBM bank, continued growth of wealth, which we know is ROE accretive.

Next year, you're going to see significant earnings growth in our Canadian bank and significant ROE expansion in our Canadian bank. As we sit here next year at this time, I'm confident you're going to see another step in that ROE journey, which is going to get us a lot closer to that 14%, probably a year earlier than we thought. Is 14% plus conservative? I continue to believe it's conservative. Part of this journey is continuing to deliver day in and day out for our shareholders on a consistent basis and do what we say we're going to do. We're eight quarters now into doing that. We're going to continue on that journey. In terms of your question on capital allocation, the focus is on organic. We've got so many opportunities with organic deployment.

We saw what GBM is doing in terms of new product capabilities and opportunity there. You see this new economic trajectory in Canada where I do think there's going to be a demand for capital. We have a pivot to growth in IB, which will start to come in the back half of this year. Our Canadian commercial business as well, I think in the back half of this year, will start to attract some capital in segments that we haven't historically been in. That would be priority one. Priority two, given the relative valuation and given our confidence in our plan, we will continue to be repurchasing shares. You've seen us do that in the last year. You'll continue to see us do that in 2026.

If there are some product capabilities or some capabilities that we can fill via tuck-ins in the U.S., I am thinking wealthier as we have talked about that. Relatively small tuck-ins that help Jacqui grow her business or help Travis close a couple of gaps. We will think about that, but that would be third on the priority list. There is nothing in the hopper right now for us to be thinking about in that regard.

Ebrahim Poonawala (Managing Director)

Got it. Super clear. Thank you.

Operator (participant)

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

John Aiken (Director of Research)

Good morning, Phil.

I get the messaging on the outlook for credit next year, but just when we take a look at the domestic retail formations as well as the 90-day plus impact on the quarter, is this, I guess as a messaging, is this more seasonality than underlying weakness that we're seeing that might be a continued trend?

Phil Thomas (Chief Risk Officer)

Hey, John. Thanks for the question. As I said in my prepared remarks, mostly what we're seeing on the GILs in Canada related to mortgages and particularly mortgages in the GTA. If I look broadly across the Canadian retail portfolio, I'm quite confident that what we're seeing is not systemic. We're still seeing strong FICOs around 790 in the portfolio.

Even if I look at where we have 90 plus on the LTV or sorry, 90 plus delinquencies, the LTVs are still in the low 60s, showing that these mortgages are fairly well collateralized. I am comfortable overall with the trends in the Canadian portfolio. There are some weaknesses, as I have mentioned in my prepared remarks, but I am confident that as we look forward into 2026, we will start to see GILs normalize in the latter half of the year, similar to PCLs.

John Aiken (Director of Research)

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

Phil Thomas (Chief Risk Officer)

Yeah. I was very happy to see that commercial GILs and PCLs normalized this quarter.

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

John Aiken (Director of Research)

Great. Thanks for the color. I'll re-queue.

Operator (participant)

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

Gabriel Dechaine (Managing Director and Senior Equity Analyst)

Hey, good morning. I was wondering, Scott, Raj, if you can just walk me through or maybe confirm some of my high-level conclusions here on your double-digit EPS growth outlook for next year.

On a segment basis, double digits in Canada, probably the same for wealth, mid-singles for capital markets and international from the sounds of it. Corporate, I mean, at least the back half will be flat probably, but who knows? Overall, high single digits plus the buybacks to get you into the double digits. Is that how you're thinking about it?

Raj Viswanathan (CFO)

Yeah, Gabe, it's Raj. I think you got it mostly right. I'll just make one correction on wealth. I think it might be high single digit. That's probably the one I would say. For IB and GBM, I'd call it modest growth is the term we use, and that I would equate to like a low single digit growth rather than mid. Now, obviously, right, markets play a role because we do have a GBM business in IB, and GBM is always subject to markets.

Of course, the other segment, like you point out, the whole year loss is $347 million. The most recent quarter is 30-odd million. That has to give us back roughly about $200 million. Of course, repurchase, right? We do not need to have repurchases to get to double digit. I think it is a contributor.

Gabriel Dechaine (Managing Director and Senior Equity Analyst)

I think the businesses themselves will get to double digit. Just a finer point on capital markets. The implication there is that your earnings in that business are going to be above the run rate, which the guidance run rate is $425 million-$450 million of earnings per quarter, and that may be stale at this point. Is that?

Raj Viswanathan (CFO)

Yeah. I mean, you heard Scott talk a lot about the investments we have done both in product capabilities and people, particularly in the U.S.

I think this quarter, $519 million, I'd probably say $475 million-$500 million is probably the business contributing, and some part of it is markets for sure that's helping. Markets remain constructive. This business is ready to capitalize on it.

Gabriel Dechaine (Managing Director and Senior Equity Analyst)

Okay, great. We talk a lot about buybacks these days for obvious reasons. What happens, Scott, if you own 15% of KeyCorp and they decide to participate in the M&A consolidation trend in U.S. regional banking? I mean, details, of course, if you like the deal or not, let's say you do like it. Do you want to be diluted, or do you want to maintain your position? What's your thought process?

Scott Thomson (President and CEO)

Yeah, I mean, I think we're really happy with the KeyCorp stake. Jacqui's sitting on the board now. I think we're getting a lot of good insights into the kind of the overall environment.

It's contributing now from a dividend perspective on a very attractive basis given it's in the significant investments bucket. There's not a plan here to increase beyond our current 15%. I think we'll just have to see what KeyCorp does from a strategic perspective and then deal with it at that time. I think we're pretty comfortable with the stake we have, and I'll leave it at that.

Gabriel Dechaine (Managing Director and Senior Equity Analyst)

All right. Thank you.

Operator (participant)

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

Doug Young (Analyst)

Yeah, good morning. Just something on capital. Raj, organic capital generation of set one generation nine basis points. Is this around what we should expect for Scotia net of dividends?

Can you maybe talk a bit about the puts and takes that maybe take you higher over the next few years if that's something that you think? Scott, can you remind us what the minimum CET1 ratio target is for the bank and what you're comfortable going down to?

Raj Viswanathan (CFO)

Sure, Doug. Good morning. I think fee income will always contribute to higher capital generation, and we're starting to see improvements in the fee income as we talked about earlier. That should help. Nine basis points, I would say, is at the lower end, frankly, Doug. I think this should progressively improve each quarter. I think 10 basis poins-15 basis points by the time we get to the end of 2026 for the quarterly contribution after dividends is likely the run rate we're looking for.

Obviously, if businesses like Wealth and GBM, if they perform well, they just contribute directly to capital generation. We will see how the year goes in 2026. Fee income is a big component. As far as the capital levels go, I think we will be around 13%. We will be north of 13% first couple of quarters. We will see how the loan growth evolves. The X-Factor, Phil talked a little bit of it from a PCL perspective. As you know, capital also gets impacted when we see migration. Like even this quarter, you see this CAD 2 billion of RWA on migration, which equates to roughly five to six basis points of capital. We will see how that evolves. That could be the only drag I can think of, which potentially is very hard to estimate, but could be small.

Capital ratios, 13% plus, funding all the organic requirements as we see in the profit plan, I think is a good position to be in to capitalize on other opportunities that may come along.

Scott Thomson (President and CEO)

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

Doug Young (Analyst)

Okay. Just a second, just back to the guidance, Phil.

The PCL, just want to confirm this while the slow this morning. The PCL guidance that you gave, I assume that's for total. If that's the case, can you break it up between impaired and performing or any sense? On the international banking, modest earnings growth. I assume that's off the base, excluding Colombia for fiscal 2025. Just wanted to confirm those two items.

Phil Thomas (Chief Risk Officer)

Yeah, I'll start on PCL. The guidance I gave is on impaired PCL. Okay. As far as your IB assumptions, you're right. I think we've disclosed since slide 25 and 26 the foregone income relating to the divested operations as it relates to lines because the bottom line is not big, but there's a lot of changes that happen on revenue, expenses, PCL.

You have all the numbers by quarter, and the growth rate of modest growth is after excluding the foregone income in 2025.

Doug Young (Analyst)

Perfect. Thank you.

Operator (participant)

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

Matthew Lee (Director and Equity Research)

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

Scott Thomson (President and CEO)

Yeah. Let me start, and then Travis maybe talk to you about what you're building in GBM.

As we've always said, the corridor strategy is primarily focused on wealth and our GBM business. We do need to, as I talked about potential capability enhancement, have a U.S. offshore booking foreign for our Latin American wealth clients and our Canadian wealth clients. That is something that we'll continue to look for. In terms of what Travis is building, it's been an organic build over time, and you're starting to see the results from that. Maybe Travis gives a sense of what you're trying to add from a product capability.

Phil Thomas (Chief Risk Officer)

Yeah, absolutely.

Everything we're doing, it's very intentional. We're trying to build an America's connected bank.

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

Scott Thomson (President and CEO)

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

Meny Grauman (Head of Investor Relations)

Absolutely.

Thank you, Scott. I think the important element to understand is what makes us different and how can we gain what is shared in the journey. Geographically, North America is the core. The tool is connectivity, like Travis just said. I think the tool of connecting clients through cash management is essential. We are very focused on it. Super excited that in October, we rolled out for the very first time our basic cash management capabilities. We have a very clear rollout schedule throughout 2026 to continuously enhance that proposition on a connected basis. We now have a global transaction banking organization for the very first time, and we have a consolidated sales effort that allows us to manage centrally our pipeline and onboarding and rollout of new capabilities, allowing us to prioritize investment and keep track of that investment.

It is really about how effectively do we cover global clients. I think Travis has done an amazing job in bringing leaders that understand how you connect global clients and using the right tools in terms of bringing a differentiated value proposition. As we see in the core countries in which we operate, other global banks leaving that footprint, we now stand in a very important position to capture share as we connect the countries on behalf of our clients.

Matthew Lee (Director and Equity Research)

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

Scott Thomson (President and CEO)

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

Matthew Lee (Director and Equity Research)

Okay. That's helpful. Thanks. I'll pass the line.

Operator (participant)

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

Please go ahead.

Paul Holden (Director)

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

Scott Thomson (President and CEO)

Thank you. I think what's important to understand is where are we today? Where we are today is a position of strength.

We have now completed the full regionalization of all the business lines and support functions, and that is allowing us to centrally drive the right investment and the right returns at scale. I can't stress enough the importance of the WBN transaction. It is allowing us to simplify our operating model and operate at scale in all the countries in which we operate in today. That is a massive advantage for us going forward. I think the element to understand is that as we pivot to growth, what you're going to see is that GBM, for example, that has been in a very deliberate effort to deselect low-returning loans and clients, we have completed that exercise in 2025. You are going to see loan growth in GBM on the double-digit side of things for the first time in the last couple of years.

We're now returning ROA was north of 2% in GBM for the first time in a long time. This is all in alignment with Travis's organization in a highly connected, deliberate effort to drive multi-country clients penetration and GTB. That is going to perform strongly in 2026. We just onboarded a new leader, for example, for capital markets, and that is bringing new capabilities that we did not have. Again, accredited to capturing what is share with clients that we did not participate in most of those activities before. When you look at commercial banking, we now have regionalized the commercial bank and changed the strategy to a cash-first strategy, meaning if we do not have cash management, we will not give you a loan. As simple as that.

That is a massive change in our strategy because it is going to drive higher returns, better penetration across the wallet of those clients, and drive consistent performance going forward. On retail, as Scott mentioned in his opening remarks, we are tremendously excited because for the first time, we now have rolled out a multi-country common value proposition for our most important clients, being affluent and emerging affluent under the singular common brand. That is a major, major step in delivering the strategy that we set out to achieve in 2023. When you put all that together, you are going to have mid-single-digit PTPP growth in 2026, trying to offset still increasing PCLs, like Phil mentioned, and higher taxes. 2026 is a strong year from the performance point of view, but we have some offsets to do.

This is also in the midst of a geographic GDP growth, which is still very modest. I mean, you're seeing Mexico barely breaking the positive growth GDP for 2026, and still Chile, Peru, and Colombia not benefiting from political change resulting from elections that we will see in 2026. It is a strong year within very much the strategy and timeline that we set out to achieve in 2023.

Paul Holden (Director)

Got it. Okay. That's helpful. Thanks for that. A question for Travis, and I guess it's almost kind of along a similar vein, because we've talked about a number of drivers, I think, for your business, Travis. Maybe you could highlight sort of, I don't know if it's top three or whatever the right number is. What would you say are the top drivers that are going to contribute to that revenue and earnings growth in 2026?

In other words, what should we be tracking for success in 2026?

Scott Thomson (President and CEO)

Sure. Listen, excellent question. I'm pretty proud. If you look at what we did in 2025 and some of the drivers, which I think will continue, we clearly had significant interest margin expansion, and it's just absolute relentless focus on our balance sheet, thinking about our capital velocity, understanding how we price our deposits, driving more core operating deposits, and looking at our loans. We haven't changed the risk profile of our lending book, but I think we've been highly selective on our loan portfolio. You've seen our loans were actually down and our ROE is up significantly, and we've still been able to maintain the fee growth and the net interest margin expansion despite the loans coming down. I think that just highlights a little bit about the discipline that we're having on our balance sheet.

I think from a strategic standpoint, there's a lot of low-hanging fruit. I mean, when we just think about exactly what Francisco said, the global connectivity of this franchise is incredibly powerful, unlike any bank I've ever seen. The ability to connect clients from Canada to the U.S. to Latin America, there's no other bank that can replicate what we're trying to do. We see tremendous opportunities. We see relatively low penetration rates of some of our clients, and we see a lot of cross-border activity. I think as we continue to build that connectivity and continue to build the capabilities on the products and on the services and on the advisory side, I think you'll see our fee income and our non-interest income continue to grow. On the market side, I think we remain incredibly disciplined. We clearly have some beta and alpha in this quarter.

You've seen highly constructive markets. You're seeing spreads all-time tights. You're seeing the capital markets incredibly constructive. You're seeing a lot of our clients access the capital markets, and we're playing a leading role. I think as we upscale our coverage and our advisory capabilities, I think you'll see more growth in those line items too. I look around, and we've been pushing on every single driver in the GBM business. I think this beat is reflective of every single one of those things hitting well, and we're going to hopefully continue that momentum. Our pipelines remain healthy right now.

Paul Holden (Director)

Okay. I'll leave it there. Thank you.

Operator (participant)

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

Mario Mendonca (Managing Director and Senior Research Analyst)

Good morning. Can we start on the deposit strategy first?

Maybe just in Canada specifically, speak to the sort of runoff of these commercial deposits that we saw this quarter or not commercial, I'm sorry, term deposits that we saw this quarter and the growth in retail. Maybe just describe what you experienced in the quarter and what your outlook is on the domestic deposit front.

Aris Bogdaneris (Group Head of Canadian Banking)

Sure. Thank you for the question. Before I dig into that question, just to remind everyone on the strategy in the Canadian bank, and it's threefold. It's driving the primacy of our clients' debt. That's the first, and that continues. The second one is the business mix, changing the business mix and changing the operating model, improving them both. That feeds into the deposit question. The third is a very intentional deployment of capital and marginal costs in our business, and that's what we continue to do.

Now, getting back to the deposit question, since Investor Day, we've added CAD 22 billion in deposits and CAD 15 billion in mutual funds. We have become a money-in bank. This is very different from the way this bank operated in the past. More importantly, as rates have come down and people have gotten out of term, we have been managing to capture that in our day-to-day savings and investment fund business. We have had a record amount of sales in mutual funds in the quarter in the Canadian bank. This idea of getting primacy is driving across the whole value chain, whether it is scorecard improvements in the branches, focus on payroll, and focus on very deliberate pricing and personalization strategies to drive more deposits from our existing base, but also what we call competitive steal. That is up 13% quarter-on-quarter as we get more clients from outside into the bank.

All this is driving what you saw in the fourth quarter, improved NIM in our deposit book. This continued focus on deposits is what we count on doing quarter-after-quarter. We're seeing it every quarter. Also linking it to the day-to-day savings growth you saw in the quarter. I think we're up in the retail side, 7% on day-to-day and 14% on the savings. It is materializing. We're seeing it in the numbers. This will continue quarter on quarter. I think it is also important to talk about how we're getting longer-term relationships to our investment fund sales in the branches, something that we were historically not very strong at, but now we're seeing record levels.

I would pass it on to Jackie, who is working very closely with Wealth in the Canadian bank in creating this connection and getting the right banker in front of the client to ensure we get the wealth of the client.

Jacqui Allard (Group Head of Global Wealth Management)

Yeah. Thanks, Aris. I actually think that's the best marker of our strategy execution is in that sales growth momentum that we have built together between Wealth and Canadian banking. Obviously, markets have been really constructive for us, both in the quarter and the full year. Together, we saw CAD 4.8 billion in net sales in the quarter between retail and Wealth. To put it in perspective, that was a 16-quarter high for us. It's also our record quarter four. I'd say also, this isn't a quarter four story alone. This has been a consistent trend for us for the whole year.

Our whole year net sales, I think Scott has used that as CAD 11.5 billion versus the prior year. Seven billion of that improvement came in Canadian retail channels alone. Just to pile on to Aris's point, since Investor Day, we've seen an 850 basis point improvement in our retail client base for investments, which is quite remarkable. The rest of the growth is coming from our Wealth businesses. Whole year net sales in Canadian Wealth Management is up 54%. International Wealth is up 76% from the prior year. I would say that we would expect this momentum to carry into fiscal 2026.

Mario Mendonca (Managing Director and Senior Research Analyst)

All right. If we could move over to mortgages, again, domestic. Could you help me understand the origination dynamics this quarter? Like 30% up in the GTA. It was down sort of meaningfully last quarter. Obviously, something changed in mortgage originations in the GTA.

Then also help me understand the extent to which mortgage growth is emerging in the broker channel versus, say, Scotia's advisors or the branch channel. Those are the two mortgage questions I have.

Jacqui Allard (Group Head of Global Wealth Management)

Just a bit of background on the mortgages in the quarter. We saw a bit of softening in the GTA and the GVA, especially in the condo market. That said, mortgage applications quarter-on-quarter are up 13% as lower home prices in Toronto and Vancouver are bringing buyers back as well as lower rates. We are seeing a little bit of a pickup in demand. We should see that continue in 2026 as affordability improves. There is a very active refi switching market going on, given the big increase in maturities that we will see next year as we saw this year.

Now, our growth is being boosted, of course, by the work we've done on renewals. We've been very strong. Our portfolio renewal rate in the fourth quarter was over 90%. We've invested a lot in virtual advisors who are driving renewal volume. That's been very strong. We're also seeing good front-book margins in our mortgage business in the fourth quarter. Mortgage+ which we've talked about today in our broker channel, 99% of all originations are coming with a mortgage bundle. In terms of the originations, your question, we're getting roughly 60% in our broker channel. We're getting 30%-35% in our HFA channel and the rest through our branches. Total originations in the quarter in Toronto, in the Toronto region, have grown. I think what's the percentage?

I don't know off the top of my head, but have grown from $3.5 billion to $4.5 billion year-on-year. So it's, as I said, as the lower home prices are kicking in and affordability, they're starting to see a pickup there in terms of originations in the GTA.

Mario Mendonca (Managing Director and Senior Research Analyst)

All right. Thank you.

Operator (participant)

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

Darko Mihelic (Managing Director and Senior Equity Analyst)

Hi. Thank you. Good morning. My question is also for Aris. I'm just trying to pin down a better understanding of your comment that fee revenue will also be stronger in 2026. What I'm specifically after is I'm trying to understand private equity and how that's helped you. This is the second quarter this year where you mentioned that private equity gains have somehow benefited the Canadian business.

I'm wondering if you can maybe just size that. Annually, how much are you getting from private equity gains? Where it's coming from? It's a little bit unclear to me. What your expectation is for 2026 on that front?

Aris Bogdaneris (Group Head of Canadian Banking)

Hey, Darko, I'll start on private equity and then pass it on to Aris on the fee. I'll be quick. Private equity earlier this year in Q1 was over CAD 30 million. I think it was CAD 33 million, if I remember right. This quarter is a little over CAD 10 million. It is a reason when you look at year over year, which is a comment I made on private equity gains helping us with the non-interest revenue. Private equity is something that's hard to forecast, Darko. It comes down to our folks who manage that. It's a small portfolio. It's not very big.

It's primarily through the Roynat business that is part of the Canadian banking portfolio. They, from time to time, if they believe that the investments that they made, and sometimes many years back, when they realize the full potential value or they end up going public, we realize gains. It's not something that we look forward to forecasting, but it does create some noise when you look at non-interest revenue, when you look at a quarter-over-quarter, a year-over-year. Would it be another CAD 50 million year? Unlikely, I would say, in 2026. It's also very hard to predict. If the valuations are there, they will make the decision to take the gains.

Scott Thomson (President and CEO)

Aris, do you want to talk about fees?

Aris Bogdaneris (Group Head of Canadian Banking)

Sure.

Jacqui Allard (Group Head of Global Wealth Management)

On fees, as I mentioned earlier, there are four important fee components in the Canadian bank that we will see acceleration in F 2026. Mutual fund fees, as we continue to drive mutual fund sales in the branches, we are starting to really build up momentum there. You see it quarter-on-quarter. I think card fees will also increase. As we now reposition the card portfolio to more premium cards, we are seeing the spend per account go up and the actual value of our card business increase as the premium clients take up a greater proportion. Third is insurance. Of course, insurance is an important part of our business linked not only to our lending business, but also standalone. We have invested and continue to invest in our insurance business. We will start to see some pickup there. Finally, cash management in commercial and small business.

That's another growing component where we're investing a lot of money and effort and sales people in the field to drive transaction banking in Canada to strengthen primacy. Between these four drivers, we're going to see close to double-digit, if not double-digit, fee growth in the Canadian banking year.

Darko Mihelic (Managing Director and Senior Equity Analyst)

That's very helpful. Thank you, Aris. I appreciate that. For the purposes of this call, I'm going to try and keep my last question very, very simple and straightforward. I think it's aimed at Travis, but maybe, Phil, you can also speak to this as well. I'm getting a lot of questions on private credit. Essentially, what we're looking for is we really want to be able to measure Scotia's sort of exposure to private credit relative to others that actually have a call report.

I wonder if Travis, maybe you can speak. I'm assuming most of this is coming from the capital markets business. I wonder if you can tell us sort of the on-balance sheet exposure to private credit and maybe even off-balance sheet or non-committed lines. Phil, the pertinent question might be, what do losses look like for this kind of business in a stress test?

Scott Thomson (President and CEO)

Darko, this is Travis. Listen, excellent question. I totally, there's some broader market questions around private credit, and they're very understandable. If you sort of step back and think about it, there's been a massive growth in non-bank financials. A lot of estimates in the U.S. that says nearly two-thirds of all assets. This is really a result of Dodd-Frank, and you've seen the move.

It is sort of hard to be a bank and not have some sort of connectivity to the non-bank financial market. If you step back and just sort of think about what we do in the non-bank financials, we have roughly CAD 31 billion of loans outstanding. If you just unpack that a little bit, Darko, around half of that is subscription finance. The other half would be in the private credit. I'm sorry. About half of that is in the private credit market. If you break that half down, half of that would be subscription finance, and the other half would be in the CLO business. If you look at what we do in those businesses, those are highly rated. Our effective average rating is between A and A-plus, or double A.

We are not really participating, I can tell you, in the equity or the lower quality tranches, if you will. We feel like we are participating in a very high-end A-plus rated part of the capital structure within this portfolio, and we are quite comfortable with it. We have hired some real experts both on the risk side and on the banking side. I am happy to take any more questions you have on that topic. Phil, we do frequent stress tests. We can talk about them. I am happy to go through that or Phil can on the stress testing side.

Phil Thomas (Chief Risk Officer)

Maybe I will just jump in quickly, Darko. We have been along for the ride with Travis and his team on this journey. Obviously, we have been staffing up the risk team as well. Just in terms of stress testing, we do run rigorous stress tests.

I can tell you, even in extreme cases where all exposures are downgraded to non-investment grade, projected losses in this book would remain a fraction of the net revenue that this business generates, which really underscores the strength of our structures and the underwriting that we have underway.

Darko Mihelic (Managing Director and Senior Equity Analyst)

Thank you. That's very helpful. Travis, just a quick question. If $31 billion, if half of that is private credit, what's the other half?

Scott Thomson (President and CEO)

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

Darko Mihelic (Managing Director and Senior Equity Analyst)

Okay. Thank you.

Operator (participant)

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

Jill Shea (Equity Research Analyst)

Thanks. Good morning. Perhaps just piggybacking on Mario's earlier question on deposits, you already addressed some of the nice progress you're seeing on your deposit strategies.

Perhaps just tying that to your net interest margin outlook, when we look at the year-over-year margin, that's improved with lower funding costs. Just curious if there's any more room to go with funding costs continuing to come down or a favorable mix shift away from term.

Raj Viswanathan (CFO)

Sure. I can start this at the all-bank level, Jill. Absolutely. Deposits are a big component of where we see the net interest margin expansion coming from. Apart from the repricing that we have, it's going to happen in the fixed-rate mortgages that I mentioned, and we've disclosed it in the 2026 year. Both are going to contribute. 240 basis points NIM this quarter, expanded four basis points. We see that continuously expanding each quarter at more modest levels, to be completely clear.

It's not going to come from the funding cost benefit that we saw in 2025, which is our wholesale funding cost coming down because we're not forecasting any more rate cuts in Canada. Obviously, if it happens, it's going to help us. It's primarily going to come from the Canadian bank. It's going to come from our GTB operations. This quarter, we have started disclosing GBM's NIM for purpose because GTB has contributed to GBM's NIM expanding 14 basis points in one quarter. It's worth a little over two basis points for the all-bank. That's going to continue. We talked a lot on this call about the investments we're making on the GTB front. It's going to come from good quality deposit growth in the Canadian bank, margin expansion on the mortgage book, and from the GTB deposits. You should see this happening incrementally each quarter.

Like I said, modestly, not four basis points each quarter, to be totally candid with you, Jill. I think you should see expansion happen throughout 2026.

Jill Shea (Equity Research Analyst)

Okay. Very helpful. Thank you.

Operator (participant)

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

Raj Viswanathan (CFO)

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