Good morning, everyone and welcome to Scotiabank’s 2016 Second Quarter Results Presentation. My name is Jake Lawrence and I am the Senior Vice President of Investor Relations for the bank. Presenting to you this morning is Brian Porter, Scotiabank’s President and Chief Executive Officer, Sean McGuckin, our Chief Financial Officer, and Stephen Hart, the bank’s Chief Risk Officer. Following our comments this morning, we will be glad to take your questions. Also in the room with us to join for the Q&A session is Scotiabank’s business line group heads, James O’Sullivan from Canadian Banking; Nacho Deschamps from International Banking; and Dieter Jentsch from Global Banking and Markets. Before we start the call and on behalf of those speaking today, I would like to refer you to Slide 2 of our presentation, which contains Scotiabank caution regarding forward-looking statements. And with that, I will now turn the call over to Brian Porter.

Thank you, Jake and good morning everyone. I will start on Slide 4. We are pleased to report our second quarter results to our shareholders. For Q2, the bank delivered another good quarter of operating and financial results. As we announced on May 2, this quarter’s results include a restructuring charge, and while the decision to take the charge was not an easy one, it was done in a thoughtful manner. The charge and associated investments will support our strategic objectives and allow the bank to provide a better experience for our customers and employees as well as better results for you, our shareholders. Sean McGuckin, our CFO will provide further details on the charge and expected benefits in a moment. Adjusting for the impact of the restructuring charge, the bank earned $1.9 billion in the second quarter, delivering diluted earnings per share of $1.46, 3% ahead of the same period a year ago. Earnings growth this quarter was again driven by good performances in our personal and commercial banking businesses both in Canada and internationally. Strong results in our retail businesses allowed the bank to grow earnings despite elevated provisions for credit losses, largely related to energy, which contributed to lower results in Global Banking and Markets and reduced performance in International Banking. As a result of the continued strong performances in Canadian and International Banking, these businesses generated more than 80% of our Q2 earnings. Our adjusted return on equity in Q2 was 14.4%. Looking at our capital position, the bank remains well capitalized with a Common Equity Tier 1 ratio of 10.1%. We are well positioned to continue to invest in and grow the bank organically, and we have the balance sheet strength to selectively pursue acquisitions. As an example, this quarter, we closed acquisitions in Panama…

Thanks, Brian and good morning everyone. I will begin on Slide 7, which shows our key financial performance metrics for the current quarter and comparative periods. As Brian mentioned, Q2 diluted earnings per share adjusted for the restructuring charge was $1.46, up 3% year-over-year. The quarter had very strong personal and commercial banking results. The elevated provisions for credit losses this quarter related to a small number of accounts primarily in the energy sector and were largely offset by a gain on sale and lower employee benefit costs. Revenue growth was strong, up 10% from Q2 last year, with solid asset growth in Canadian Banking, International Banking, as well as U.S. corporate lending. Revenues are positively impacted by acquisitions as well as higher banking revenues, net gains on investment securities, and the aforementioned gain on sale of a non-core lease financing business, partially offsetting was lower wealth management, underwriting and advisory, and trading revenues. Our core banking margin was 2.38%, down 3 basis points year-over-year. Higher margins in Canadian Banking and International Banking were more than offset by the mix impact of higher volumes of lower yielding investment securities and lower interest gap profits. Core expenses were up 2% year-over-year after adjusting for the impact of the restructuring charge and acquisitions, overall a very good expense management performance in Q2. The 2% increase was primarily due to higher technology and professional fees reflecting the continued investments related to the digitalization of the bank as well as efficiency initiatives. Adjusting for the restructuring charge, the productivity ratio was 51.7%, reflecting an improvement of 310 basis points quarter-over-quarter and 160 basis points year-over-year. It is important to note that there were no benefits recorded in the second quarter related to the Q2 restructuring charge. These benefits start to accrue in Q3 and…

Thanks Sean. Good morning, everyone. We remain comfortable with the underlying fundamentals of the Bank’s risk portfolios and we expect that this quarter’s higher loan loss ratio to be the peak level for the year. The all bank loss ratio came in at 64 basis points or 59 basis points after adjusting for the increase in the collective allowance for performing loans. This loss ratio was up 14 basis points quarter-over-quarter and up 18 basis points year-over-year. Before discussing the current credit metrics, I would like to give you an update on our retail, corporate and commercial credit portfolios. In Canada, our retail delinquency rates and overall retail credit quality remained stable albeit we are seeing some continued regional weakness in the prairies. This is being offset by strength in other markets including Ontario and BC. As noted by Brian, we have been closely following the tragic events in Fort McMurray and are working with our customers to assist them. To-date, our review of our credit exposures and related mitigants, including insurance, would indicate that any of related loan losses will not be material. Turning to international, retail credit performance leading indicators also remain stable in the quarter. We operate a diverse number of portfolios across different geographies and some books are performing better than others. We have seen particularly strong credit performance in Mexico and the Caribbean. Overall delinquency rates remain generally stable across international retail. Looking at our corporate and commercial loan books, we did see increased provision related to our energy exposures and to a lesser extent, Puerto Rico. I will have more to say on the energy portfolio in a minute. Looking at the credit metrics, our gross impaired loans were relatively stable, up 1% quarter-over-quarter. Similarly, our net impaired loans as a percentage of our…

Thank you, Stephen. Before we open the call for questions, I would like to comment briefly on each business lines performance over the quarter and make some brief remarks on our outlook. As noted earlier, Canadian Banking had another quarter of strong results. James and his entire team are executing on their strategy to improve the customer experience, enhance our business mix and drive efficiency gains. Their efforts are delivering solid growth in the businesses and products we are targeting. I would like to call out the continued strong growth in deposits, particularly in personal deposits, which reflect our increased efforts to focus on both sides of the balance sheet. Our deposit growth paired with our focus on targeted growth and assets that provide attractive yields will continue to enhance our risk adjusted margin. This quarter, we saw solid expense management with underlying expenses only up slightly from Q2 last year. A continued focus on efficiency combined with our good revenue growth will support greater operating leverage. As we move into the second half of 2016, despite slower growth in some markets, we expect continued good growth in Canadian Banking through the balance of the year. Turning to International Banking, as Sean noted, the division delivered another strong performance. This quarter also marks the third consecutive quarter with at least $500 million of earnings, which is consistent with the expectations we have shared with you over the past year. Similar to recent quarters, the strong results were again driven by the Pacific Alliance region. We saw particularly strong growth in Mexico and Peru. The strong operating results this quarter allowed us to earn through the higher energy related loan loss in Colombia that Steven mentioned. We expect the strong business momentum in International to continue as provisions move back towards…

Alright. Thanks Brian. That concludes our prepared remarks. We will now be pleased to take your questions. Please limit yourself to one question and then rejoin the queue to allow everyone the opportunity to participate in the call. Operator, can we have the first question on the phone please?

Your first question comes from Meny Grauman of Cormark Securities. Please go ahead sir. Mr. Grauman your line is open.

Hi, can you hear me now? Hello.

Yes.

Good morning. Sorry about that. Stephen, you mentioned cumulative losses of 3% to 3.5%, I am just wondering if you can talk about how that would hold if conditions stayed stable, if you could just comment on the sensitivity to different assumptions, are oil prices a big part of that outlook and how would that change if oil prices went back down or – and if you could comment on maybe some other key assumptions that are driving that outlook on the accumulative loan losses?

Sure, Meny. I mean, when we did this analysis, as I said, we did it company by company, reserve base by reserve base, and quite frankly, we used the oil and gas prices that’s in our deck that dates back to February, so these are numbers that do not reflect the current up-tick. So any up-tick that we get that’s sustainable will be an improvement to those numbers, so we were still going off the $30 to $35 range for oil, and so you can go with that.

Okay. And then, if I could just ask a question just on the restructuring, you talked about three different areas of cost savings including the branch network, and I am wondering how would the cost savings basically get divided across those three areas, is the most – is most of the cost savings over the expected term related to savings from the branch network?

I will take that one, Meny. No, it would be – as I mentioned, there is the Canadian Banking, there is the internal corporate services we are looking at and also just simplifying and streamlining our operations. When you look at the final allocation benefit, because we do allocate savings – the corporate function costs to the business lines, as I mentioned it earlier, Canadian Banking will generally get 70% of the net savings benefit, GBM about 20% and IB kind of the small balance after that.

And when you talk about the branch network optimization, do you have any numbers around that in terms of number of branches or square footage, can you give us any sort of sense of how dramatic those changes will be and over what time?

I will ask James to give some color on that.

Sure. So Meny, we have just over 1,000 branches as we speak. That would be down from a peak of about 1,040. So we have been opening branches and we have been consolidating branches and we are opening branches every quarter as we speak. I would say it’s difficult to forecast on a go-forward basis as we are right on the cusp now of piloting our new branches of the future. So we are going to have an express format called Scotiabank Express. We are going to have an advice format called Scotiabank Solutions, and we will continue to have a lot of full service branches as well. My point is that learnings from these pilots are going to shape future openings and future consolidations. But to your specific question, based on our current knowledge, we might expect a further reduction of 4% to 5% over the next 2 years. But I do want to be clear Meny, branch transformation for us, it’s about much more than just openings and consolidation. It’s about new branch formats. It’s about more technology and it’s about new and better roles for our employees that involves less paper.

Thanks.

Next question please.

Your next question will come from Gabriel Dechaine of Canaccord Genuity. Please go ahead.

Good morning. Just want to talk about the international business, actually the credit trend there, first of all, it looks like you had a $50 million credit mark release, where would that show up, would that be in the commercial portfolio?

I will take that one. That comes from the some of the recent acquisitions, the acquisitions of Citibank in Peru, Costa Rica, Panama, and a bit [indiscernible] from last year. But even on the credit markets being released, we are also adding provisions to build up reserves in those as well. So the net acquisition benefit to the bottom line is the best way to look at that and that’s both $20 million or so for International Banking and about $15 million or so for Canadian Banking.

So it wasn’t all in International, sorry that’s how I read it.

Not all of that falls in there.

But would that have been in internet – the element that was in international, was that international and commercial, what I am getting at here is that it looks like, maybe we can do it rather this way, the losses and international and commercial were very high, you talked about one account in Colombia and some others in Puerto Rico, I am just wondering what kind of went on there?

Most of the acquisitions were on the retail side. And so the credit mark to the majority is on the retail side and not on the commercial side.

Okay. So what was going on in the commercial side as far as the type of loss you incurred, which is much, much higher than the run rate we have seen there, how – is it really a one-off there, some special situation that went awry, I guess?

Yes. As indicated Gabriel, there is one loan that we have had that has been non-accrual for the last few quarters. And quite frankly, with a sizable portion of the $150 million that I quoted, so well over 40% of that $150 million related to that one particular loan in Colombia, which quite frankly, as I indicated did not reflect our normal standards and we’ve decided to just take it down to the bare minimum. So that truly in our mind is a one-off with International. The rest of the portfolio performed well as indicated. We did pick up, do some additional increases in Puerto Rico given the ongoing situation that’s going there. But on average, the rest of the portfolio is performing very well.

And I guess that begs a question what – how can I get – being comfort that this is truly a unique situation, there is one particular that didn’t meet your normal criteria, whenever we see things like this, you kind of wonder is there anything more that didn’t meet these – the normal lending criteria of the bank?

Gabriel, it’s Dieter. We talked about only one formation at our Investor Day in Mexico and there was isolated one problem account and that one came to fruition.

This is the one, okay?

Yes. We are quite clear about our investment and this is the one.

Okay. I missed that one probably. Okay. And then just a quick one on the margin in Canada, it looks like it was up but mostly due to the Chase, I guess, so excluding Chase, which was around 6 basis points of balance, is this mostly prime/BA spread narrowing that’s causing the margin to kind of reverse a little bit?

No. We see continued margin pickup. We are seeing a lot of the value come to the deposits as we have the stronger deposit growth in checking and savings. That’s adding a positive mix to our margins. So we would again continue to see margins generally being flat to slightly up as we continue to evolve our business mix in Canadian Banking.

Okay, alright. Thanks.

Next question please.

Your next question comes from John Aiken of Barclays. Please go ahead.

Good morning. With the sale of the run out leases that occurred at the end of the quarter, can you give us some sense as to what the anticipated dilution to net interest margins will be and what potential offset could come through on the PCL ratio for Canadian consumer?

You want the net interest margin impact and the net sale?

Yes.

That would – that’s very small portfolio, I think it will last through $1 billion out of our total $300 billion in Canadian Banking, so it should not have a meaningful impact in our margin. And sorry, what was your second question?

Then an offset on the – anticipated on the PCL ratio?

Yes. We had very little losses in that business, so it shouldn’t have much impact at all on our PCL ratio.

Okay. Thanks Sean.

Next question please.

Your next question comes from Robert Sedran of CIBC. Please go ahead.

Hi Sean, I just wanted to come back to the restructuring initiatives if I can, there is a pretty big ramp into 2019 and so is this just kind of the delay in branch closing, is it the size of the initiatives you have underway that – is this going to take some time or are there investments that need to be made in the meantime?

Yes. So the benefits of $750 million are a multiple of the charges you saw this quarter. And as I have mentioned, we have some immediate near-term savings mostly from simplifying the organization, some near-term benefits on some sourcing procurement initiatives. But some of the other ones, the branch network transformation that plays out over 18 months to 24 months. As we look to improve the cost to deliver our internal services, be it finance, HR, risks, some other functions, that takes a bit of time to lean out some of those operations and get some consolidation synergies on that. So the investments for those ones take a bit longer are being paid for by the near-term savings. So when I mentioned $350 million savings in ‘17 and then ‘18, further $200 million to get the cumulative rate of $550 million and a further $250 million, is because the second part is 18 months to 24 months pieces. The investments are being paid for by the near-term savings. But once you get through the full cycle, that $750 million is a run rate benefit from current levels. And as we mentioned, will improve productivity by 200 basis points to 250 basis points from these initiatives by then.

Okay. And just a follow-up, I mean there is – I guess there is a perception externally that there has been an awful lot of transformation at Scotiabank over the last few years. And Brian, I am curious how you characterized the amount of transformation that’s been happening and how much execution risk you put around the latest round considering again externally at least, it feels like there has been a fair bit going on?

Yes, that’s a fair question, Rob. Let me go back. If you look back 4, 5 years ago, the bank was extremely acquisitive and I think from the start of the crisis through to the 2012, 2013, the bank did some 25 different acquisitions, most of them internationally. So, we had to go through a period of digestion and integration. And as I have always said, buying is the easy part, integrating these businesses is the tougher part. So, the charge we took in Q4 of ‘14 largely related to the International business, branch optimization, some – few factors in the Canadian business. We have been working on this structural cost initiative for the past year and a half. It largely relates to the Canadian operations of the bank and that’s really focused around the customer, the customer experience and digitizing the bank. In terms of pace of change and the degree of change, I spent a lot of time with the management team here. We spent a lot of time with the board thinking through what we are doing, the pace of change, how much can the organization absorb at any one time. And we are very comfortable with the pace of change. And I am also cognizant of the fact people want to tell me what I want to hear from time to time. But as I crisscrossed the country and talked to people, our customers and our employees about what we are doing, overwhelmingly, they say, this is great. We are glad you are doing it. It’s about time. So, I think summing it up, we have been very thoughtful and deliberate about the pace of change and the degree of change here and we are very pleased as to where we are.

Thank you.

Next question, please.

The next question comes from Peter Routledge of National Bank Financial. Please go ahead.

Hi. A question for Brian just on the restructuring. On Page 9, which is very useful and I appreciate you are quantifying the goals. I always thought Scotia was really strong on expense management. And through the size of this restructuring and then the goals you intend to achieve were a lot more than I would have thought and I am trying to figure out why that might be the case? And the three reasons I came up with where either the bank wasn’t as disciplined on the expenses as I had thought. The bank was underinvested in technology that would be another explanation or there is something more profound happening in your business and your platform is changing more significantly than I expected. So, I wondered if you could talk about what the explanation for the scale of this change or how do you explain the scale of the change to this business?

Well, I think that most of this, as I said in the last question pertains to the Canadian operations of the bank. And if you look at our efficiency ratio compared to our peer group, there is lots of room for us to deliver more efficiencies for our shareholders. So, we did a deep dive and a diagnostic on the Canadian bank with James and his team and efficiency isn’t – it’s an ongoing initiative around here. It doesn’t – you just don’t do a program and then stop. So, this is a continual program. And part of this is I would describe as catch-up and part of it would be getting to the top of the pack.

And the gains are inclusive of any new investments you make in technology or the gains you are forecasting?

Yes, we have – beyond this structural cost program we have had some other ongoing cost initiatives within the business lines. We have had a higher regulatory spend in terms of our technology. So, when you think of some of those running off and the other ongoing initiative opportunities we see in the business lines, a lot of that will pay for the ongoing digital transformation that you will hear more of from the bank. So, we are fairly confident that the large piece of these benefits will make it to the bottom line from this most recent structural cost reduction program.

Peter, another way to look at it to provide some color for you is that if we look at the bank’s ROE and this is an industry trend, the compression of ROE over the last 5 years, if you look at the components, the biggest components of compression on our ROE is one has increased capital or less leverage, which is obvious. The other one is just a lower margin environment. So that one of the ways you are going to offset that is using technology to your advantage and digitizing the Bank. So productivity gains are going to help offset margin compression and increase the amount of capital that we hold as an organization.

Alright. Thanks very much.

Next question please.

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

Good morning, Sean if you can go back to the restructuring and I may ask for a level of precision that you can offer here, but let me give it a shot anyway, when you talk about using the expense savings to fund all the necessary investments, is that the same as saying that in ‘16, ‘17 and ‘18, that there will be no net contribution from these restructuring initiatives to the Bank’s expenses and earnings and it all really falls through in ‘19?

No, I am not saying that at all. We are saying that we expect near-term benefits. So your question is the $350 million savings we project for ‘17, how much of that falls to the bottom line, right, your general question?

That’s right.

So again, we continue to work out our digital strategy and as Brain had mentioned, we are going to have Investor session later in the year to lay out for you to our digital strategy over the near-term. That will require investments, but some of the money where we have been spending recently will not be at the same pace and that’s generally around regulatory investments we have been making to meet some recent regulatory requirements and as often some other near-term efficiency initiatives within the business lines that are also freeing up capacity to invest. So again, I am fairly confident we are going to have a large – very large portion of $350 million make it to the bottom line in ‘17 and a bit more in ‘18 and a bit more in ‘19 until we get to that run rate savings.

Large portion of the $350 million and the $550 million then fall to the bottom line?

Yes.

Okay. So then what we are dealing with then is inflation obviously, which I guess for Scotia runs higher than the sort of 2% or 3% because of your international business, so we should factor in some inflation, some investment spending and then take off a large portion of this $350 million and that will get us to I mean it’s I am not asking to prepare the model for me, but that’s the general…?

Yes, something we just built it. As you have seen in the past, technology spend is our highest expense category for growth and we expect that to continue. And we expect it to maybe moderate from the 20% plus rate we have been seeing in the last couple of years, that will moderate. But overall, we expect these savings to offset the inflation and some of the higher technology spend going forward.

Okay. So real quickly then, just on credit, you – Stephen, you talked about $300 million to $350 million in cumulative losses, ‘15 to ‘17, 2015 to 2017, where are you right now on that?

Right now, we are $270 million…

$277 million, 1.7…

$277 million.

1.7%.

1.7%.

So 170 basis points a year, so you are about halfway through that?

Yes. We are in the bottom of the fifth.

It sounds good. Thank you.

Next question please.

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

Hi, good morning. Just – I think most of my questions have been asked and answered, but I did notice that you did do a bulk mortgage reinsurance deal I think it was in the quarter, correct me if I am wrong, but just wanted to get a little bit of sense of why and what regions that related to, so just a little bit more detail around that? Thank you.

That was really mostly around giving us some flexibility for balance sheet managements, provides us more liquid – liquidity, more liquid assets, some flexibility around funding. There is some real change that come July 1, about the purchase of insurance and what purity we have got to actually apply it out if you want to securitize. So overall, it was just balance sheet optimization, small capital benefits, but again it was really around balance sheet flexibility.

Can you quantify…?

And it was across the country...

Yes. It was across the country. And you are seeing that our LTV, loan-to-value ratio for the uninsured portfolio because of that improve from about 55% down to 51%.

And what was the – can you quantify the capital benefit, was it 5 basis points or somewhat smaller, just quantify...?

It’s around that range, 5 basis points.

Okay. And then just secondly, on the International Banking side, I noticed just acquisitions were a big part of the NIM expansion year-over-year I guess excluding acquisitions, that would have been 19 basis points or that acquisition – I am going to guess, predominantly that’s Cencosud, is that correct?

Yes, on year-over-year basis, Cencosud was a big driver of that. The more recent ones in Costa Rica and Panama also contributed to that as well. But looking from Q1 to Q2, the margin increase was quite meaningful, about two-thirds was from acquisitions and one-third was from just organic growth in our margin.

Okay. Thank you.

Next question please.

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

Hi. Thank you. Good morning. I just want to make sure I understand the commentary around the problem loan in Colombia and maybe you can perhaps help me with this, on Page 18 of your supplemental, when we look at the commercial classifications in the quarter of $222 million, would that include that account that was in Colombia?

No, that was classified I think in Q1.

Yes.

Okay. So then what is it that’s building the big classifications in Q2, is $220 million a classification?

Yes. We would have ongoing energy classifications. That’s the bulk of the classifications.

In International?

International commercial, there were two classifications in Puerto Rico. But the rest of it and that would probably pick up some of the delta, but the rest of it was just across the board.

And then going back to the account that was classified in Colombia, that was classified in Q1 and would largely…?

Yes.

Okay. What was it that required the next quarter to realize you weren’t going to collect much money on that account?

Well, as you know restructurings and negotiations are ongoing issues. This was a complicated transaction. In this case, there were not just banks but there were also bondholders, new equity investors as well as the existing management group. So quite frankly, it was a moving target that we had hoped for a better result. And quite frankly, at the end of the day, that result didn’t come, so we decided to take the hit, move on.

And then just to wrap up and so the – one could take a view that there could be other similar such circumstances that other loans that are already classified as impaired that would require top ups to your provisions in future quarters, what would you say to that kind of a thought process?

I would indicate that as I said earlier, we have done a name by name analysis. There were one or two other loans that we did top up this quarter, but that was the extent of it. We feel very comfortable where our existing provisions are.

Darko, it’s Brian. I think that because this was a one-off, it requires a further explanation, which you are requesting. As this was – when you go through a cycle like this, there is always one loan you wish you never did and this would be the one. And I think that it lessons under the category of lessons learned on this point was the quality of the reserves and the quality of the management’s team ability to execute. And it’s been a painful experience for us, but this is a one-off situation.

Okay. Thanks very much for that commentary.

Next question please. This will be the last question.

Your next question comes from Sohrab Movahedi of BMO Capital Markets. Please go ahead.

Okay. Thank you. Brian, internal capital generation in the quarter, less than 20 basis points, lots of puts and takes, how should we think about Scotia’s internal capital generation given everything you have talked about, we have seen peak loan losses probably, we see expense benefits coming through, some investments going through, how do you think about your internal capital generation over the next four quarters to six quarters, let’s say?

Yes. We are – we haven’t talked about this, but I alluded to it in my comments, we are proud of what we have done in terms of balance sheet optimization here. I think the organization gas done a very good job on deposit growth, personal deposit growth both here in Canada and internationally. And we have done a lot of work in terms of risk weighted assets and looking at underperforming parts of our portfolio. And you saw the benefit of that this quarter. We still have some more work to do on – there is always work to do on cleaning up your risk weighted assets, but we have made very good headway. But there is still more work we can do in subsequent quarters. So this has been a bit of a messy quarter. There is lots of moving parts in our quarter, but we are optimistic about capital generation in Q3 and Q4 and into 2017.

But above this quarter’s levels?

Yes.

Yes. Okay. Thank you.

Alright. That concludes the call. Thank you all for participating. We look forward to talking to you next quarter.