Investor Presentation - First Quarter 2019 - Seeking Alpha
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Investor Presentation First Quarter 2019
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Our public communications often include oral or written forward-looking Bank’s business infrastructure; unexpected changes in consumer spending and
statements. Statements of this type are included in this document, and may be saving habits; technological developments; fraud by internal or external parties,
included in other filings with Canadian securities regulators or the U.S. Securities including the use of new technologies in unprecedented ways to defraud the Bank
and Exchange Commission, or in other communications. All such statements are or its customers; increasing cyber security risks which may include theft of assets,
made pursuant to the “safe harbor” provisions of the U.S. Private Securities unauthorized access to sensitive information or operational disruption; anti-money
Litigation Reform Act of 1995 and any applicable Canadian securities legislation. laundering; consolidation in the financial services sector in Canada and globally;
Forward-looking statements may include, but are not limited to, statements made competition, both from new entrants and established competitors; judicial and
in this document, the Management’s Discussion and Analysis in the Bank’s 2018 regulatory proceedings; natural disasters, including, but not limited to,
Annual Report under the headings “Outlook” and in other statements regarding earthquakes and hurricanes, and disruptions to public infrastructure, such as
the Bank’s objectives, strategies to achieve those objectives, the regulatory transportation, communication, power or water supply; the possible impact of
environment in which the Bank operates, anticipated financial results (including international conflicts and other developments, including terrorist activities and
those in the area of risk management), and the outlook for the Bank’s businesses war; the effects of disease or illness on local, national or international economies;
and for the Canadian, U.S. and global economies. Such statements are typically and the Bank’s anticipation of and success in managing the risks implied by the
identified by words or phrases such as “believe,” “expect,” “anticipate,” “intent,” foregoing. A substantial amount of the Bank’s business involves making loans or
“estimate,” “plan,” “may increase,” “may fluctuate,” and similar expressions of otherwise committing resources to specific companies, industries or countries.
future or conditional verbs, such as “will,” “may,” “should,” “would” and “could.” Unforeseen events affecting such borrowers, industries or countries could have a
material adverse effect on the Bank’s financial results, businesses, financial
By their very nature, forward-looking statements involve numerous assumptions, condition or liquidity. These and other factors may cause the Bank’s actual
inherent risks and uncertainties, both general and specific, and the risk that performance to differ materially from that contemplated by forward-looking
predictions and other forward-looking statements will not prove to be accurate. Do statements. For more information, see the “Risk Management” section of the
not unduly rely on forward-looking statements, as a number of important factors, Bank’s 2018 Annual Report.
many of which are beyond the Bank’s control and the effects of which can be
difficult to predict, could cause actual results to differ materially from the estimates Material economic assumptions underlying the forward-looking statements
and intentions expressed in such forward-looking statements. These factors contained in this document are set out in the 2018 Annual Report under the
include, but are not limited to: the economic and financial conditions in Canada headings “Outlook”, as updated by quarterly reports. The “Outlook” sections are
and globally; fluctuations in interest rates and currency values; liquidity and based on the Bank’s views and the actual outcome is uncertain. Readers should
funding; significant market volatility and interruptions; the failure of third parties to consider the above-noted factors when reviewing these sections. The preceding
comply with their obligations to the Bank and its affiliates; changes in monetary list of factors is not exhaustive of all possible risk factors and other factors could
policy; legislative and regulatory developments in Canada and elsewhere, also adversely affect the Bank’s results. When relying on forward-looking
including changes to, and interpretations of tax laws and risk-based capital statements to make decisions with respect to the Bank and its securities,
guidelines and reporting instructions and liquidity regulatory guidance; changes to investors and others should carefully consider the preceding factors, other
the Bank’s credit ratings; operational (including technology) and infrastructure uncertainties and potential events. The forward-looking statements contained in
risks; reputational risks; the risk that the Bank’s risk management models may not this document are presented for the purpose of assisting the holders of the Bank’s
take into account all relevant factors; the accuracy and completeness of securities and financial analysts in understanding the Bank’s financial position and
information the Bank receives on customers and counterparties; the timely results of operations as at and for the periods ended on the dates presented, as
development and introduction of new products and services; the Bank’s ability to well as the Bank’s financial performance objectives, vision and strategic goals,
expand existing distribution channels and to develop and realize revenues from and may not be appropriate for other purposes. Except as required by law, the
new distribution channels; the Bank’s ability to complete and integrate acquisitions Bank does not undertake to update any forward-looking statements, whether
and its other growth strategies; critical accounting estimates and the effects of written or oral, that may be made from time to time by or on its behalf.
changes in accounting policies and methods used by the Bank as described in the
Bank’s annual financial statements (See “Controls and Accounting Policies – Additional information relating to the Bank, including the Bank’s Annual
Critical accounting estimates” in the Bank’s 2018 Annual Report) and updated by Information Form, can be located on the SEDAR website at www.sedar.com and
quarterly reports; global capital markets activity; the Bank’s ability to attract and on the EDGAR section of the SEC’s website at www.sec.gov.
retain key executives; reliance on third parties to provide components of the
TABLE OF CONTENTS Scotiabank Overview 4 • Canada’s International Bank 5 • Well-Diversified and Profitable Business 6 • Medium-Term Financial Objectives 7 • Why Invest in Scotiabank? 8 • Increasing Scale, Improving Focus 9 • Track Record of Earnings and Dividend Growth 10 • Strong Capital Generation and Position 11 • Progress in Digital Banking 12 • Corporate Social Responsibility 13 Business Line and Financial Overview 14 • Q1 2019 Financial Performance 15 • Canadian Banking 16 • International Banking 23 • Global Banking and Markets 26 • Credit Performance by Business Lines 28 Treasury and Funding 29 • Funding Strategy 30 • Wholesale Funding Composition 31 • Deposit Overview 32 • Wholesale Funding Utilization 33 • Liquidity Metrics 34 Appendix 1: Bail-in and TLAC 35 Appendix 2: Canadian Housing Market 42 Appendix 3: Key Market Profiles 50 Appendix 4: Covered Bonds 62 Appendix 5: Additional Information 66 Contact Information 68
Scotiabank Overview
Canada’s International Bank
Top 10 Bank in the Americas1,2 FY Change
Scotiabank3 Q1 2019 Y/Y
Americas Revenue $7.6B +7%
7th largest bank by assets1
Net Income4 $2.3B +4%
10th largest bank by market capitalization1
Return on Equity 13.7% (260bps)
Europe Operating Leverage4 (4.3%) n.a.
Productivity Ratio 54.1% 220bps4
Total Assets $1.0T 12.0%
Ranking by Market Share5
Canada #3
USMCA U.S.A. Top 10 Foreign Bank
Full-Service Asia Mexico #6
Canada • Mexico Peru #3 #4
PAC in PAC
Peru • Chile Chile #3
Colombia • Caribbean
Uruguay Colombia #5
Wholesale Operations
USA • UK • Hong Kong Earnings by Other
Singapore • Australia Geography3,6,7
Ireland • China • Brazil C&CA
7%
South Korea • Malaysia 9%
India • Japan
PAC
50% Canada
2018 Bank of the Year
26%
Latin America and the
Caribbean by LatinFinance
8%
1 Source: Bloomberg 2/24/19; 2 By assets and market capitalization; 3 Figures adjusted for Acquisition-related costs, including integration and U.S.A
amortization costs related to current acquisitions, and amortization of intangibles related to current and past acquisitions; 4 Exclude employee
benefits re-measurement credit of $203MM pre-tax, $150MM after-tax in Q1/18; 5 Ranking based on market share in loans as of December 2018
for PACs, as of November 2018 in Canada for publically traded banks; 6 For the three months ended January 31, 2019; 7 Excluding Corporate
Americas (>90%)
adjustments
5
LEADING BANK IN THE AMERICASWell-Diversified and Profitable Business
Diversified by business and by geography, creating stability and lowering risk
Earnings by Business1,2,3 Earnings by Geography1,2,3
Canadian
Banking Other
Canadian
Banking Wealth 49% International
C&CA 7%
10% Colombia 9%
Global Canadian 2%
Banking and Banking
Markets P&C Chile
15% EARNINGS MIX 39% 6%
EARNINGS MIX Canada
$2.2B Peru $2.2B 50%
10%
Mexico
International
Banking 8% U.S.
36% 8%
18.4%
14.9% 13.7%
11.5%
Canadian Banking International Banking Global Banking and All Bank
Markets
1 For the three months ended January 31, 2019; 2 Adjusted for Acquisition-related costs, including integration and amortization costs related to current acquisitions, and amortization of intangibles related to current and past acquisitions
3 Excluding Corporate adjustments
6
GREATER SCALE, GREATER FOCUSMedium-Term Financial Objectives1
Q1/19 RESULTS2
METRICS OBJECTIVES
(Y/Y Change)
ALL BANK
EPS Growth3 7%+ -
ROE 14%+ 13.7%
Operating Leverage3 Positive (4.3%)
Capital Strong Levels 11.1%
Dividend Payout Ratio 40%-50% 48.5%
BUSINESS LINE
CANADIAN BANKING
Net Income Growth 7%+ (2%)
Productivity RatioWhy Invest in Scotiabank?
Canada’s international bank • Unique footprint that provides sustainable and growing earnings
and dividends
and a top 10 bank in the
• Strong balance sheet, capital and liquidity ratios
Americas
• Attractive dividend yield and long-term shareholder returns
• Leading bank in the Pacific Alliance growth markets of Mexico,
Peru, Chile and Colombia – a region of 230 million people with
Diversified exposure to high an under-banked market and a median age of 29
quality growth markets • Earnings momentum in personal & commercial, wealth, and
wholesale businesses
• Gaining market share in key markets of Canada and the Pacific
Alliance countries
Increasing scale and market • Top 3 bank in Canada, Chile and Peru
share in key markets • Increasing scale in Wealth and Pacific Alliance with $7B of
strategic acquisitions in 2018
• Approximately 80% of earnings from core personal and commercial
banking businesses
Improving quality of earnings • Exited over 20 non-core countries and businesses since 2014
while reducing risk profile • Strong Canadian risk management culture – building stronger
capabilities for AML, cyber and reputational risk
• Leading levels of technology investment supports digital banking
Enhancing competitive strategy. Increasing digital sales adoption with clear targets
advantage in technology • Well positioned in the Pacific Alliance to leverage technology, risk
and talent management and funding versus local and global competitors
• Named to Top 25 ”World’s Best Workplaces” (2018)
8Increasing Scale, Improving Focus1
Gaining scale in key markets to drive earnings growth, improve earnings quality and reduce risk
2013
Gaining Market Share (Total Loans) Increasing Scale with Strategic Acquisitions (2017-2019)
2018
0 2 4 6 8 10 12 14 16 18 20 Increases wealth management assets to $230B.
Canada
Adds 110,000 potential primary customers.
Canada
Chile Doubles market share. Creates 3rd largest bank.
Mexico
Peru Creates #2 bank in credit cards.
Chile
Colombia Creates market leader in credit cards.
Peru
Dominican
Colombia Doubles customer base. Creates 4th largest bank.
Republic
Improving Earnings Quality Reducing Risk Profile
Between 2013 and 2019, exited
57 20 countries with either low
countries 37 returns, small scale or higher
countries
operational risk:
Turkey • Russia • Haiti • Egypt
Taiwan • UAE • plus 13 others
Increased wealth AUM by 37% to $282B in 2018.
2013 2019 Exited 3 non-core businesses
Targeting earnings contribution to All-Bank earnings
from
• Reduced wholesale funding (% of assets) from 29.6% to 23.9%
12% to 15%
• Reduced asset exposure in Asia by 21%
1 5-year period 2013-2018
9
INCREASING SCALE, IMPROVING FOCUSStrong Track Record of Earnings and Dividend Growth
Stable and predictable earnings with steady increases in dividends
Earnings per share (C$)1,2 Total shareholder return3
Scotiabank Big 5 peers (ex. Scotiabank)
+9%
CAGR $7.11 16.7%
14.4%
11.8% 12.0% 11.1%
$3.05 8.6%
08 09 10 11 12 13 14 15 16 17 18
5 Year 10 Years 20 Years
Dividend per share (C$)
$3.28
+6%
CAGR
$1.92
08 09 10 11 12 13 14 15 16 17 18
1Reflects adoption of IFRS in Fiscal 2011 2 Excludes notable items for years prior to 2016. For 2016 onwards, results adjusted for acquisition-related costs including Day 1 PCL impact on acquired performing loans, integration and
amortization costs related to current acquisitions and amortization of intangibles related to current and past acquisitions. 3 As of January 31, 2019
10
INCREASING SCALE, IMPROVING FOCUSStrong Capital Generation and Position
Capital levels are well above minimum regulatory requirements. Expect CET1 >11%.
CET1 Ratio
11.1% +28 bps 11.1% 11.2%
-12 bps -9 bps -3 bps -4 bps +10 bps
Q4/18 Internal Capital RWA Impact Pensions Share Other Q1/19 Net Impact of Q1/19 Pro-
Generation (ex. FX) issuance / Including FX Announced Forma
(buybacks) Acquisitions &
(net) Divestitures
Strong Capital Levels
15.3%
14.6% 14.5% 14.3% 14.6%
1.8%
1.9% 1.7% 1.8% 2.1%
1.5%
1.5% 1.4% 1.4% 1.4%
11.2% 12.0% 11.4% 11.1% 11.1%
Q1/18 Q2/18 Q3/18 Q4/18 Q1/19
CET1 Tier 1 Tier 2
11Progress in Digital Banking
Progressing well against 2018 Investor Day digital targets
Digital Retail Sales1 Digital Adoption2 In-Branch Financial Transactions3
+1400bps +700bps -800bps
25 33 33 26
22 29 23
26 20
18
15
11
F2016 F2017 F2018 Q1/19 F2016 F2017 F2018 Q1/19 F2016 F2017 F2018 Q1/19
Goal Goal Goal
>50% >70%Corporate Social Responsibility
Our Priorities
MEMBERSHIPS &
ASSOCIATIONS
Financial Responsible
K now ledg e D iversity Investin g Financing
and in Young Maintaining
Access to Inclu sion People Climate Trust
Finance Chang e
Our Achievements
900,000 3 4 % women $80 Million Joint Lead Manager Achieved
Canadian students in leadership in donations on $1 Billion World recognition on the
participated in positions (VP+) globally in 2018 Bank Sustainable 2018 Dow Jones
Talk With Our Kids globally in 2018 to support the Development Bond Sustainability Index
About Money day communities to support women North America
in 2018 Named as a Top we operate in and youth
100 Company in
2018 by Thomson Internal Carbon
Reuters Diversity & Price set at
Inclusion index $15/tonne CO 2
reinvested in energy
efficiency initiatives
Our Ability
We have We have We have
financial expertise the reach the resources
97,000+ 25 Million+ $998 Billion
employees customers in assets
around the globe
13Business Line and Financial Overview
Q1 2019 Financial Performance
Strong revenue and balance sheet growth
$MM, except EPS Q1/19 Y/Y Q/Q YEAR-OVER-YEAR HIGHLIGHTS
Reported
Net Income $2,247 (4%) (1%) • Adjusted Net Income down 3%2
Diluted EPS $1.71 (8%) - • Excluding pension revaluation benefit,
Revenue $7,604 +7% +2% diluted EPS was in-line with last year
Expenses $4,171 +19% +3%
• Revenue up 7%
Productivity Ratio 54.9% +550bps +30bps
o Mostly relating to acquisitions
Core Banking Margin 2.45% (1bp) (2bps)
PCL Ratio1 47bps +5bps +8bps o Net interest income up 9%
PCL Ratio on Impaired Loans1 47bps +4bps +5bps o Non-interest income up 6%
2
Adjusted2 • Expenses up 18%
Net Income $2,291 (3%) (2%)
o Acquisitions and the prior year’s benefits re-
Diluted EPS $1.75 (6%) (1%) measurement contributed to approximately two-
Expenses $4,110 +18% +4% thirds of the expense growth
Productivity Ratio 54.1% +500bps +80bps o Remaining growth due to technology, regulatory
initiatives, share-based payments, other business
DIVIDENDS PER COMMON SHARE growth expenses
+0.03
+0.03 +0.02
• PCL ratio1 on impaired loans up 4 bps
0.82 0.82 0.85 0.85
0.79
Q1/18 Q2/18 Q3/18 Q4/18 Q1/19
Announced Dividend Increase
1 Provision for credit losses on certain assets – loans, acceptances and off-balance sheet exposures
2 Adjusted for Acquisition-related costs, including integration and amortization costs related to current acquisitions, amortization of intangibles related to current and past acquisitions
15Canadian Banking
Top 3 bank in personal & commercial banking, wealth and insurance in Canada
• Canadian Banking provides a full suite of financial advice and banking solutions, supported by an excellent
customer experience, to Retail, Small Business, Commercial Banking, and Wealth Management customers
Retail Residential
56% Mortgages 61% MEDIUM-TERM FINANCIAL OBJECTIVES
Target2 Q1/191,3,4
AVERAGE Net Income Growth5 7%+ (2%)
REVENUE MIX1 LOAN MIX1
$3.4B $342B
Productivity RatioQ1 2019 Canadian Banking Financial Performance
Strong deposit growth and higher NIM
1
FINANCIAL PERFORMANCE AND METRICS ($MM) YEAR-OVER-YEAR HIGHLIGHTS
Q1/19 Y/Y Q/Q
Reported
• Adjusted Net Income down 2%3
o Lower real estate gains and prior year Interac gain
Revenue $3,415 +3% (1%) reduced net income by 4%
Expenses $1,730 +8% (1%) o Higher PCLs related to one commercial account
PCLs $233 +11% +18% o Includes the impact of acquisitions
Net Income $1,073 (3%) (4%) o Asset and deposit growth, margin expansion
Productivity Ratio 50.6% +200bps (10bps) • Revenue up 3%
Net Interest Margin 2.44% +3bps (1bp) o Includes impact of acquisitions
PCL Ratio2 0.27% +2bps +4bps o Net interest income up 5%
PCL Ratio on Impaired Loans2 0.27% - +5bps
• Loan growth of 4%
Adjusted3
o Business loans up 10%
Expenses $1,709 +7% -
o Residential mortgages up 3%; credit cards up 7%
Net Income $1,089 (2%) (5%)
Productivity Ratio 50.0% +160bps +50bps
• Deposit growth of 9%
o Personal up 7%; Non-Personal up 12%
• NIM up 3 bps
1,3
ADJUSTED NET INCOME ($MM) AND NIM (%)
2.46% 2.45% 2.44%
2.41% 2.43% o Primarily driven by the impact of prior rate increases
• Expenses up 7%3
o Includes impact of acquisitions
1,107 1,022 1,141 1,146 1,089
o Investments in technology and regulatory initiatives
• PCL ratio up 2 bps to 27 bps 2
Q1/18 Q2/18 Q3/18 Q4/18 Q1/19
1 Attributableto equity holders of the Bank
2 Provision for credit losses on certain assets – loans, acceptances and off-balance sheet exposures
3 Adjusted for Acquisition-related costs, including integration and amortization costs related to current acquisitions, and amortization of intangibles related to current and past acquisitions
17Canadian Banking: Retail Exposures
High quality retail loan portfolio: ~93% secured
• Residential mortgage portfolio is high quality
79%
o 42% insured, and the remaining 58% uninsured has a LTV of 55%1 Real Estate
• Market leader in auto loans Secured Lending
o $37 billion auto loan portfolio with 7 OEM relationships (3 exclusive)
o Prime Auto and Leases (~91%)
o Lending tenor has been relatively stable with contractual terms for new
originations averaging 78 months with projected effective terms of 55 DOMESTIC
months RETAIL LOAN
BOOK
• Growth opportunity in credit cards
$287.4B
o $7.4 billion credit card portfolio represents ~3% of domestic retail loan
book and 1.3% of the Bank’s total loan book
o Organic growth strategy focused on payments and deepening customer
relationships
o Upside potential from existing customers: ~80% of growth is from existing
customers (penetration rate mid-30s and trending up versus peers in the
low-40s) 5% 13%
o Strong risk management culture with specialized credit card teams, Unsecured
Automotive
customer analytics and collections focus
3%
Credit Cards
1 LTV calculated based on the total outstanding balance secured by the property. Property values indexed using Teranet HPI data.
18Canadian Banking: Residential Mortgages
High quality, diversified portfolio
• Residential mortgage portfolio of $216 billion: 42% insured; LTV 55% on the uninsured book1
o Mortgage business model is “originate to hold”
o New originations2 had average LTV of 64% in Q1/19
o Majority is freehold properties; condominiums represent approximately 13% of the portfolio
• Three distinct distribution channels: All adjudicated under the same standards
o 1. Broker (~59%); 2. Branch (~20%); and 3. Mobile Salesforce (~21%)
CANADIAN MORTGAGE PORTFOLIO: $216B (SPOT BALANCES AS AT Q1/19, $B)
$109.2 Freehold - $188B Condos - $28B
42%
$12.6 Insured
Total
Portfolio:
$216 billion
$96.6
$39.2
$9.5 $30.8
$3.6
$16.0
$29.8 $27.2 $1.8 $11.3 $9.5
$14.2 $11.1
$0.2
$8.8 $0.7 58%
Uninsured
Ontario BC & Territories Alberta Quebec Atlantic Provinces Manitoba &
Saskatchewan
% of
50.5% 18.1% 14.3% 7.4% 5.3% 4.4%
portfolio
1 LTV calculated based on the total outstanding balance secured by the property. Property values indexed using Teranet HPI data
2 New originations defined as newly originated uninsured residential mortgages and have equity lines of credit, which include mortgages for purchases
refinances with a request for additional funds and transfer from other financial institutions
19Canadian Banking: Residential Mortgages (continued)
High quality portfolio, lower originations in Vancouver and Toronto
NEW ORIGINATIONS UNINSURED LTV* DISTRIBUTION
Growth/Change
Q1/18 Q4/18 Q1/19 Y/Y
Canada
GVA Total Originations ($B) 10.3 10.5 9.3 -10%
59% Uninsured LTV 64% 63% 64% -
GTA
63%
BC & GTA
Territories Total Originations ($B) 3.4 3.2 3.2 -6%
61% Uninsured LTV 63% 62% 63% -
Atlantic
Prairies 67% Provinces
ON QC GVA
64% 66% 68%
Total Originations ($B) 1.5 1.1 1 -33%
Uninsured LTV 62% 59% 59% -3%
*Average LTV ratios for our uninsured residential mortgages originated during the quarter
FICO® DISTRIBUTION – CANADIAN UNINSURED PORTFOLIO1
Average FICO® Score
Canada 787
56%
GTA
GVA
789
791
• 788
FICO is a registered trademark of Fair Isaac Corporation
1 FICO ® distribution for Canadian uninsured portfolio based on score ranges at origination
20Automotive Finance
Canada’s leader in automotive finance
• Provide personal and commercial dealer financing solutions, in partnership with seven leading global
automotive manufacturers in Canada
• Portfolio grew 5%1 year-over-year
o Personal up 4%, Commercial up 8%
Exclusive Relationships
Commercial
13%
MAZDA VOLVO JAGUAR LANDROVER
AVERAGE
ASSET MIX
Near-Prime 8%
Retail $42.4B1 Semi-Exclusive Relationships*
100% Secured 79%
Prime Retail
HYUNDAI CHRYSLER GM TESLA
* 1 to 2 other financial institutions comprise Semi-Exclusive relationships
Market Share2
Prime Retail Market Share3 Near-Prime Retail Market Share4 Commercial Floorplan Market Share5
39% 30% 30%
61%
70% 70%
1For the three months ended October 31, 2018; 2 Data as at June 2018; 3 CBA data, includes BMO, CIBC, HSBC, National Bank, RBC, Scotiabank, TD; 4 DealerTrack Portal data, includes all Near-Prime Retail providers on DealerTrack Portal; 5 Includes BMO, CIBC, RBC,
Scotiabank, TD, HSBC, Canadian Western Bank, Laurentian Bank 6 2018 amounts are based on IFRS 9. Prior period amounts were based on IAS 39; 7 Provision for credit losses on certain assets – loans, acceptances and off-balance sheet exposures
21Tangerine
Canada’s #1 Digital Bank
STRATEGIC FOCUS:
Simplicity
• Industry-leading customer service (NPS) • Simple, market-leading products that appeal to value-
• 97% digital transactions conscious and tech-savvy Canadians
• Seamless digital client experience
• 96% digital on-boarding
• Highly competitive rates, simple products
• 90% digital sales
• Velocity
• Enhanced self-service options, adding speed & agility
• Nimble, modern platform supporting rapid development cycles
~50% multiple-product clients • Low cost, scalable business model
Primary clients +18% Y/Y Partnerships
• Accelerating momentum through the Toronto Raptors
~50% New Clients via Referrals • Deepening client relationships by introducing SCENE Loyalty
• Strong partnership with Scotiabank
Modern Platform Speed & Agility Client-Driven Innovation Unique ‘Orange’ Culture Award Winning Approach
Scalable: Rapid Deployments: Incubator: Team Tangerine: Third-Party Recognition:
Nimble, low cost systems Agile best practices enable Identify, explore, and pilot new Our unique culture and J.D. Power Customer Satisfaction
provide a holistic client view. quick & efficient new product & technologies and solutions to lean team are an essential seven years in a row, Finovate “Best
feature delivery. meet evolving Client needs. part of how we deliver. in Class” for digital experiences.
22International Banking
Leading diversified personal and commercial franchise in high quality growth markets
• International Banking operates primarily in Latin America, the Caribbean and Central America with a full range
of personal and commercial financial services, as well as wealth products and solutions
Asia Business
4% 51% Loans MEDIUM-TERM FINANCIAL OBJECTIVES
REVENUE1 Credit
LOAN MIX1 Target2 Q1/193,4
25%
$3.3B 71% Cards
6%
$149B
C&CA Latin Net Income Growth5 9%+ 18%
16%
America
Personal 27%
25%
24% Peru Loans Productivity RatioQ1 2019 International Banking Financial Performance
Strong performance across the Pacific Alliance
1, 2 2
FINANCIAL PERFORMANCE AND METRICS ($MM) YEAR-OVER-YEAR HIGHLIGHTS
Q1/19 Y/Y Q/Q
Reported • Adjusted Net Income up 18%5
Revenue $3,331 +22% +6% o Includes impact from alignment of reporting period in
Expenses $1,742 +20% +1% Peru which contributed 6%
PCLs $470 +37% +14% o Strong asset and deposit growth across the Pacific
Net Income $782 +16% +10% Alliance
Productivity Ratio 52.3% (100bps) (260bps)
Net Interest Margin 4.52% (14bps) -
• Revenues up 22%
PCL Ratio3 1.28% +2bps +23bps o Includes impact of acquisitions
PCL Ratio on Impaired Loans3 1.23% (2bps) +3bps o Pacific Alliance up 31% includes impact of acquisitions
Adjusted5
Expenses $1,702 +18% +2%
• Loans up 29%
Net Income $805 +18% +8% o Pacific Alliance up 44% includes impact of Chile and
Colombia acquisitions
Productivity Ratio 51.1% (180bps) (190bps)
1,5
• NIM down 14 bps
ADJUSTED NET INCOME ($MM) AND NIM5 (%)
o Driven by the business mix impact of acquisitions (BBVA
4.66% 4.74% 4.70% Chile)
4.52% 4.52%
• Expenses up 18%5
o Includes impact of acquisitions
805
683 715 746 o Business volume growth and inflation
675
o Productivity ratio improvement of 180bps5
Q1/18 Q2/18 Q3/18 Q4/18 Q1/19 • Positive operating leverage of 4.2%5
• PCLs ratio reflects stable credit quality
1 Attributable to equity holders of the Bank
2 Y/Y and Q/Q growth rates (%) are on a constant dollars basis, while metrics and change in bps are on a reported basis
3 Provision for credit losses on certain assets – loans, acceptances and off-balance sheet exposures
4 Net Interest Margin is on a reported basis
5 Adjusted for Acquisition-related costs, including integration and amortization costs related to current acquisitions, and amortization of intangibles related to current and past acquisitions
24Scotiabank in the Pacific Alliance Countries
Well positioned for long-term growth in large, growing market
Key Highlights of Pacific Alliance countries (PACs)
Population1,2 • 230 million. 6.2x Canada’s population. Projected growth outpaces Canada, other EM3 and G7 countries; median age4 of 29
Government
Presidential Elections • No elections scheduled until 2021
Financial Stability • All sovereign credit ratings in IG category with central banks’ policy targeting inflation since 1999
Economy
GDP1 • 9th largest economy in the world
Exports5 • 64% of exports related to manufacturing
Trade Partners5 • US, China and Canada are the PACs’ largest trading partners, representing 72% of exports
Business Environment
HDI Score Rank6 • Rank “High” or “Very High” (United Nations, 2017)
Banking Penetration1 • Under-banked with average banking penetration at ~50% compared to over 90% in Canada and the U.S.
Foreign Direct Investment1 • FDI averaging 3.2% of GDP compared to 1.7% in Canada and the U.S.
PACs
Mexico Peru Chile Colombia (Total/Average)
Scotiabank Market Share7 7.1% 17.7% 14.0% 6.2% 11.5%
Market Share Ranking7 6th 3rd 3rd 5th 4th
Commercial, personal Commercial, personal Credit Cards and
Strengths Auto and mortgages Well positioned
and Mortgages and Mortgages personal
Average Total Loans8(C$B) $28.1 $20.5 $45.6 $12.2 $106.3
Revenue9(C$B) $0.6 $0.6 $0.6 $0.4 $2.2
Net Income after NCI9,10(C$MM) $182 $212 $135 $39 $567
ROE9,10 25% 28% 9% 10% 16%
# of Employees11,12 13,214 11,080 9,257 9,689 43,240
1 Source: World Bank 2017 8 Average loan balances over Q1/19
2 Population growth: World Bank DataBank 2017-2022 9 For the quarter ended January 31, 2019
3 EM countries include: Argentina, Brazil, China, Greece, India, Indonesia, Poland, South Africa, Turkey, and Russia
4 Source: The World Factbook, CIA 2017
10 Earnings adjusted for acquisition –related costs including integration and amortization costs related to current
5 Source: United Nation Conference on Trade and Development (UNCTAD) 2017; Organization for Economic Co- acquisitions, and amortization of intangibles related to current and past acquisitions
11 Employees are reported on a full-time equivalent basis
operation and Development (OECD) 2016 12 As of January 31, 2019
6 Human Development Index. Source: United Nations Development Programme (UNDP) 2017. For more information,
13 May not add due to rounding
please refer to: http://hdr.undp.org/sites/default/files/2018_human_development_statistical_update.pdf
7 Ranking based on publicly traded banks by total loans market share as of December 2018
25Global Banking and Markets
Second-largest Canadian wholesale banking and capital markets business serving global clients
• Full-service wholesale bank in Canada, the United States and Latin America. Offers a range of products and
services in select markets in Europe, Asia and Australia.
Business
Canada Banking Equities
34%
Asia Global
6% Other
42% Equities
10%
Europe 10% 16% 60%
GEOGRAPHIC REVENUE
TRADING RELATED
REVENUE1 BY BUSINESS LINE1
REVENUE (TEB)1,2
$1.1B $1.1B 14%
$479MM
Commodities 24%
24%
42% 18%
US FICC Foreign
Interest Rate
Exchange
& Credit
STRATEGIC OUTLOOK
• Up-tiering lending relationships, expanding our Investment Banking capabilities in key markets, increasing our investment in
the Pacific Alliance to become a leader in local and cross-border banking and capital markets
• Continued strong growth in deposits, improved corporate lending and investment banking results to absorb required
regulatory and technology investments
1For the 3 months ended January 31, 2019; 2 All-Bank trading-related revenue
26Q1 2019 Global Banking and Markets Financial Performance
Market volatility negatively impacted results
1
FINANCIAL PERFORMANCE AND METRICS ($MM) YEAR-OVER-YEAR HIGHLIGHTS
Q1/19 Y/Y Q/Q • Reported Net Income down 26%
Revenue $1,075 (10%) -
• Revenue down 10%
Expenses $645 +13% +17% o Non-interest revenue down by 12% due to lower fixed
PCLs ($16) N/A N/A income trading, partly offset by higher equity trading
and fee income
Net Income $335 (26%) (20%)
Productivity Ratio 60.0% +1200bps +850bps
• NIM down 23 bps
o Mainly driven by lower lending margins and loan
Net Interest Margin 1.80% (23bps) +8bps origination fees
PCL Ratio2 (0.07%) (3bps) +2bps • Loans up 15%
PCL Ratio on Impaired Loans2 (0.01%) - +6bps o Strong corporate growth across Canada and the U.S.
• Expenses up 13%
1
NET INCOME AND ROE o Higher regulatory and technology investments
16.2% 16.9% 15.6% 15.3% • PCL ratio2 improved by 3 bps to (7 bps)
11.5%
o Improving credit quality in oil and gas portfolio
447
454 441 416
416
335
Q1/18 Q2/18 Q3/18 Q4/18 Q1/19
1 Attributable to equity holders of the Bank
2 Provision for credit losses on certain assets – loans, acceptances and off-balance sheet exposures
27Credit Performance by Business Lines
Stable underlying credit
Q1/18 Q2/18 Q3/18 Q4/18 Q1/19
(As a % of PCLs on PCLs on PCLs on Total PCLs on PCLs on
Total Total Total Total
Average Net Loans & Impaired Impaired Impaired PCLs Impaired Impaired
Acceptance) Loans
PCLs PCLs PCLs PCLs
Loans Loans (adj) Loans Loans
Canadian Banking
Retail 0.29 0.28 0.28 0.28 0.25 0.24 0.25 0.25 0.28 0.28
Commercial 0.11 0.08 0.09 0.09 (0.04) 0.06 0.06 0.15 0.21 0.23
Total 0.27 0.25 0.25 0.25 0.21 0.21 0.22 0.23 0.27 0.27
International Banking
Retail 2.28 2.39 2.26 2.16 2.36 2.253 2.38 2.21 2.33 2.36
Commercial 0.28 0.201 0.55 0.341 0.38 0.311, 3 0.07 (0.06) 0.19 0.26
Total 1.252 1.261, 2 1.382 1.221, 2 1.33 1.234 1.20 1.05 1.23 1.28
Global Banking and Markets (0.01) (0.04) 0.02 (0.05) (0.06) (0.05) (0.07) (0.09) (0.01) (0.07)
All Bank 0.43 0.42 0.46 0.42 0.41 0.40 0.42 0.39 0.47 0.47
1 Excludes provision for credit losses on debt securities and deposit with banks
2 Not comparable to prior periods, which were net of acquisition benefits
3 On an adjusted basis; adjusted for Day 1 PCLs from acquisitions
28Treasury and Funding
Funding Strategy
Flexible, well-balanced and diversified funding sources
Funding Strategy • SHORT-TERM FUNDING
o USD 25 billion Bank CP program
o USD 3 billion Subsidiary CP program
• Build customer deposits in all of our key markets o CD Programs (Yankee/USD, EUR, GBP, AUD, HKD)
• Continue to manage wholesale funding (WSF) • TERM FUNDING & CAPITAL
and focus on longer term funding
Canadian Dollar
o Endeavouring to fund asset growth through deposits
o CAD 36 billion global registered covered bond program
• Achieve appropriate balance between cost and (uninsured Canadian mortgages)
stability of funding o Canada Mortgage Bonds and Mortgage Back Securities
o CAD 15 billion debt & equity shelf
(senior/sub debt, prefs, common shares)
o Maintain pricing relative to peers
o CAD 15 billion START ABS program (indirect auto loans)
o
• Diversify funding by type, currency, program, CAD 7 billion Halifax ABS shelf (unsecured lines of credit)
o CAD 6 billion Principal at Risk (PAR) Note shelf
tenor and markets
o CAD 5 billion Trillium ABS shelf (credit cards)
• Pre-fund at least one quarter ahead, market Foreign Currency
permitting
o USD 40 billion debt & equity shelf
• Centralized funding strategy and associated risk (senior/sub debt, prefs, common shares)
management o USD 20 billion EMTN shelf
o AUD 8 billion Australian MTN program
o USD 7.5 billion Singapore MTN program
30Wholesale Funding Composition
Wholesale funding diversity by instrument and maturity1,6,7
1%
Bail-inable Notes MATURITY TABLE
34% (CANADIAN DOLLAR EQUIVALENT, $B)
(EX-SUB DEBT)
Senior Notes
2%
Asset-Backed $26
Securities $24
$23
$4
12%
Covered Bonds
$1 $4
$3 $11
$19
$17
Asset-Backed $3
Commercial Paper3 $2
$247B $1
3% $1 $11
9%
Mortgage
$21
$17 $6
Securitization4 $15 $15
$12
34% 4% $5
Bearer Deposit Notes,
Commercial Paper &
Short-Term Certificate
1%
Deposits from Banks2
Subordinated Debt5
< 1 Year 2 Years 3 Years 4 Years 5 Years 5 Years >
of Deposits
Senior Debt ABS Covered Bonds
1 Excludes repo transactions and bankers acceptances, which are disclosed in the contractual maturities table in the MD&A of the Interim Consolidated Financial Statements. Amounts are based on remaining term to maturity.
2 Only includes commercial bank deposits raised by Group Treasury.
3 Excludes asset-backed commercial paper (ABCP) issued by certain ABCP conduits that are not consolidated for financial reporting purposes.
4 Represents residential mortgages funded through Canadian Federal Government agency sponsored programs. Funding accessed throu gh such programs does not impact the funding capacity of the Bank in its own name.
5 Although subordinated debentures are a component of regulatory capital, they are included in this table in accordance with EDTF recommended disclosures.
6 As per Wholesale Funding Sources Table in MD&A, as of Q1/19.
7 May not add to 100% due to rounding.
31Deposit Overview
Stable trend in personal & business and government deposits
PERSONAL DEPOSITS PERSONAL DEPOSITS
(SPOT, CANADIAN DOLLAR EQUIVALENT, $B)
$222 • Important for both relationship purposes
$211 and regulatory value
$196
$199 $198
$201 $215 • Good momentum with 4.4% CAGR over
$195
$202 $204 the last 3 years
$199 $200
$193 3Y CAGR – 4.4%
Q3/16
Q1/16
Q2/16
Q4/16
Q1/17
Q2/17
Q3/17
Q4/17
Q1/18
Q2/18
Q3/18
Q4/18
Q1/19
BUSINESS & GOVERNMENT DEPOSITS1 BUSINESS & GOVERNMENT
(SPOT, CANADIAN DOLLAR EQUIVALENT, $B)
$179
$197
• Gaining share of deposits through
$172 $170 $197 leveraging of relationships
$156 $161 $156
$169
$174
$168 • 8.2% CAGR over the last 3 years
$155
$149
3Y CAGR – 8.2%
• Focusing on operational, regulatory
friendly deposits
Q3/16
Q1/16
Q2/16
Q4/16
Q1/17
Q2/17
Q3/17
Q4/17
Q1/18
Q2/18
Q3/18
Q4/18
Q1/19
1 Calculated as Bus& Gov’t deposits less Wholesale Funding, adjusted for Sub Debt
32Wholesale Funding Utilization
Managing reliance on wholesale funding and growing deposits
WHOLESALE FUNDING / TOTAL ASSETS REDUCED RELIANCE ON
WHOLESALE FUNDING
27.7% • Operating in line with peers
o Reduced reliance on wholesale funding
25.2% o Sustained focus on deposits as an alternate to wholesale
23.8% funding
23.4% 23.9%
Q4/15
Q1/16
Q2/16
Q3/16
Q4/16
Q1/17
Q2/17
Q3/17
Q4/17
Q1/18
Q2/18
Q3/18
Q4/18
Q1/19
MONEY MARKET WHOLESALE FUNDING / FOCUS ON TERM FUNDING
TOTAL WHOLESALE FUNDING
• Reduced reliance on money market
funding and termed out funding book
o Q1/19 increase is temporary and expected to revert
39.9% to previous levels
38.7% 38.3% 38.4%
37.5% 37.4% 36.8%
35.6% 36.0%
Q1/17
Q2/17
Q3/17
Q4/17
Q1/18
Q2/18
Q3/18
Q4/18
Q1/19
33Liquidity Metrics
Well funded Bank with strong liquidity
• Liquidity Coverage Ratio (LCR)
o Stable and sound management of liquidity
o Net Stable Funding Ratio (NSFR) implementation date is January 2020
132%
128% 128%
127% 127%
126%
125% 125% 125%
124%
Q4/16 Q1/17 Q2/17 Q3/17 Q4/17 Q1/18 Q2/18 Q3/18 Q4/18 Q1/19
• High Quality Liquid Assets (HQLA)
o Efficiently managing LCR and optimizing HQLA
$158
$140 $144
$136 $138
$128 $132
$125 $127
$123
Q4/16 Q1/17 Q2/17 Q3/17 Q4/17 Q1/18 Q2/18 Q3/18 Q4/18 Q1/19
34Appendix 1: Bail-in and TLAC
Overview of Canadian Bail-in Regulations
Introduction Bail-In Basics
• In effect since September 23, 2018 • A statutory conversion power that allows for the
permanent conversion of eligible shares and
• Canada’s resolution authority is Canada liabilities of a non-viable bank into common shares,
Deposit Insurance Corp (CDIC) incremental to OSFI’s conversion of NVCC
• Bail-in framework provides CDIC the • Bail-in conversion would occur in the context of an
statutory power to convert certain open bank; the bank remains open and operating
eligible debt into common equity to and continuing to provide critical services to its
recapitalize a non-viable DSIB customers
• Supplements existing NVCC framework • CDIC has flexibility to determine:
o Quantum of conversion – portion of bail-in debt to be converted
and other resolution tools into common shares
o Several tools available including bail-in and o Timing of conversion – if it will take place immediately or over a
restructuring the bank period of time
o Goal to return the bank to viability o Process for converting – if conversion will take place in one or
more steps
• Applies to six Canadian DSIBs, including • CDIC must adhere to certain parameters
Scotiabank o Adequate recapitalization
o Order of conversion
o Equally ranking instruments
o Relative creditor hierarchy
36Overview of Canadian Bail-in Regulations
Scope of Bail-in Debt Bail-in Outcomes
• Scope emphasizes operational feasibility, • Bank stays open and operating
credibility and preserving access to
liquidity in stress
• DSIB is recapitalized with limited or no
taxpayer support and able to re-access
• What’s in scope: markets
o Issued, originated or renegotiated after September 23,
2018
o Long term (original term >400 days) • Recoveries are consistent with relative
o Tradeable and transferrable hierarchy of claims (shared losses)
o Unsecured o Significant dilution of original common shareholders through
conversion of NVCC and Bail-in debt
o New common shares issued to NVCC and Bail-in debt
• What’s not in scope: holders according to their relative rankings
o Deposits
o Most structured notes • No creditor worse off
o Secured liabilities
o Covered bonds
o Derivatives
• Legacy (non-NVCC) instruments are not in
scope but would be subject to other
resolution tools to ensure that senior bail-
in debt holders are better off than holders
of legacy capital instruments
37Bail-in Process
Resolution
Bail-in Conversion
Business Heightened Point of Resolution Stabilization / CDIC
as usual risk non-viability weekend restructuring exits
• Good • Financial difficulties • OSFI declares • CDIC takes • 1-week to 1- • 1 to 5-year
financial the DSIB non- control / year timeframe timeframe
health viable ownership of
• DSIB may the DSIB
implement recovery • Common • Voting rights are
plan actions under • Minister of shares resulting resumed
OSFI oversight Finance has • OSFI triggers from NVCC and
Federal Cabinet NVCC BID conversion
issue orders conversion are issued • “No creditor
• CDIC may monitor authorizing (voting rights worse off”
and undertake CDIC to assume suspended) determination
necessary temporary • Management and payment of
preparatory control or and Board of compensation
activities ownership of the DSIB • Execution of
DSIB and to replaced if restructuring
necessary plan
• DSIB may execute a Bail-in
experience declining conversion
market confidence, • Liquidity
credit rating support if
downgrades and necessary
funding / capital
raising challenges
38Overview of Canadian Bail-in Regulations
Compensation Regime Resolution Tools
• No creditor worse off: Creditors and • CDIC has a number of tools to assist or
shareholders are compensated where they resolve a failing DSIB
have been made worse off than they would
have been in a liquidation 1. Liquidation of the bank and reimbursement of insured
deposits
• Persons who hold the following claims at the 2. Bank is placed under temporary CDIC control to
complete its sale to a willing buyer (forced sale) via one
time of entry into resolution are entitled to of two approaches:
compensation:
o All shares are transferred to CDIC and it becomes
o Shares of the institution
the sole shareholder to facilitate the sale; or
o Subordinated debt vested in CDIC at the time of entry into
resolution o CDIC is appointed receiver to sell all or some of the
o NVCC subordinated debt subsequently converted into assets and liabilities to the buyer
common shares pursuant to contractual terms
o Under both approaches, critical banking operations
o Liabilities subsequently converted into common shares
are maintained
pursuant to Bail-in power
o Any liability of the institution if the institution was wound-up 3. Bank is placed under temporary CDIC control and CDIC
at the end of the resolution process transfers certain functions to a bridge bank which is
o Any liability of the institution that was assumed by a CDIC- temporarily owned by CDIC
owned work-out company or bridge bank which was
subsequently liquidated or wound-up o Meant to bridge the gap from when an institution
fails and when a buyer or private-sector solution can
be found
• Compensation = liquidation value – o Critical banking operations are maintained
resolution value
4. Bail-in regime
• Right to compensation is not transferrable
39TLAC Requirements and Eligibility
Two concurrent minimum TLAC
compliance requirements by Q1/22
21.5% minimum risk-based TLAC ratio
&
6.75% minimum TLAC leverage ratio
TLAC eligibility
Tier 1 and 2 regulatory capital
as per CAR guideline
+
Bail-in debt
Eligibility criteria for bail-in debt to qualify as TLAC
• Subject to permanent conversion into common shares in whole or in part pursuant to CDIC Act
• Directly issued by Canadian parent operating company
• Not secured or covered by a guarantee of the issuer or related party
• Perpetual or have remaining term >365 days
• No acceleration rights outside of bankruptcy, insolvency, wind-up, liquidation or failure to make
principal or interest payments for 30 business days or more
• Callable without OSFI prior approval if, following the transaction, the minimum TLAC requirement
is satisfied
By Q1/22, Scotiabank will exceed the minimum TLAC requirement (plus Domestic Stability Buffer
requirement) based on maintaining current capital levels and refinancing upcoming senior maturities
40Overview of Canadian Bail-in Regulations
NVCC vs. Bail-in Enhanced Disclosures
• NVCC are regulatory capital instruments • Bail-in debt will be subject to robust
other than common shares that are disclosure requirements to promote
converted to CET1 at non-viability transparency, legal certainty and market
discipline
• Authorities would trigger NVCC only
where there was a high level of • Contractual terms must include a clause
confidence that the conversion plus whereby investors expressly submit to the
additional measures would restore the Canadian Bail-in regime notwithstanding any
viability of the bank foreign law to the contrary
• NVCC improves regulatory capital quality, • Disclosures regarding Bail-in power are
not quantity required in offering documents
o Conversion of NVCC increases CET1 but not total
capital – a gap that Bail-in addresses
• DSIBs are not permitted to advertise or
otherwise promote Bail-in debt, including in
• NVCC is a prerequisite to Bail-in its name, to a purchaser in Canada as a
deposit
• Failure to meet these requirements would not
exempt an issuance from being eligible for
Bail-in
41Appendix 2: Canadian Housing Market
Canadian Household Credit Growth Moderating
Public policy changes are moderating growth in household credit
• Total household credit grew at 3.1% in nominal terms in 2018 vs 2008 peak of 12.4% y/y
• Consumer loans excluding mortgages (i.e. cards, HELOCs, unsecured lines, auto loans, etc.)
grew at 3.0% in 2018 vs > 5% in late-2017
• Mortgage credit grew at 3.1% in 2018 vs 2008 peak of 13%
HOUSEHOLD CREDIT GROWTH CONSUMER LOAN GROWTH RESIDENTIAL MORTGAGE GROWTH
20 20 20
%, 3-month moving average %, 3-month moving %, 3-month moving average
18 average 18
16 15 y/y % 16
y/y % change
14 change 14 y/y %
m/m %
change
12 change, 10 12
SA
10 10
8 5 8
6 6
4 0 4 m/m %
m/m % change,
2 change, SA 2 SA
0 -5 0
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Sources: Scotiabank Economics, Bank of Canada. Sources: Scotiabank Economics, Bank of Canada. Sources: Scotiabank Economics, Bank of Canada.
43Household Debt: Canada vs. U.S.
Canadian households’ balance sheets compare favourably to US
• Canadian debt-to-income ratio is now 2.2 percentage points below the U.S. peak in 2008
o Over the last 8 years, increases in the Canadian debt-to-income ratio have slowed vs 2002–10
o Calculated on the same terms, Canada’s debt-to-income is currently 167% vs 134% in the U.S.
• Canadian debt-to-assets ratio remains below U.S.
o U.S. households have incentive to pursue higher asset leverage in light of mortgage interest deductibility
o Debt is a stock concept, to be financed over one’s lifetime. Income is a flow concept measuring
one single year’s earnings. Debt should be compared to lifetime or permanent income, or assets
• Ratio of total household debt-to-GDP remains lower in Canada than U.S.
o Calculated on a comparable basis, the ratio of household credit market debt is 98.6% in Canada vs 101.1% in the U.S.
Household Credit Market Total Household Liabilities Household Credit Market
Debt to Disposable Income As % of Total Assets Debt to GDP
200 30 130
household credit liabilities household debt
% of GDP
as % of disposable income as % of assets
173.8 120
180
US with
110 unincorporated
160 25 US business debt
166.8 Original 102.9
100 Canada 101.1
140 98.6
90
134.0 20 Canada*
120 17.8
80
100 Original 74.9
Canada 70 US
Adjusted Canadian* 16.8
15
80 Official Canadian
60
Official US
60 50
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
10
* Adjusted for US concepts and definitions. 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 * Adjusted for US concepts and definitions.
Sources: Scotiabank Economics, BEA, Federal Sources: Scotiabank Economics, Federal Sources: Scotiabank Economics, BEA, Federal
Reserve Board, Statistics Canada. Reserve Board, Statistics Canada. Reserve Board, Statistics Canada.
44Canadian Mortgage Market
Less than half of households have a mortgage or a HELOC More than 50% of Households Do Not
Have a Mortgage or HELOC
• Mortgage holders 45 % of households, 2017
40
o Less than 50% of Canadian households have exposure to a mortgage with HELOC
35 10.6
and/or a HELOC
30
o Negligible number of negative equity mortgages in Canada
25 3.4
o 91% of all homeowners have equity ratios of 25% or higher. Significant price
decreases required to reach a negative equity position 20
32.0
o High share of equity: average equity ratio is 74% (excluding HELOCs) 15 30.7
22.8
o Approximately half of first-time home buyers in Canada are able to source 10
their down payments from their personal savings 5
0
Owned dwelling Owned dwelling Rented
• 2014–17 data show 79% of buyers from that period have w/ mortgage w/o mortgage
25% or more equity Sources: Scotiabank Economics, Mortgage Professionals Canada.
o Reflects speed of rising house prices, increased down payment High Percentage of Equity
requirements, and tightened mortgage rules
(real estate equity as % of real estate assets)
• 2014–17 data indicate only 42% of first-time home buyers
80
% Official (excludes HELOCs)
75
had less than 20% down 70 Cda estimate
including HELOCs
65
US estimate
with NFPs
60
• Efforts to cool the housing market are working, which
excluding
HELOCs
55
implies moderating price appreciation 50
45
Official FRB with NFPs
(includes HELOCs)
40
35
90 92 94 96 98 00 02 04 06 08 10 12 14 16
Sources: Scotiabank Economics, OSFI, FCAC,
Statistics Canada, Federal Reserve Board.
45Canadian Housing Fundamentals Remain Sound
Solid indicators on several dimensions
INTERNATIONAL IMMIGRATION TOTAL DEBT-SERVICE RATIO
2021 16
% OF DISPOSABLE INCOME
NUMBER OF IMMIGRANTS
Target = 350K
290 15
TO CANADA, 000S
14 1990–2017
240 average
13
12
190
11
140 10
90 95 00 05 10 15 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Sources: Scotiabank Economics, Statistics Canada. Sources: Scotiabank Economics, Statistics Canada. Data through 2018Q3.
RESIDENTIAL UNIT SALES TO NEW LISTINGS RATIO RESIDENTIAL MORTGAGES ARREARS
% OF MORTGAGES IN ARREARS
1.0 6
5
3 MONTHS OR MORE
0.8
Sellers’ Market
4
0.6
RATIO
Balanced Market 3 U.S.
0.4
2
Buyers’ Market
0.2 1 Canada
0.0 0
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Sources: Scotiabank Economics, CREA MLS. Data through January 2019. Sources: Scotiabank Economics, CBA, MBA. Data through 2018Q4 (US) and October 2018
(Canada).
46Households Can Sustain Higher Rates
Real interest rates are still negative and will turn only mildly positive in 2019
• Scotiabank Economics expects the Bank of Canada to raise its target overnight rate
an additional 100 bps by Q1/2020
• Average mortgage borrowers have only just begun renewing their loans at higher
interest rates
Further Rate Hikes Ahead from BoC & Fed Little Change in 5-yr Mortgage Rates at Renewal
9 50
% 5-yr difference, basis points
8
0
7
Fed Funds
-50
6 Target Rate
(Upper Limit)
5 -100
4 forecast -150
3
-200
BoC
2 Overnight
Target Rate -250
1
0 -300
93 98 03 08 13 18 10 11 12 13 14 15 16 17 18 19
Sources: Scotiabank Economics, Haver Analytics. Sources: Scotiabank Economics, CMHC.
47Housing Market Differences vs U.S.
Canada’s housing market features distinct practices and policies
Canada U.S.
• Mortgage interest not tax deductible • Tax-deductible mortgage
• Full recourse against borrowers in most provinces interest creates incentive to
• Foreclosure on non-performing mortgages - no stay periods borrow and delay repayment
Insurance
• Lenders have limited recourse
in most states
• Mandatory default insurance mortgages with LTV > 80% • 90-day to 1-year stay
o CMHC backed by Government of Canada (AAA). Private insurers period to foreclose on
are 90% government backed non-performing mortgages
o Insurance available for homes up to CAD 1 mn • No regulatory LTV limit
Regulation and o Premium is payable upfront • Private insurers are not
Taxation o Covers full amount for life of mortgage government backed
• Homebuyers must qualify for mortgage insurance at an interest rate
that is the greater of their contract mortgage rate or the Bank of
Canada's conventional five-year fixed posted rate
• Re-financing cap of 80% LTV on non-insured mortgages
Amortization
• Maximum 25-year amortization on mortgages with LTV > 80%
• Maximum 30-year amortization on conventional mortgages
• Down payment of > 20% required for non-owner
occupied properties
• Conservative product offerings, fixed or variable rate options • Can include exotic products
• Much less reliance upon securitization and wholesale funding (e.g. adjustable rate
Product • Asset-backed securities not subjected to US-style off-balance sheet mortgages, interest only)
leverage via special purpose vehicles
• Terms usually three or five years, renewable at maturity • 30-year term most common
Underwriting • Extensive documentation and strong standards • Wide range of documentation
and underwriting requirements
48Housing Policy Developments in Canada
Consistent policy initiatives to maintain a balanced and sustainable market
2019 2018 2017 2016
• British Columbia: Increase in • Ontario: Elimination of rent • Ontario: 16 measures aimed to • Canada: Qualifying stress rate
speculation tax on foreign and control on new rental units first slow rate of house price for all new mortgage insurance
domestic home owners who do occupied on or before appreciation must be the greater of the
not pay income tax in BC from November 1, 2018 contract mortgage rate or the
0.5% of a property’s assessed Key aspects include: Bank of Canada's conventional
value to 2%; additional school • British Columbia: Extension of o 15% non-resident five-year fixed posted rate
tax levied on portion of a the Property Transfer Tax on speculation tax • Low-ratio mortgage insurance
property’s value that exceeds non-resident buyers. eligibility requirements updated
CAD 3 mn. Investment of more than CAD o Expanded rent control to all
private rental units in Ontario for lenders wishing to use
1.6 bn through FY2021 toward portfolio insurance:
the goal of building 114,000 o Vacant home tax
affordable housing units in the o Maximum amortization 25
o CAD 125 mn five-year years
next 10 years program to encourage
construction of new rental o CAD 1 mn maximum
• Canada: OSFI imposes more apartment buildings purchase price
stringent stress tests for o Minimum credit score of 600
uninsured mortgages, including
a minimum qualifying rate at the o Property must be owner
greater of the five-year fixed occupied
posted rate or the contractual • Elimination of primary residence
rate plus 200 bps, effective tax exemption for foreign
January 1, 2018 buyers
• Minimum down payment on
insured mortgages on homes
valued CAD 0.5–1 mn
increased from 5% to 10%
• British Columbia: 15% land
transfer tax on non-resident
purchases in Metro Vancouver
introduced
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