BNS Q2 2026 Earnings Transcript

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DATE

May 27, 2026, 7:00 a.m. ET

CALL PARTICIPANTS

• President & CEO — L. Thomson
• Group Head and CRO — Shannon McGinnis
• Group Head, Canadian Banking — Aris Bogdaneris
• Group Head, International Banking — Francisco Alberto Aristeguieta Silva
• Group Head, Global Wealth Management — Jacqueline Allard
• Group Head, Global Banking and Markets — Travis Sanou
• Group Head and CFO — Rajagopal Viswanathan

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TAKEAWAYS

• Adjusted earnings -- $2.7 billion and $2.02 per share, with pretax pre-provision earnings up 16% year over year, reflecting broad-based revenue growth and cost management.
• Return on equity (ROE) -- 13.2%, up 270 basis points year over year, signaling progress toward the bank's 2027 target ahead of schedule.
• CET1 ratio -- 13.3%, achieved after repurchasing 6.4 million shares and reflecting disciplined capital management.
• Dividend increase -- Quarterly dividend raised by $0.04 per share, demonstrating confidence in earnings persistence.
• Capital returned to shareholders -- $7.5 billion over 12 months through buybacks and dividends, with ongoing commitment to this level of distribution.
• Pretax pre-provision profit -- Up 20% year over year, supported by 13% total revenue growth and 17% noninterest income growth.
• Productivity ratio -- Improved by 290 basis points year over year to 52.5% at the group level, indicating efficiency advancements.
• Canadian Banking segment -- Earnings of $935 million, up 53% year over year; loans grew 3%, with margin expansion and 10% growth in noninterest income led by mutual fund distribution and credit card revenues.
• Global Wealth Management -- Reported earnings of $474 million, up 19% year over year; ROE reached 17.9% and spot AUM increased 18%, supported by record net sales and robust referral flows.
• Global Banking and Markets -- Earnings of $457 million, up 11% year over year; revenues up 9%, driven by a 25% surge in capital markets.
• International Banking -- Earnings of $701 million, up 3% year over year; revenue up 7%, with net interest income rising 5% and a segment net interest margin of 4.76% due to lower funding costs and positive business mix shifts.
• Credit loss provisions -- All Bank provisions at $1.2 billion or 66 basis points, up 5 basis points quarter over quarter, with allowance for credit losses increasing to $7.3 billion or 96 basis points.
• Deposit trends -- Canadian day-to-day and savings deposits rose 3% year over year despite a 3% decline in term deposits, reflecting a focus on higher-quality funding.
• Commercial loan momentum -- Canadian commercial loans up 2% quarter over quarter, with management citing a robust pipeline and expectations for further acceleration.
• AI and technology investment -- Direct launch of Scotia Intelligence and Scotia Navigator platforms, with leadership emphasizing "a unified enterprise AI platform" and explicit focus on security, flexibility, data quality, and platform-first strategies.
• Segment operating leverage -- Canadian Banking: 3.9% year-to-date, Global Wealth Management: 2.1% year-to-date, International Banking: 3.2% year-to-date, evidencing segment-specific discipline.
• Share buyback priority -- CEO Thomson said, "The second [capital deployment priority] would be share buybacks…we should take advantage of that while we're in this position."
• Acquisition commentary -- CEO Thomson clarified, "When I say tuck-in, what's the size? I don't know, think $200 million, $300 million, $400 million…We're talking about tuck-in."

RISKS

• Impaired credit losses outlook -- Group CRO McGinnis stated, "we expect impaired PCLs to settle in the mid-50 basis points range for the remainder of 2026. While this is slightly elevated relative to our initial outlook, we still expect PCLs to moderate from first half levels, though more gradual than previously anticipated."
• Concentration risk episode -- A single corporate account in International Banking contributed about 7 basis points to total impaired PCLs; McGinnis said, "not reflecting deterioration in the underlying portfolio," though monitoring will remain heightened.
• Deposit competition -- Management acknowledged industry-wide term deposit contraction and "intensifying deposit competition," requiring ongoing focus on deposit retention and mix optimization.
• Persistent macroeconomic headwinds -- Continued uncertainty cited, with McGinnis noting, "prolonged inflationary pressures could further strain already vulnerable client segments," particularly in Canadian retail.

SUMMARY

The Bank of Nova Scotia (NYSE:BNS) reported improved top- and bottom-line results, with management pointing to strong execution on both strategic priorities and operational discipline. Executives highlighted positive operating leverage and efficiency gains across multiple segments, alongside the launch of enterprise-scale AI systems aimed at productivity and risk mitigation. Segment-specific outperformance was recorded in Canadian Banking and Global Wealth Management, supported by high net flows and enhanced cross-selling metrics. The current outlook for credit includes a higher impaired provision range than previously forecast, with management referencing both episodic and macroeconomic drivers. Strategic priorities remain weighted toward organic growth and share repurchases, with any potential acquisitions limited to small-scale "tuck-in" opportunities aligning with targeted business needs.

• Management confirmed continued upward revision to impaired provision guidance due to changing macro conditions, but forecasted more gradual improvement rather than rapid normalization.
• Year-to-date total operating leverage across the group reached 4.9%, underpinned by noninterest income gains and rigorous cost control.
• Referrals between retail, small business, and wealth management segments contributed $9 billion in closed transactions year-to-date, accelerating internal cross-sell activity.
• In International Banking, Mexico delivered a standout quarter with revenue growth of 8% and earnings up 25%, spotlighting geographic earnings diversification.
• Leadership explicitly committed to maintaining or increasing capital returns while preserving robust CET1 ratios, balancing payout ambitions against growth investment and risk management.

INDUSTRY GLOSSARY

• PCL (Provisions for Credit Losses): The amount set aside to cover estimated loan losses over a given period; an indicator of credit risk and asset quality trends.
• CET1 ratio: Common equity tier 1 capital ratio, representing the core capital buffer relative to risk-weighted assets, a key regulatory and solvency metric for banks.
• NIM (Net Interest Margin): The spread between interest earned on assets and interest paid on liabilities, expressed as a percentage of average interest-earning assets; a fundamental measure of bank profitability.
• AUM (Assets Under Management): The market value of assets managed by the bank on behalf of clients, relevant for wealth management and investment activities.
• PTPP (Pretax Pre-Provision Profit): Earnings before taxes and credit loss provisions, reflecting core operating profitability before credit adjustments.

Full Conference Call Transcript

L. Thomson: Thank you, Meny, and good morning, everyone. Scotiabankers should be proud of this quarter as we continue to drive our business forward and deliver for shareholders even in the face of unexpected geopolitical developments. We remain focused on the needs of our clients as we work to deepen client relationships across our bank. Adjusted earnings came in at $2.7 billion or $2.02 per share. Pretax pre-provision earnings were up 16% year-over-year as we continue to drive revenue growth and manage our expenses effectively. Our CET1 ratio was 13.3% even after repurchasing 6.4 million shares in the quarter. And today, we announced a quarterly dividend increase of $0.04 per share, reflecting confidence in our earnings growth.

Over the past 12 months, we have returned $7.5 billion in capital to our shareholders through share buybacks and dividends. And looking ahead, we expect to keep this pace while maintaining strong capital ratios. Our capital deployment priority continues to be organic growth, followed by share buybacks and strategic tuck-in acquisitions that fit a well-defined need. Return on equity for the quarter was 13.2% and remains on track to hit 14% plus in fiscal 2027, 1 year ahead of our Investor Day target. Our business mix is shifting, which is resulting in strong revenue growth and higher returns, and we expect those trends to continue into fiscal 2027.

In Canadian Banking, the momentum is building, and we are delivering better results quarter after quarter after quarter. Pretax pre-provision earnings were up 13% year-over-year, helped by the fourth consecutive quarter of margin expansion and continued strength in our fee income line as we maintain our focus on growing wealth management, credit card and insurance revenues. At the same time, we are managing expenses effectively even as we continue to make substantial investments in frontline sales capacity and technology. As a result, Canadian Banking's productivity ratio was down 230 basis points year-over-year, contributing to positive operating leverage for the third consecutive quarter.

Industry-wide term deposit balances continued to contract during the quarter, but we've been able to consistently retain over 90% of retail GIC maturities despite intensifying deposit competition. These flows are either staying in Canadian Banking, where savings and deposits were up 3% year-over-year or are moving into retail mutual funds, where net sales were up significantly year-over-year. A key pillar of our strategy is to grow high-quality, sticky deposits. And earlier this month, we announced the launch of the Scotia High Interest Savings Account, which is one of Canada's first relationship-based accounts that offers tiered regular interest rates based on a client's total relationship balance across eligible Scotiabank accounts. Average loan growth remains in the low single digits.

But by the end of the year, we expect to catch up to the broader market, thanks in large part to an acceleration in commercial loan growth. Commercial loans were up 2% sequentially this quarter, and we expect that pace to increase given our robust pipeline growth. Overall loan growth will also be supported by our small business portfolio, which continues to grow in high single digits. Spot credit card growth is expected to reach mid-single digits by the end of the year, while our mortgage volume should keep pace with peers. In International Banking, pretax pre-provision earnings were up 12% year-over-year, helped by revenue growth of 7%.

This, combined with strong expense discipline, delivered year-to-date positive operating leverage of 3.2%. Performance in Mexico was particularly strong this quarter with revenue up 8% year-over-year and earnings up 25% year-over-year. Retail loans continued to grow across our footprint by 4% year-over-year with non-mortgages growing by a strong 7%, especially in Mexico and the Caribbean. Commercial loan growth was up 2% quarter-over-quarter and should continue to modestly improve in the second half of the year as we pursue growth thoughtfully and employ a cash management first strategy. Our focus on deposits is also gaining traction, climbing 3% quarter-over-quarter and 5% year-over-year.

Earlier this month, we were proud to sponsor Chile Day 2026, which brought together government and business leaders in New York and Toronto to strengthen Canada-Chile ties and advance investment in this important market. Scotiabank also hosted Mexico's official trade mission to Canada, convening senior government leaders, business executives and clients. This event was a significant milestone and reinforced Scotiabank's role as a connector across the North American corridor. In Global Wealth Management, we are continuing to drive our underlying business forward. Net sales for the quarter were at $4.7 billion, 4x what we had in Q2 2025 and marking our seventh consecutive quarter of positive net flows. ROE came in at 17.9%, up 210 basis points year-over-year.

Canadian Wealth Management is continuing to benefit from deeper connectivity with Canadian Banking in the form of higher referral volume. Total closed referrals were at $9 billion year-to-date, largely stemming from our retail and small business segments to wealth. Closed referrals between Commercial Banking and Wealth were $2.8 billion or double what we reported in the first half of last year. In our Global Asset Management business, we delivered year-to-date net sales of $3.1 billion and continue to rank third amongst our peers in long-term retail mutual fund sales, up from fifth in the same quarter last year, highlighting the opportunities we have to deepen penetration within our own network.

And in our international wealth business, earnings were up 12% year-over-year and 22% in Mexico. This quarter, we were also recognized with 8 Euromoney Private Banking Awards across our footprint, and Mexico's asset management unit was recognized by Morningstar with 6 funds ranked in the top 10 among all 4-star and 5-star funds. Finally, in Global Banking and Markets, revenues were up 9% year-over-year, driven by a 25% year-over-year increase in capital markets. Our deal pipeline is strong, and Q3 has started off on a strong footing with a number of marquee transactions being announced over the past few weeks. Our mortgage capital markets business is accelerating, which is a good example of our U.S. growth strategy in action.

GBM loans grew 1% quarter-over-quarter or up 3%, excluding our Asia portfolio, which is in runoff. Growth here should accelerate as the year goes on but will increasingly be driven by our capital market strategy. We will continue to deploy balance sheet through our corporate revolver loan book, but with a focus on customers where we have a broader multiproduct relationship. We are focused on improving returns while also growing our loan book and investing in critical technology, including AI. This quarter, Scotiabank announced the launch of Scotia Intelligence and Scotia Navigator. Scotia Intelligence unifies the capabilities, platforms and governance required to deliver AI securely and at scale for employees and clients globally.

And Scotia Navigator puts AI directly into the hands of employees across the bank, including advanced assistance that automates routine tasks and redirect capacity towards more complex, higher-value tasks. Our approach to AI is designed to take us from isolated AI use cases to AI that is embedded across our processes, decision-making and client interactions in a trusted, efficient and effective manner. Our approach is grounded in 4 key principles, but at the top of the list is security, which has taken on added importance given the cybersecurity risk posed by advanced AI models.

We are embedding security, governance and controls into the foundation of our AI infrastructure by design, enabling us to scale not just quickly but safely, fully aware of both the opportunities and risks of advanced AI. We are also leveraging AI to strengthen our security posture, including AI-driven scanning and monitoring to proactively identify and mitigate risks. Our second principle is flexibility. The AI landscape is evolving rapidly, and we believe that no single model or vendor will dominate over an extended period of time. We have adopted a model-agnostic approach from Day 1, selecting models based on performance, security and cost. This approach gives us maximum flexibility with what is a rapidly evolving technology. Our third principle is data.

AI is only as effective as the data it can understand. We have deliberately invested in getting our data foundation right, clean, well governed and richly described so that AI can deliver meaningful outcomes at scale. This is enabled by our enterprise data platform, which ensures that our data is discoverable, trusted and ready for AI consumption across the enterprise. And our fourth and final principle is platform-first thinking. Rather than fragmented tools, we are building a unified enterprise AI platform. This allows for faster deployment, consistent governance and repeatable scale across the bank.

It also enables the deployment of AI agents and continuous monitoring and improvement of models in production, all with enterprise-grade security guardrails built in from the outset. In closing, as we've committed to, we are delivering growth across product lines that are strategically important to us and where we can drive client primacy. In Canadian Banking, we delivered sequential commercial loan growth this quarter on top of already strong small business growth and our growing commercial pipeline gives us confidence that, that momentum will continue. Although total deposits are contracting because of industry-wide pressure on GICs, we are consistently growing our higher-quality savings and day-to-day deposits even as deposit dollars increasingly flow into retail mutual funds and our wealth business.

The connectivity between Canadian Banking and Global Wealth Management continues to strengthen, thanks to growing retail fund sales and 2-way referrals between the 2 units. In International Banking, retail and commercial loans grew 4% year-over-year with non-mortgage loan growth continuing to outpace mortgage growth on the retail side and growth improving on the commercial side as we build deeper client relationships. Finally, in Global Banking and Markets, Capital Markets loans are growing even as total loan growth is being impacted by our decision to reduce our exposure in Asia. Overall, despite increased macro volatility, we continue to drive towards delivering on our medium-term financial objectives and building a stronger and more profitable bank for the long term.

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

Rajagopal Viswanathan: Thank you, Scott, and good morning. My All Bank and other segment comments will be on an adjusted basis, which includes the usual amortization of acquisition-related intangibles. The business line results will be on a reported basis beginning this quarter. Moving to Slide 9 for a review of the second quarter results. The bank reported quarterly earnings of $2.7 billion and a diluted EPS of $2.02. My remarks that follow will refer to the last column of this slide that excludes the impact of divestitures. The return on equity was 13.2%, up 270 basis points year-over-year, driven by strong revenue growth of 13%.

Net interest income grew 10% year-over-year as net interest margin grew 24 basis points from higher business line margins and lower funding costs. The net interest margin expanded to 6 basis points quarter-over-quarter, benefiting from some seasonality in International Banking and increased levels of higher spread reverse repos. Noninterest income was up 17% year-over-year, mainly from higher wealth management revenues, investment gains and income from associated corporations. Expenses grew 7% year-over-year, mainly due to higher performance-based and personnel costs and technology spend that also grew 9% to $1.4 billion to support strategic growth initiatives. This resulted in a pretax pre-provision profit growth of 20% year-over-year.

The bank generated positive operating year-to-date leverage of 4.9% and the productivity ratio improved by 290 basis points year-over-year to 52.5%. The bank's effective tax rate decreased to 23.3% quarter-over-quarter, primarily due to higher income in lower tax jurisdictions and higher inflationary adjustments. Moving to Slide 10. The bank's CET1 capital ratio remained strong at 13.3%. We generated capital from strong earnings in the quarter and prudent management of RWA growth. We completed the 2025 share repurchase program and commenced repurchases under the 2026 program this quarter. Under the 2 programs, we repurchased 6.4 million shares this quarter, representing 13 basis points of capital usage. The model parameter updates also consumed 13 basis points.

Total risk-weighted assets were $474 billion, up $1.6 billion quarter-over-quarter, excluding FX, mainly relating to higher credit risk. Turning now to the business line results beginning on Slide 11. Canadian Banking earnings were $935 million, up 53% year-over-year from strong pretax pre-provision earnings growth of 13% and lower performing provisions for credit losses. Loans grew 3% year-over-year from mortgage growth of 4%, while commercial and small business loans grew 1%. Day-to-day and savings deposits grew 3% year-over-year, in line with our strategy. However, deposits declined 3% year-over-year, mostly in term. Turning to the P&L. Net interest income grew 7% year-over-year from loan growth and margin expansion. Net interest margin continued to expand, up 4 basis points sequentially.

Noninterest income was up 10% year-over-year from higher mutual fund distribution and credit card revenues. The PCL ratio was 50 basis points with impaired PCLs declining to 2 basis points quarter-over-quarter. Expenses were up 3% year-over-year from investments in technology, partly offset by the benefit of efficiency initiatives. Year-to-date operating leverage was 3.9%. Turning now to Global Wealth Management on Slide 12. The earnings of $474 million were up 19% year-over-year as Canadian earnings were up 20% and international was up 12%, mainly in Mexico. Spot AUM and AUA grew 18% and 15% year-over-year from market appreciation and higher net sales. Revenues were up 14% year-over-year from higher mutual fund fees, net interest income and brokerage revenues.

Expenses were up 12% year-over-year from higher volume-related expenses. Year-to-date operating leverage was 2.1%. Turning to Slide 13. Global Banking and Markets earnings were $457 million, up 11% year-over-year. Revenue grew 9% year-over-year as capital markets revenues were up 25%, while business banking was down 7%. Net interest income was 5% year-over-year, primarily due to higher margins. Noninterest income was up 10% year-over-year due to higher trading-related revenues from equities, commodities and fixed income, partly offset by lower FX trading and underwriting and advisory fees. Expenses were up 10% year-over-year, mainly due to higher technology and personnel costs. Moving to Slide 14. My comments on International Banking are on a constant dollar basis and exclude the impact of divested operations.

The segment delivered earnings of $701 million, up 3% year-over-year. Revenue was up 7% year-over-year with net interest income up 5% and noninterest income up 14% from higher investment in associated corporations and insurance income. Net interest margin of 476 basis points expanded by 22 basis points quarter-over-quarter from lower funding costs in Latin America and inflation benefits mainly in Chile. Deposits were up 5% year-over-year as personal deposits grew 3% and nonpersonal grew 7%. The loans were down 2% year-over-year as non-retail loans declined 8%, while retail grew 4%. The operating leverage was 3.2% year-to-date. The PCL ratio was 166 basis points, mainly from impaired.

The effective tax rate was 17.3%, mainly from higher inflation, refund of prior taxes in Peru and higher income from associated corporations. The GBM Business and International Banking generated earnings of $237 million, impacted by higher loan loss provisions. Turning to Slide 15. The other segment's net income was $35 million compared to a loss of $41 million in the prior quarter, benefiting from higher mark-to-market gains. I'll now turn the call over to Shannon to discuss risk.

Shannon McGinnis: Thank you, Raj, and good morning, everyone. The macroeconomic environment remains uncertain, shaped by geopolitical developments and elevated energy costs that continue to affect trade flows and the GDP growth outlook. In Canada, near-term growth has moderated amid continued trade headwinds and inflation remains a key focus for policymakers. Against this backdrop, All Bank provisions were $1.2 billion or 66 basis points, up 5 basis points quarter-over-quarter. Impaired provisions were $1.1 billion or 61 basis points, up 3 basis points quarter-over-quarter. This increase was driven mainly by a corporate account in International Banking, which represented about 7 basis points of the All Bank impaired PCLs.

Performing provisions were 5 basis points, up 2 basis points quarter-over-quarter, driven mainly by the impact of forward-looking indicators in Canada. Our allowance for credit losses increased to $7.3 billion or 96 basis points, up 2 basis points quarter-over-quarter. Turning to Slide 18. Gross impaired loans increased 4 basis points quarter-over-quarter to 99 basis points, driven mainly by the one corporate account in International Banking and higher formations in Canadian Commercial. Retail gross impaired loans declined across both Canada and International Banking as lower new formations reflected the impact of enhanced collections efforts. In non-retail, new formations increased $368 million quarter-over-quarter, driven mainly by one account in International Banking and one account in Canadian Banking.

Overall, the non-retail portfolio remains well positioned and underwritten to strong credit standards. Turning to Slide 19. In Canadian Banking, provisions were $575 million or 50 basis points. In retail, total PCLs were $435 million, flat quarter-over-quarter as lower impaired provisions across most products were offset by higher performing PCLs. Performing PCLs were up $22 million quarter-over-quarter, driven primarily by unfavorable impact in our forward-looking indicators, partially offset by credit quality improvements. In unsecured lending, we are seeing the benefit of targeted collection actions, including expanded capacity, enhanced client segmentation and increased self-service options through our online channels. These efforts contributed to a 20-basis points quarter-over-quarter improvement in 90-plus day delinquency for unsecured products.

That said, we continue to closely monitor the portfolio given ongoing macroeconomic uncertainty affecting consumers, including elevated energy costs and inflationary pressure. Moving to International Banking. International Banking provisions were $599 million or 166 basis points, up from $536 million in the prior quarter. In non-retail, the increase in PCLs was concentrated mainly in a single corporate account. This reflects primarily company-specific factors rather than broader macroeconomic or trade-related pressures. We continue to actively manage the exposure with close monitoring and ongoing engagement and expect non-retail impaired PCLs to meaningfully moderate from Q2 levels.

On the retail side, total PCLs were lower quarter-over-quarter, reflecting lower new formations in the Caribbean and Peru and lower performing provisions in the Chile consumer finance portfolio. Retail impaired PCLs were $381 million, down $24 million quarter-over-quarter, driven by divestitures. In Global Banking and Markets, provisions were $38 million or 8 basis points lower quarter-over-quarter. The macroeconomic environment has evolved meaningfully since the start of the year. Elevated energy costs, persistent trade uncertainty and higher unemployment continue to pressure both consumers and businesses across our footprint. Against this backdrop, we expect impaired PCLs to settle in the mid-50 basis points range for the remainder of 2026.

While this is slightly elevated relative to our initial outlook, we still expect PCLs to moderate from first half levels, though more gradual than previously anticipated. Looking at each of our portfolios. In Canadian Retail, Q2 performance benefited from collections efforts. However, prolonged inflationary pressures could further strain already vulnerable client segments. In Canadian Commercial, performance remains resilient and in line with expectations with continued attention on potential second-order impacts from trade developments and sustained elevated oil prices. Across our key international markets, retail impaired performance is expected to remain elevated, in line with our earlier outlook. In Mexico, macroeconomic indicators continue to present a mixed outlook given trade uncertainty.

In Chile and Peru, credit performance has been stable, supported by commodity fundamentals, although the potential impact of higher energy costs remains an area of focus. In non-retail for International Banking, we continue to actively manage the portfolio through ongoing reviews and early warning monitoring. And while the macro uncertainty remains, we expect impaired PCLs to meaningfully moderate from Q2. In closing, we continue to build allowances, adding $159 million this quarter to bring total reserves to $7.3 billion or 96 basis points and now 24 basis points higher than Q1 2023.

Importantly, these allowances reflect a range of forward-looking macroeconomic scenarios, and we are comfortable that both the level of reserves and the quality of our portfolio position us well to navigate the environment. With that, I will turn it back to Meny for Q&A.

Meny Grauman: Thanks, Shannon. Operator, we're now ready for our first question.

Operator: [Operator Instructions] Your first question comes from Doug Young with Desjardins.

Doug Young: Maybe, Shannon, sticking with yourself. So just the guidance that you gave, so the impaired PCL guidance of mid-50 basis points for the remainder of fiscal '26. So that is -- I guess, your guidance for the full year now is higher than it was before. I just wanted to confirm that. And then the moderation in PCLs in the back half of this year, can you talk a bit about what gives you the confidence in the moderation?

Shannon McGinnis: Thanks for the question. So if I take a look at the macro when we gave guidance back in December, the macro environment has evolved meaningfully since that time. And so considering this, we do expect impaired PCLs to settle in the mid-50 basis points range for the remainder of '26, which I mentioned in my remarks. I think it is important, though, that we still expect a gradual trend down from first half levels, although more modest than we originally anticipated. And in terms of what gives me confidence around that and what kind of going into that outlook, let me kind of walk you through a few portfolio components.

In international retail, performance continues to be mixed by geography, and we do expect impaired PCLs to remain elevated, and that is consistent with our initial outlook. If I look at Canadian retail, Q2 performance benefited from the collections efforts that we've been speaking about over the past few quarters. And we do expect impaired PCLs to potentially be impacted by prolonged inflationary pressures. So that could impact some of our vulnerable client segments. And then when I look at the non-retail portfolio, we do continue to monitor on a heightened basis, the sectors that are more exposed to trade dynamics and oil price volatility.

But as I look from this quarter forward, we do expect to see the non-retail impaired PCLs moderate from the Q2 levels. So when I take all of that into consideration, we do expect to trend down from the first half. But as you point out, it will be more gradual than we had originally anticipated, and that's really reflecting the changes in the macro since we gave our guidance back in December.

Doug Young: Okay. And then just maybe a follow-up on the performing loan side, a bit of a build this quarter. Can you maybe quantify or talk about or just put in perspective how confident you are in your performing loan allowances relative to your forward-looking indicators and your expectations for impaired? Just trying to get a sense. It's always difficult to kind of look at it across the group, but maybe there's some perspective you can give.

Shannon McGinnis: Yes. So maybe it would be helpful to take a step back and just kind of grounding how we factor scenarios into our performing allowance, we obviously take into consideration a range of scenarios, which includes the environment that we've been operating in and as we look forward and talk about some of the pressures that I spoke to in my remarks. And so as we think about the performing build this quarter, which was 5 basis points, about $50 million of that was related to our forward-looking indicators, which we do think appropriately captures what we see as we look forward.

And so when I look at the scenarios and what we leverage to generate the performing build, we're quite comfortable with our reserves. As you know, we're going to reassess this every quarter as the environment evolves but feeling good where it is right now.

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

Gabriel Dechaine: Just a quick numbers one to start the other, other income. I heard mark-to-market gains in the explanation for the corporate segment. Can you tell me what was in that other, other income line item that was pretty high this quarter, please?

Rajagopal Viswanathan: Sure, Gabe. It's Raj. Absolutely, you're right. There are 2 items that have gone into that line this quarter. One, I talked about the mark-to-market gains, which is on the private equity book that we have in treasury. That contributed somewhere between $35 million to $40 million. There is another component, which is WBN that closed a deal in their books, and we had to do an equity pickup of the mark-to-market increases they have in their assets this quarter, and that was in the mid-40s. It was about $46 million that has gone into that line. That's why you're seeing that line elevated.

Gabriel Dechaine: Okay. So $35 million to $40 million, that's pretax or...

Rajagopal Viswanathan: Correct. Yes. Because the WBN that we pick it up after tax, there's no tax effect because of the way we account for investment in associated companies.

Gabriel Dechaine: Okay. Great. Just to keep going with this credit discussion, the mid-50s H2. I guess the -- I'm trying to decipher where some of the changes are taking place. I can draw my own conclusions based on what I see in the environment, but it looks like Canadian retail because of inflation and the economy that's not rebounding as fast as expected, that's where you're expecting more upward pressure than you did previously.

In international retail, it doesn't sound like you're -- it's changed from what you anticipated at the start of the year, but these -- in Peru and Chile, especially the energy prices that are putting a lot of pressure, keep using that word on their economies, that's got to be a new twist to this saga. And then I guess, it's too early to start thinking about 2027, not really, but technically, I guess. But none of this stuff seems to be -- and this isn't a Scotia-specific issue, but none of the stuff seems to be like is going to be all clear anytime soon.

Are we thinking already that maybe 2027 will have this higher for longer impaired PCL ratio?

Shannon McGinnis: Yes. Okay, maybe I'll stick to the 2026 guidance and what's driving our outlook as we go into the latter half of the year. And I mentioned it a bit previously in my remarks. So in terms of what's changed from when we gave our guidance in December, it really is, as I think about the environment that we're operating in. And so we do expect to see improvement in the latter half of the year, which is consistent with our guidance we provided. It's just the magnitude of that is maybe different than we had originally expected and again, reflecting the macro that we're in.

And so we expect it to be more gradual than we did at the time. And to your point, Canadian retail is an area that I would point to. Again, we're really encouraged by the Q2 performance. And that is a reflection of the collections efforts that have been underway for a period of time. We've seen that impact this quarter. But we are cognizant of the environment. And if you think about inflationary pressures and what that can mean to affordability, we have factored that into our outlook as we look out to the rest of the year.

L. Thomson: And Gabe, it's Scott. I would just add a couple of things. One, I mean, there's definitely some stresses in the Canadian portfolio. There's no doubt. I mean I was really pleased that we saw improved impaired performance in that book. But as you look out to '27, I'm actually relatively optimistic about the outlook for Canada. Despite the war and the kind of the tragic aspect of it, we're an oil exporting nation. You've got a new business-friendly government that is trying to get things done. And so as we look further out, I actually -- I think we're going to see some good things in the Canadian environment.

Gabriel Dechaine: Yes, I get it. I agree, but there's a lag between when -- the bad stuff is still having an impact and when the good stuff kicks in. And -- I don't know it's a moving target, obviously. So I'll leave it there.

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

Mario Mendonca: I think, Raj, you covered the corporate gains there. In the past, you've given us some outlook on what we'd expect from that segment going forward. Presumably, you'd expect that to return to maybe a modest loss next quarter. Is that right?

Rajagopal Viswanathan: That's correct, Mario.

Mario Mendonca: And then on international, the margin there in international remains well above the outlook you've offered in the past of 4.40% to 4.50%. Can you talk about what drove such a meaningful increase in the quarter and what your outlook is?

Rajagopal Viswanathan: Absolutely, Mario. I think you're right. 4.76% is a high watermark for the international margin this quarter. As you know, IB NIM has got multiple countries, right? It's got all the Latin American countries, but it also has a big Caribbean operation. So a lot of the benefits or the increase in the NIM that we saw is lower funding costs in our Latin American franchises. We have seen rate cuts in Mexico. We've seen it in Chile earlier, and we've seen it in Peru as well. So that's going to continue, and that's in line with what we expected even at the beginning of the year.

What we did not expect, and it's a nice tailwind to have is there's been no U.S. rate cuts, so the Caribbean NIM has held up very well for us. And then there is the asset balance mix that is happening, no less mortgages and higher non-mortgages going over there. If I look forward, this quarter, there was some nuance. There's some seasonality to some Q2 benefits that we get in International Banking NIM. I call it somewhere between 7 to 10 basis points, Mario. So I would say next quarter should be somewhere between 4.65% to 4.74% frankly, for the remainder of the year.

And that is a nice tailwind to have to our 4.40% to 4.50% normal expectations we have for that NIM. And that's primarily driven because we don't see rate cuts happening at any scale in the United States that should help with our Canadian -- sorry, the Caribbean deposit risk franchise. So it's a good tailwind. The 4.65% to 4.70% is likely the number I would look at for Q3 and for Q4 as well.

L. Thomson: And maybe, Francisco, you can just highlight for Mario some of the business mix changes that are ongoing there because I think it was a great quarter for international to highlight some of the moving pieces.

Francisco Alberto Aristeguieta Silva: Sure, Scott. Thank you. Mario, thanks for the question. We continue to be steady state on the strategy to try to change the balance sheet mix across all countries. This particular quarter, you begin to show on the year-on-year progression, for example, deposits moving quite strongly around the 6% mark. But when you begin to see also the loan growth in retail around 4.5%, non-mortgage predominantly growing at twice the pace of mortgage, increasing client profitability. When you see GBM deposits year-on-year growing at 8%, that's all contributing to the sustainability that Raj was mentioning of the NIM expansion.

So the overall underlying quality of our balance sheets in every market are improving sustainably on the back of the client strategy and the, I would say, very deliberate effort on quality deposits. So we have been optimizing expensive deposits out and replacing them by operational deposits sustainably across all business lines.

Mario Mendonca: And Francisco, while you're there, do you have a sense for when the non-retail loan growth will emerge in your segment?

Francisco Alberto Aristeguieta Silva: It's consistently growing. And remember, this year was a pivot to growth, right? And we wanted to ensure that the new value propositions resulting from the segmentation exercise generated high-quality vintages that allow us to get to primacy faster and sustainably. So we are in that journey. What is very encouraging to see is that our primary market being Mexico is beginning to show that progression quite strongly in this quarter and has been the work over a year of the new team we have in place in driving that strategy. We're seeing similar progress in Peru and in Chile as well as in the Caribbean.

So you should expect that by 2027, this will consolidate, but we are being very deliberate in the quality of the portfolio that we're building towards sustainability of performance.

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

Paul Holden: I want to ask you about the net interest margin outlook for Canada. Obviously, a positive result, I think, in Q2. A number of moving parts there, which is why I asked the question, right? Like the residential mortgage renewals, which should be a nice tailwind. I think we're hearing about increasing deposit competition, so maybe a little bit of a headwind there. Anyways, maybe you can give us an outlook and sort of wrap all of those components together would be helpful.

Rajagopal Viswanathan: Sure. Paul, I'll start, but I want Aris to talk about his business as well and how the changes are impacting. I'll keep it short. I think the net interest margin expansion we saw this quarter will continue, maybe not to the same magnitude. But like in the beginning of the year, I had mentioned 2 basis points a quarter improvement driven by better deposits, the mix. Better loan growth because even mortgages, I think, are more profitable than what we've had, and we've seen strong growth as well as commercial, like Scott alluded to in his opening remarks.

So those are all going to contribute, I would say, for the remainder of the year for margin expansion in the Canadian bank. And maybe Aris, you can talk about the business mix shifts that you're seeing in the...

Aris Bogdaneris: Sure. So I think in line with what you heard, the numbers this quarter really affirm the direction and the strategy we embarked on a few years back, and you see it in the numbers. And you have to go back, I think, to 2022 to see growth rates at this level across revenues, PTPP and the like. And I think the drivers, as I mentioned in the last call, there's really 4 drivers. It's the business mix shift that you've heard about, both on the deposit side and more and more now on lending as we increase the proportion of non-mortgage lending.

The second is the RAM, the improvement in the risk-adjusted margins from the renewals and repricing of our mortgage book, which is now going to accelerate as the renewals start to increase. And then, of course, you saw in the quarter the increase in fee income across cards, mutual funds and insurance. So all these put together are helping lift that revenue and PTPP line. In terms of the margin question you asked about, I think you'll see it primarily now coming on the asset side as the commercial loan book and business banking book and personal lending starts to increase, that will help the overall NIM. You saw the sequential growth in commercial lending on the quarter.

And again, that commercial lending growth is broad-based. It's across real estate, mid-market, and Ag. And that pipeline that has been built up since a year ago is starting to mature. And as it matures, it's going to actually lift the yield on our lending book as it grows. So we'll see continued increases in the NIM in the quarter, but again, more now weighted to the asset side as we go forward. So all in all, positive outlook from that standpoint.

Paul Holden: Okay. That's good. And maybe, Aris, a follow-up question for you. Maybe you can drill down a little bit more into the NIR growth because it is quite strong year-over-year. And I think you touched on some of the drivers there, the credit card fees, et cetera, but maybe you can spend just a couple more minutes so we can understand fully, yes.

Aris Bogdaneris: Sure. So the NIR growth for the quarter was close to 10%. I think there's 3 components. First is on the card book. Even though the balances have not grown, what you're seeing in the card book is a real shift in the quality of the card book,45% of new card acquisition now is in the premium card segment. That obviously has a huge impact on purchase volumes, transactions and balance growth. And we're shifting the portfolio more to that premium -- that premium client group, and then you obviously see the fee increase from there is substantial. I think the other big part in the quarter, I think we had record mutual fund sales in the branches.

I think fees were up 21% year-on-year. That's unprecedented. And the third aspect, of course, is insurance as we build creditor and non-creditor insurance, that's also providing a lift on the NIR. So generally, the things that we talked about before in terms of trying to drive card, mutual fund and insurance growth is starting to really materialize. You see it in the quarter. And again, the other part, and I'm going to pass to Jacqui, is just the sheer amount of referrals that we're doing now, where we're trying to get the right client in front of the right adviser and moving these clients over to wealth is also having a substantial impact on the business.

So maybe Jacqui could give a few highlights on that piece.

Jacqueline Allard: Yes. I think what really stands out to me in the quarter, Aris, is that we saw really strong AUM growth driven by net new client flows. Like markets were actually pretty choppy during the quarter. They were up for the full quarter, a bit down in March. And in that kind of environment, we might typically see clients moving to the sideline. But what I found really encouraging is we saw positive client flows throughout the quarter despite that backdrop. From our perspective, from a mix, what we're really focused on is retail growth and wealth advisory growth. And on the retail side, as Aris said, we had a really good quarter.

We were #3 this quarter for the third quarter in a row compared to our bank peers in long-term mutual fund sales. That's up from #5 a year ago, #6 at Investor Day. And net flows in the first half of the year and Aris' business alone exceeded our full year flows for 2025. So I think that is quite remarkable again, considering the market backdrop that I mentioned. Wealth Advisory as well had a really good quarter in both Canada and International. We saw over $3 billion in net new flows for the quarter. Fee-based assets are at an all-time high in those businesses. So overall, we're seeing great momentum both in terms of flows and mix.

And I think that positions us really well to continue to deliver consistent higher quality earnings growth going forward.

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

Matthew Lee: I'll keep it tight. You've spoken about strong commercial momentum and the expectation for that growth to continue accelerating. Could you maybe unpack what's driving that outlook, whether it's broader demand recovery, sector-specific opportunities or maybe just that increasing deeper client activity?

Aris Bogdaneris: Thanks for the question. So as I mentioned earlier, the commercial growth we expect in the subsequent quarters to match the market growth rates you'll see, and it's on the back of work we started probably 1.5 years ago as we started to rebuild the sales force, particularly in mid-market, starting to add what we call boots on the ground to be able to compete more effectively in high-growth markets in BC, in Quebec. And those RMs now are starting to generate business after a certain period of training. The pipeline has grown substantially, as I mentioned, on loan pipeline and the deposit pipeline. And all you're seeing now is these pipelines materializing.

The paydowns we saw in real estate have stabilized now. So that is also helping the overall balance growth. So taken all together in combination, we're very confident actually that it's just more business, more new client acquisition and more primacy that's driving this growth that we're going to see, and it's going to continue in the quarters to come.

Operator: Your next question comes from the line of Sohrab Movahedi with BMO Capital Markets.

Sohrab Movahedi: Shannon, how many other similar large loans do you have in the non-retail international banking segment? Where does this kind of rank in the order of magnitude from a concentration risk in the portfolio, please?

Shannon McGinnis: Maybe I'll start by just giving a bit of context of this particular file and then maybe just talk about the overall non-retail portfolio and why we're comfortable. So in terms of this specific file, it was essentially driven by company-specific factors rather than broader macroeconomic or trade-related pressures. This is a long-standing client for us, investment-grade rating. It's in Brazil. And so this is a domestically important file within that economy. And that's really what led to the downgrade. So I think that's just an important context because it's not really related to anything that we're seeing systemically in the book.

But if I take a step back and I look at this impairment, I do see it as episodic, and I know we had a few in Q1 as well, but not reflecting deterioration in the underlying portfolio. And there's a few things that I look at that give me comfort around that. First, when I look at our non-retail watch list, that remains below 2% out of our total outstandings. And so that's obviously an indicator of where we have stress in the book. The second thing that I look at is our risk management framework and how we're managing our portfolio. So we have disciplined credit reviews. We have targeted deep dives on higher risk names and sectors.

So as you can appreciate, we're very closely monitoring the portfolio. Importantly, we are talking to our clients each and every day. And so that's giving us real-time visibility into performance and what's happening on the ground. And then our book is overall like very well diversified across industry and geography and within our risk appetite. So when I put that together, I'm not seeing systemic stress across the portfolio. And then maybe just one last comment just on the file in Brazil.

Just to give you context, since we've been in Brazil, prior to this quarter, our impaired PCLs have been around $65 million, just to put in context in terms of how that portfolio, in particular, has performed over an extended period of time.

Sohrab Movahedi: I mean I appreciate that. But one name, you said, I think, cost about 7 basis points of total bank impaired PCLs. I'm just trying to get a sense of how many other similar sized names you would have in Brazil.

Shannon McGinnis: Maybe I'll give a bit more details on the Brazil portfolio. And I think -- just when I think about exposures, and I'll go back to this was an investment-grade account. So when you think about where we typically have higher exposures, it would be in those more highly graded companies. On this particular file as well, I think it's also important just to comment that we were in a large kind of banking group on this particular exposure, and we're taking, I'd say, a reasonable hold. So our exposure was less than 5% of the total amount outstanding. When I look at the Brazil portfolio, it is a very selective and deliberate corporate franchise for us.

And when I look at what's in that portfolio, these are high-quality borrowers across strategic international corporates and leading players in the Brazilian economy. We have done a deep dive on the portfolio. You can probably appreciate that, and it really has reinforced our confidence in the quality of the book and absence of similar stress within that particular portfolio. So again, we have exposures that are very much driven by the risk, and we're quite comfortable with where those sit. But Brazil as a book, we're quite comfortable with.

Sohrab Movahedi: So a plus or minus 7 basis points to 10 basis points impaired kind of surprise is within your tolerance?

Shannon McGinnis: I think when you look at a corporate portfolio, you do from time to time, see what I would call a fallen angel. And I would put that in this category. And we do not expect to see those frequently. And I would say we haven't seen those frequently. And again, back to this particular portfolio in the last, I guess, more than 15 years, we've had one.

Operator: Your next question comes from the line of Ebrahim Poonawala with Bank of America.

Ebrahim Poonawala: I guess maybe, Scott, just wanted to double-click on like your optimism on the Canadian economy next year. From what we understand, the government actions probably kick in sometime late next year in terms of having a real impact and then you could have a multiyear investment cycle if all of that plays itself out. In the near term, you have a challenged consumer, CUSMA uncertainty. Just round that out for us as we think about the macro-outlook for this group where -- and for Scotia, as you think about the next 6 to 12 months, where is the optimism coming from? Is it just the tone at the top has already led to businesses making investment hiring decisions?

Like what are the markers that you're looking for that give you that optimism outside of the messaging.

L. Thomson: Yes. Sure. Thanks, Ebrahim. So I guess a couple of things. One is we're an oil exporting nation. So right now, and you saw this in the budget, when you have oil at this type of prices, that is very beneficial for the overall Canadian economy. And that allows fiscal stimulus -- significant fiscal stimulus by the Canadian government to support some of the provinces that will be impacted either by CUSMA or affordability issues. And you saw that in the most recent budget. You've actually seen that in the HST rebate that has gone about.

And if you talk to people on the ground with this HST rebate, it's actually having an impact on real estate in Ontario in particular. So I guess that's one point. I think the second point is you have seen a significant change in tone from international investors to Canada. And they would not underestimate an impact of something like a Shell acquisition of ARC, where over the last 15 years, and I've lived this, you've seen a lot of foreign money leave Canada. And now you have a lot of foreign money looking at Canada for a foreign direct investment. And I would say that also includes the pension funds in Canada.

I think pension funds in Canada historically looked outside of the borders. Now I think they're increasingly looking inside of the borders. And when you look at the agenda from the Prime Minister around whether it's the grand bargain out in Western Canada with pipelines and reduced emissions through carbon capture or airport privatization, which is increasingly talked about, I do think you're going to see uses of capital in the country. And then the third piece I would say is CUSMA. I think it's become increasingly apparent to everybody that Canada, U.S. and Mexico need each other. And CUSMA is not something that's going to be ripped up.

I mean the business community kind of has appreciated that now, which is a significant difference than a year ago and that it may continue to evolve and there may be tariffs on specific sectors, and there may be some industries that are impacted. But ultimately, I think it's very clear that this regional trading block is increasingly important to the U.S. as opposed to unimportant. And so I think you'll continue to see business community get more certainty in that regard. So I'm not saying that there's no pressure, particularly in some provinces. You saw the unemployment rate pick up a little bit in Quebec. But similarly, you've seen real strength in Alberta.

And I do think if you look at our economists, who I think is the best economist on the street, he's highlighting an improved outlook in Canada next year, an improved unemployment rate. And as Shannon said, probably a little bit later than what we thought at the start of the year, but nevertheless, I think pretty positive from my perspective.

Ebrahim Poonawala: Got it. So your economists must feel pretty good about life after that praise on the call. Second question, Scott, in your prepared remarks, you said when you're addressing capital tuck-in acquisitions. So 2 questions. One, at these valuations, do you still want to lean into buybacks the way you have over the last 6 to 12 months? Or do you sort of become more opportunistic? And give us a sense so that the Street is not surprised what a tuck-in deal would look like?

L. Thomson: Yes, sure. So on the -- I mean, the first use of capital is organic, and you're seeing our tech spend increase pretty significantly as we continue down this AI journey. So that's the first use of capital for us. The second would be share buybacks. You've seen what we've done over the last year. I would expect that to remain consistent going forward. And I say that because of the valuation gap between us and our peers, which will narrow over time. And so we should take advantage of that while we're in this position. So we'll continue to do that.

As we've highlighted before, I think pretty transparently, there's some capabilities in Travis' business that we need to address, particularly around mortgage capital markets. It would be nice to get some FDIC insurance. And so if we could find something small to help that mortgage capital market business, which actually really has performed well over the last year, you're starting to see it through the numbers. If we could do something to get FDIC insurance, get some more sticky deposits that allowed us to fully capitalize on that opportunity, we would do something in that regard.

And similarly, in Jacqui's business, having a U.S. offshore booking point for our Mexican business is growing at 25% and the Canadian business is growing 25%, I think that would be helpful. When I say tuck-in, what's the size? I don't know, think $200 million, $300 million, $400 million. I mean we're not talking about billions of dollars here. We're talking about tuck-in. And frankly, I would like to do that sooner rather than later because I think the opportunity in those 2 businesses is so material.

Operator: That does conclude our question-and-answer session. I will now turn the conference back over to Raj Viswanathan for closing comments.

Rajagopal Viswanathan: Thank you. On behalf of the entire management team, I want to thank everyone for participating in our call today, and we look forward to speaking to you again at our Q3 call in August. Have a wonderful day.

Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.

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