Good morning, and welcome to Scotiabank's 2024 Second Quarter Results Presentation. My name is John McCartney, and I'm Head of Investor Relations here at Scotiabank. Presenting to you this morning are Scott Thomson, Scotiabank's President and Chief Executive Officer; Raj Viswanathan, our Chief Financial Officer; and Phil Thomas, our Chief Risk Officer. Following our comments, we will be glad to take your questions. Also present to take questions are the following Scotiabank's executives: Aris Bogdaneris from Canadian Banking; Jackie Allard from Global Wealth Management; Francisco Aristeguieta from International Banking and Travis MacHen from Global Banking and Markets. Before we start and on behalf of those speaking today, I'll refer you to Slide 2 of our presentation, which contains Scotiabank's caution regarding forward-looking statements. With that, I will now turn the call over to Scott.

Thank you, John and good morning, everyone. We are pleased to share our Q2 results, which reflect solid earnings from each of our four business lines. This is our second quarter since we shared our enterprise-wide strategy, and I'm encouraged by our continued progress against our plan. I want to take a few moments to recap a few key enterprise initiatives. First, disciplined capital allocation to higher-return client segments and geographies and as virtually all of our incremental capital deployed in fiscal 2024 has been to identify priority businesses. Second, deposit growth remains fundamental to our business prioritization and client selection decisions. Our focus on building primacy through deeper relationships has resulted in continued growth with P&C deposits up 7% year-to-date. Third, cost and process efficiencies, which both drive profitability and ensure frontline teams have the tools and capacity to deliver an excellent client experience. Well managed expenses and productivity gains are driving positive year-to-date operating leverage. And finally, a strong balance sheet, which will allow us to support clients through the cycle while maintaining optionality to invest in our businesses as evidenced by strong liquidity and our 13.2% CET1 capital ratio. In terms of results, the bank reported adjusted earnings of $2.1 billion or $1.58 per share in the quarter. We saw solid revenue growth from both net interest income and fee income, coupled with disciplined expense management. The benefits of our productivity initiatives were particularly notable in our Canadian and International Banking segments, where productivity ratios improved 100 basis points and well over 200 basis points, respectively, over last year. Higher credit provisions reflecting the uncertain macroeconomic environment and the impact of sustained higher interest rates on certain client segments impacted profitability. Overall, net loans were 3% lower year-over-year and in line with Q1. Balances have stabilized in…

Thank you, Scott and good morning, everyone. All my comments that follow will be on an adjusted basis for the usual acquisition-related costs. Starting on Slide 6 for a review of the second quarter results. The bank reported quarterly earnings of $2.1 billion and diluted earnings per share of $1.58. Return on equity was 11.3%, and return on tangible common equity was 13.8%. Revenues were up 5% year-over-year, driven by 5% growth in net interest income and also by net interest margin expansion and 6% growth in noninterest income. All bank net interest margin expanded 5 basis points year-over-year. Margin was down 2 basis points quarter-over-quarter, driven mainly by a lower contribution from asset and liability management activities. Noninterest income was $3.7 billion, up 6% year-over-year, primarily from higher wealth management revenues, underwriting and advisory, commitment and credit fees, partly offset by lower acceptance fees. The provision for credit losses were $1 billion and the PCL ratio was 54 basis points, up 4 basis points quarter-over-quarter. Expenses grew a modest 3% year-over-year driven by higher technology-related costs. Personal costs from inflationary adjustments and higher performance-based compensation, partly offset by lower share-based compensation and the benefits of the efficiency initiatives. Quarter-over-quarter, expenses were down 1%, driven by seasonally higher share-based compensation in the last quarter. The productivity ratio was 56.2% this quarter and year-to-date operating leverage was a positive 1%. Moving to Slide 7, which shows the evolution of the common equity Tier 1 ratio and risk-weighted assets during the quarter. The bank's CET1 capital ratio was 13.2%, an increase of 30 basis points quarter-over-quarter and 90 basis points year-over-year, primarily benefiting from RWA optimization efforts. Total risk-weighted assets was $450.2 billion, marginally down from $451 billion in the prior quarter. Earnings contributed 14 basis points and the DRIP program contributed…

Thank you, Raj. Good morning, everyone. Credit performance is playing out as expected. International Banking has benefited from a stabilizing macroeconomic environment and specific client segments in Canadian Banking are facing headwinds as rate relief is delayed. As a result, this quarter, all bank PCLs were 54 basis points towards the higher end of our range. This resulted in total PCLs of approximately $1 billion, up quarter-over-quarter by $45 million. performing PCLs were $32 million or 2 basis points. Impaired PCLs were $975 million or 52 basis points, up 33 basis points quarter-over-quarter largely driven by Canadian Banking and retail, partly offset by lower PCLs in Canadian Business Banking. We continue to maintain appropriate allowances on loans with an ACL coverage ratio of 88 basis points up 2 basis points quarter-over-quarter and up 10 basis points from Q3 2023. In Canadian Banking, PCLs were $428 million, translating to a PCL ratio of 40 basis points up 6 basis points quarter-over-quarter. Canadian retail PCLs were $365 million, of which $343 million were impaired PCLs. This represented a $65 million increase quarter-over-quarter. Canadian clients continue to be impacted by increased borrowing costs and higher expenses driven by inflation. PCLs were elevated due to deterioration in the Canadian automotive finance portfolio in the used segment and specific cohorts of variable rate mortgage customers. Specifically, variable rate mortgage customers originated in 2022 have shown signs of stress. These clients are largely from the Greater Toronto Area and Vancouver. This resulted in an increase of vulnerable customers from 2,700 in Q1 to 3,300 in Q2. Variable rate mortgage portfolio delinquency increased 2 basis points quarter-over-quarter to 28 basis points. Our fixed rate mortgage portfolio, representing 68% of balances had stable delinquency performance. We will continue to work through our mortgage and auto clients and have…

Great. Thank you, Phil. Operator, please open the line for questions. Please limit your questions to one, so that all participants have the opportunity to ask a question, and re-queue if you have a call. Operator?

Thank you. [Operator Instructions] The first question is from Ebrahim Poonawala from Bank of America. Please go ahead. Your line is now open.

Hi. Good morning. I guess maybe question, Phil, starting with you just on credit quality. You mentioned impaired PCLs or PCLs at 55 basis points for the back half. Give us a sense of your visibility on credit around, do you see things peaking in the back half of the year, and whether one or two rate cuts from the BoC will make any significant impact, or how we should think about just credit quality as we look beyond the back half, and the potential that this could be a lot more worse come 2025, and within that, like, where do you see the drivers of the lost content within your loan book? Thank you.

Thanks, Abraham. So, I'll guide towards the higher end of the 45 to 55 basis points that we gave in Q4 last year on a full-year basis. I think the dynamic within our portfolio is you'll see, as I mentioned earlier, international banking starting to stabilize, and we've seen rate cuts over the last few quarters in international, and those are starting to really bear fruit for and provide relief for our consumers. I'm more thoughtful about what's going on in the Canadian market, and you are seeing this, the impact of higher for longer really starting to impact, particularly our variable rate mortgage customers and into our auto portfolio. We're seeing friction in those portfolios. There's some talk about rate decreases in June and July. I'm of the opinion that those rates, even with those decreases in June and July, it'll take a few quarters. Maybe one, two, three quarters for it to start to really support the Canadian consumer. Maybe a little bit of math to help you, some numbers to help just do it with the thought process. On the variable rate mortgage customer, particularly those within Toronto and Vancouver, with the average decrease of 25 basis points, or a 25 basis point decrease will lead to, about an average decrease in payment of about $100. And so, as you think about how quickly rate decreases happen, that will provide good relief for the average consumer, to start making payments on other products. And so, but I think it's going to take probably one to three quarters, depending on the consumer, for it to really bear fruit.

And just on that field, the 25 basis points, should we be looking at the overnight rate, obviously on the variable rate, but when you think about the rest of the book, overnight versus the five-year rate, like how do you think about the sensitivity between the two? Like should we be monitoring the yield curve needing to move lower as well as through the BoC rate cuts?

Ebrahim, I can start and maybe Phil can help. Yes, I think for the variable rate mortgage customer, like you said, the short end of the rate curve is going to have an immediate impact, because of our product and therefore a benefit in the ranges that Phil talked about. The others, they will benefit based on the longer term rate. I think most of our renewals we're seeing in the three-year cohort, fixed rates, so on. So, as the rate curve moves, definitely it's not going to go down 25 basis points at the long end of the curve. We know that, it might go down something, you know, five, 10 basis points and that will get reflected in some of the relief that these customers will get at the time of renewal. But I would say it's more meaningful at the short end of the curve for the variable rate mortgage customer.

Thank you. The next question is from Doug Young from Desjardins Capital Markets. Please go ahead. Your line is now open.

Good morning. Just Phil, looking at Slide 15, you talk about the low - the decline in the PCL in international banking driven by lower retail formations, across all countries. And then, I flip to Slide 16 and you talk about higher GIL formations driven by higher new retail formations, mainly Chile, Mexico. Just trying to reconcile these two statements. I'm a little slow this morning, but just trying to kind of understand the movements there. And then, as a follow-up, just I just want to clarify, Phil, as well, you're talking about higher end of your 45 to 55 basis point PCL guidance. Is that higher end for Q3, Q4, or is it the higher end for the full year?

So, I'll start with your - question on Slide 16. And what you see, a lot of our increasing GILS this quarter in ID are related to Chile commercial real estate. And so, given the real estate higher for longer situation in that market, we have seen some prolonged stress on the commercial real estate portfolio there. It's not a big portfolio. It's about $3 billion. And really, the challenge has been for the real estate developers, the cost to complete. What we're seeing in Chile, though, the dynamic has been we've had about 475 basis point reduction in interest rates already. And so, we're starting to see the construction starting to come back online. And we're also reassured, because we have pre-sales in place for the majority of the lending that we've put in, that we have there. So, it's going to be higher for a little bit longer, but we're not expecting to lose any money there. So, that sort of explains the increase in GILS from that part. In terms of the forecast, we're expecting we'll be at the sort of 54, 45 range for the next two quarters. And so, I've been speaking more on the quarterly outlook. Sorry, 54 to 55 basis points for the next two quarters.

Thank you.

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

Yes, thank you. I want to continue on the line of questioning of the higher for longer and potential impact on Canadian retail borrowers, specifically on the fixed rate mortgages. I'm wondering how you're viewing the difference or similarities and potential payment shock for the fixed rate mortgage borrowers versus what you're seeing with the VRM today?

Sure. Thanks for the question, Paul. We haven't - most of the renewals that are coming up on the fixed rate portfolio are those that were originated in 2017. So, we haven't been seeing a big volume of fixed rate renewals so far. Maybe it's interesting to note that 70% of the renewals that are coming through right now, are opting for a fixed three-year fixed term. What we are looking forward to, though, in terms of, you know, as we look in this year 2025 and 2026, obviously, there's some payment shock anticipated. But we're taking some comfort in terms of how our variable rate mortgage customers, are absorbing the shock. We have seen discretionary spend decrease. As an example, on our VRM portfolio, those customers' discretionary spend has decreased, by about 10% on retail expenditures year-over-year. And on fixed rate today, it's around five. So, we're already starting to see some consumers making choices in terms of how they're managing their savings. And I think I've given this number in prior calls, but we still see our variable rate mortgage customers holding on to about two payments, two payment buffer within their deposit accounts. And on the fixed rate, it's about three and a half to four. So, we're still comfortable with the credit quality we're seeing there. And just as a reminder, the average FICO score that we're seeing at renewal still remains strong at about 768, with 91% of the renewed balances being prime or above on the fixed rate portfolio. So, hopefully that's helpful.

Yes. Thank you. And I'll leave it there. That's my one question. Thanks.

Thank you. The next question is from Matthew Lee from Canaccord Genuity. Please go ahead. Your line is now open.

Hi, good morning. Thanks for taking my question. One regarding balancing primacy and growth, Canadian loans declined by 1% year-over-year in the quarter. And I think part of that was a conscious effort to focus capital on areas you achieve primacy. So, we still be expecting to see accelerating loan growth in the back half of the year, maybe particularly on the mortgage front?

Hi, Matthew. It's Aris here. Thanks for the question. Just to give a little context. So, on a spot basis in the quarter, we grew our mortgage book by around $2 billion. And we continue to grow our credit card book, our unsecured lending book. But where we see challenges is on the auto book, as Phil alluded to. Actually, the auto book, the retail business, is actually down 14% year-on-year in terms of origination. But we're slowly seeing now the pipeline for mortgages will continue to go up. We're trying to stay extremely focused on what you've heard Scott say often, this value versus volume. And just to give you a bit of background on that. So, 70% of our new mortgage originations are coming with three or more products. And actually, in April, that number was approaching 80% across all channels. That's one fact. The other fact is renewals. We're hitting a very high level of renewals now passing over 80% of renewals for the second quarter for our mortgages. These are the originations, or the business we like to book for obvious reasons. So, we're going to see continued mortgage growth in the second half of the year, obviously predicated on how rates go. But even if rates come down. We will continue to stay disciplined on getting multi-product mortgage customers at origination and again, focusing on renewal. The auto book will continue to be stressed. We're actually pulling back on used car on non-subvented and where we'll see some growth will be in the subvented new car business, as more new cars come on stream with our dealers. In terms of credit cards, we'll continue to grow double-digit the balances. But again, our credit card is not a monoline business. It's actually a cross-sell product, where 80% of our new originations in credit card, are coming from existing customers in C+. So, hopefully that gives you a bit of a background.

That's helpful. Thanks.

Thank you. The next question is from John Aiken from Jefferies. Please go ahead. Your line is now open.

Good morning. I wanted to dive into the appendix, actually slight 28 if I may. Declining balances in commercial and corporate lending international, not terribly surprising. But in context, we're actually seeing a shift away from investment grade to non-investment grade. First part of this is, is this just simple credit migration where some of the former investment grade has slipped into non-investment grade given what's going on in the region? And second part to the question, when do we think we can actually start to see the reversion of that and growth? Because presumably, you're looking to grow the investment grade part of the business, or do I have that strategy incorrect?

Yes, I can start, John. It's Raj. What you're seeing in investment and non-investment grade has got both qualities what you described. Yes, there is some level of migration that is happening, both in the GBM book as well as in the international commercial book. You actually see it in the capital, where we see non-retail migration for obvious reasons, right? High inflation, low growth in all these economies, high interest rates has got some impact. The numbers that you see is actually small, right? I mean, it's moving from 40% to 39% in investment grade and 60% to 61% in non-investment grade. There's no deliberate strategy over here. It's how we are going to deselect clients and those clients who we believe we are not getting the appropriate return. We're trying to pull back - from a capital perspective. And international banking, as you know, every three months, we have the ability to reprice if you want to keep the client, or reprice if you want to exit the client. So we have used that in the past. We continue to use it as we, you know, we have a finite amount of capital that international banking has and they're making the right choices to improve the returns. You can see some early reference to it. Scott made reference in his comments talking about ROE, how it's improved beyond 15%. Now, these are all contributors to the outcome, which is to have a more profitable business. But there's no significant shift that you should expect to see even going forward. It's just a small shift based on a couple of factors.

Thanks for the call, Raj. I'll re-queue.

Anytime, John.

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

All right. Just a couple here. On international, a good NIM expansion this quarter, but with rate cuts that we've seen across the region, how do you expect that to evolve in the coming quarters? And then on the credit side, look, there's a lot of ways to slice and dice the evaluation of your provisions. But one thing I look at is the performing ACL ratio today versus pre-COVID, historical reasons, I guess. And it's pretty flat for Scotia. Your peers have more of a buffer above that pre-COVID level. Given what you've highlighted as far as, some of the challenges your customers are facing, and this is across the industry, of course, but your book in particular and the auto book, is it possible, plausible that we could see another bump up required to that performing ACL ratio just because of - everything that's going on? Thanks.

Gabe, it's Raj. I'll start on NIM, and Francisco might have a comment or two to follow me, and then Phil will take over on the performing ACL ratio. International banking, then, Gabe, you probably followed me quite a bit. A number of countries, multiple factors that move the NIM up and down, inflation is a factor and so on. This quarter, the benefit came primarily from reduction in cost of funds.

Right.

And we have a significant cut in rates, particularly in Chile and Peru that we looked at. Peru's NIM is up 15 basis points. Chile is up 8 basis points. And even Colombia is up 41 basis points for the same reason. So that thing, I think, is largely done. We'll see some marginal benefits over there, but I think most of it is baked into the 447 basis points. There is about two, three basis points in the 447, which is inflation-related, which we know we will give up in Chile. So maybe look at it as 445. And then it'll bob around as international banking NIM always does, because of multiple factors. I - somewhere around that, maybe 450 is the top end, at least over the next two quarters, because we're not expecting meaningful rate cuts like we've seen in the last two or three quarters. So that would be my sense of how the NIM will behave looking forward.

I would agree, Raj. This is Francisco. I think the one, the lagger is Mexico. We expect Mexico to cooperate much later and much slower. So that will be the remaining benefit. But we don't believe that's going to happen in the second half of the year, but rather a 2025 event.

Okay. Thanks for the clarity.

Gabe, Phil here. Hope you're well. So maybe just on the ACL question you asked, you know, if you recall, we did do a large performing build in Q4 last year, and we did it on both the business banking side and on the Canadian retail, just in anticipation of some of the headwinds we expected for fiscal 2024. If I were to go back to look at Q1, '20, we were at 82 basis points. We're at 88 basis points this quarter. So, I feel given where we are, given the level of build that we've done over the past four quarters, I'm comfortable with the level of allowances that we have. Will we increase performing allowances as we go forward? It's going to depend on how the macroeconomic scenario plays out, and we'll be guided by that.

And that guidance range you gave, sorry, that was for impaired or total? The 45 to 55?

That's for total.

Yes. Okay. All right. Thank you.

Thanks, Gabe.

Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead. Your line is now open.

Good morning. Probably for Raj, the capital ratio looks pretty healthy now, north of 13.2%. You may have discussed this somewhere in the presentation or in the material. I may not have seen it yet. Can you update us on what your intentions are with the DRIP? Most of your peers, I think all of your peers have dropped the DRIP. So I'm interested in your outlook there?

Yes, sure, Mario. Good morning. Capital ratio, yes, definitely healthy at 13.2% reflects a lot of the actions that we have taken, and we will continue to take as we pivot away from lower profitable segments and businesses to higher profitable segments. So, we're seeing good returns over there on the efforts that we've made. So the capital build has been really good, particularly over the last two quarters. And we're very pleased with the results from all the initiatives that we talk about, which we call as RWA optimization initiatives. We previously indicated that our intention, was to turn off the DRIP in the second half of the year. Our intention still remains the same. We're quite motivated to doing that, and that's what you should expect from us in the second half of the year to turn off the DRIP, but right now it is still on.

Okay. And then, again, this is something I may have missed. I thought the cadence for dividend increases was every Q2, but again, I may have missed this. I don't see a dividend increase this quarter?

No, you haven't missed anything, Mario, as always. I think, yes, there is no dividend increase this quarter. It's part of what we're thinking is, we do want to grow dividends in line with our earnings growth, which we know is going to happen in 2025, rate situation and other stuff to contribute it. So we decided that it's better to take a pause at this time and we should start commencing our dividend increases in 2025, in line with what we do every year in the second quarter.

Thank you.

Thank you. The next question is from Lemar Persaud from Cormark Securities. Please go ahead. Your line is now open.

Yes, thanks. Maybe turning to Aris on a question on Canadian banking. This cessation of CDOR, is that going to weigh on non-interest income in Canadian banking? Because like I noticed the net fee and commission income dropped to $619 million this quarter, but it's been kind of stable in the north of $630 mid-$640 range throughout 2023. So I'm wondering if that's going to be a headwind - you're going to see play out for the next couple of quarters? Thanks.

Hi, Lemar, it's Raj. How about I start and then, Aris might have a couple of comments on this. Yes, absolutely. As we turn off the CDOR and the acceptance level starts going down, which should happen in an accelerated manner in Q3, yes, the non-interest revenue will go down, but it doesn't impact total revenue. It's kind of a geography that moves between non-interest revenue and NII. So, we don't have the stamping fees, but we pick it up through the NII line. And as you may know, some of these acceptances tend to be at lower margins. So as they come up for renewals, it'll be a tailwind to the margin of the Canadian bank and to the bank as a whole, not necessarily in Q3, but as they come up for renewal. So that's the change you should expect to see. But part of the non-interest revenue of the Canadian bank is also down, because we've lost the Canadian Tire Financial Services income, which as you know, is between $16 million to $18 million a quarter. But that shift will happen just between revenue for the acceptance as part of the business, but not necessarily impact the total revenue in any meaningful manner.

And just to add, up to now, it's been one-third we've converted the BAs into loans, and that has obviously impacted the NIR. But again, as Raj said, the net interest income going up. By September, the remaining part of the BAs will be converted. These are not able to reprice like the earlier ones. So, we'll see a bit of pressure on the NIM, as that conversion takes place.

Okay. So net-net, it just a - we should expect it to be kind of a shift from NIR into NII...?

Yes, that's right, Lemar. It shouldn't be meaningful. It's a $20 billion portfolio compared to the $440 billion we have in the business, but it'll have some impact as it transitions away. Yes.

Understood. Thank you.

Thank you. The next question is from Mike Rizvanovic from KBW Research. Please go ahead. Your line is now open.

Good morning. I have a question for Raj, and I wanted to ask about the corporate segment loss. And just in light of Scott's comments at the outset, it sounds like your - view on the number of rate cuts has certainly changed. And so, if you think about medium term, I'm trying to get a sense of the reasonable trajectory that we should expect on that loss. So I'm guessing it's not going to be $400 million plus. But if you think about, say, exiting 2025, so six quarters from now, does this go down to something like sub $300 million? And if that's the case, what do we need to see on maybe the shape of the yield curve to get you there?

Yes, thanks, Mike, for your question. Yes, the other segment this quarter, just to clarify, it benefited, because of market adjustments. And I believe for the second half of the year, unless rate cuts happen different than what we're expecting, which is only, one rate cut we're expecting now in the second half of the year in Canada. We'll remain around the $450 to $475 million loss range, unless we benefit again from some late mark-to-market benefits like I saw this quarter. But to answer your question on trajectory, it will follow the trajectory of rate cuts, Mike, because the benefits of the rate cuts will show up in the other segment for us, because the business plan is compensated through the transfer pricing arrangements that, we have to remove the volatility in the business plan results. Each rate cut, this time we put out one additional disclosure in the appendix slide, where we said a 25 basis point cut at the short end of the curve gives us about $100 million NII benefit in a full year. So it gives you a little bit of perspective how many rate cuts and how that could play out for the other segment next year. The more meaningful one, Mike, is to look at our fixed rate mortgages that is coming up for renewal in 2025. You can make some assumptions saying, what could be the pickup in the yield that will show up in the other segment, because the spread will remain constant in the business. But it also has to be offset by some of the GICs which are coming up for renewal. Even this quarter in the Canadian Bank, we saw GIC renewals impacted there, NIM by about two basis points. So there is a dynamic between fixed rate borrowings that we have and fixed rate mortgages that will come up for renewal. That should help. If you have reasonable rate cuts, call it four rate cuts, right, through to 2025. I would see that the other segment will not start with a four. The quarterly loss should be meaningfully lower. But it's tough to provide an estimate. Like you said, it depends on how the various parts of the rate curve move right, from the short end all the way to five years. But it should be a meaningful benefit in 2025 through the other segment.

Okay, that's super helpful. So it's rate cuts, Bank of Canada, and not necessarily the shape of the yield curve that would drive that?

Yes, I'm assuming that, the rate cuts obviously benefit the short end of the curve. Hopefully, there's not a parallel shift. I don't think any of us expect that, because the rate curve is inverted. So the long end of the curve should go down meaningfully lower than the 25 basis point rate that we might see at the short end of the curve. So, we might lose something at the three year and five year point. But the significant benefit will come from the short end.

Okay. Perfect. Thanks for that. And then if I just squeeze one more in for Aris on Canadian banking, just wanted to ask about it sounds like you're getting a bit of traction on those more fulsome relationships, which is now your strategy. On the cost side, I'm just wondering, is that something that near term could result in a bit of expense inflation, I'm not sure how much incentives play a part in getting that customer, to become more of a fulsome customer for the bank. Any thoughts on near term expense?

Let me just on the primary, just to give a bit of background before I get to your question. So on primary, what we're doing is, at the point of sale, we're much more deliberate in the types of customers we want to bring into the bank. So again, having multi product acquisition at the point of sale, I talked about mortgage, and but it's also in generally in our acquisition in our branch network. The mortgage plus, as you know, I discussed when we book mortgages, we're looking for the multi-product day-to-day banking, additional products along with the mortgage, and then again, the advisory getting more products. So as you can imagine, getting more products to our customers, they're more engaged with us, there could be additional, of course, interactions and costs with that. But again, in parallel, as you know, and you see that a bit on the cost side, is we're digitizing our business, we're looking to take costs out by digitizing end-to-end digitizing, onboarding digitizing, and that's where our investments are going. Despite the good management on the cost side, there's a lot of work going on behind the scenes on how we're going to digitize this business, in line with what I talked about at Investor Day. So yes, you'll get more engaged customers, they'll be interacting with you more, but you'll obviously drive more revenues and there the operating - leverage will continue to be strong. That's the whole thesis behind it.

Thanks for the color.

Thank you. The next question is from my Nigel D'Souza from Veritas Investment Research. Please go ahead. Your line is now open.

Thank you. Good morning. I wanted to follow-up on the variable rate mortgages, but from a different perspective. When I think you mentioned those were 2022 vintages. So would you be able to set some light on the LTVs for those mortgages? And what I'm getting at here is, were those mortgages underwater or near 100% LTV? There wasn't a payment option to have an adjustable payment structure. And is there a correlation ultimately between the amount of equity and the LTVs of the ownership portfolio and the delinquencies and impairments you're seeing in that book?

Hi, Nigel. It's Phil. Our average LTV on that portfolio is in the 50s. So it is quite low. At origination, the average FICO for those products were 800. And so, it is a quite a strong credit quality portfolio. I think, as I pointed to in my prepared remarks earlier that the friction is really coming from Toronto, GTA and Vancouver, where you're seeing, where you had higher cost on the mortgage. And I think people are just in the process now of given the higher for longer rate, they're making tradeoffs in terms of their payments. And maybe they got a little bit over their skis at point of origination. But these are good customers that are just facing a little bit of tightness in terms of their cash flow. We've been really focused on the collections efforts, and we've been doing a lot of proactive outreach to these individuals. It's not - as if we have a bad customer here. This is just a customer who's sort of going through a life event, or having just some difficulties making some payments to pay. We've expanded our proactive outreach to these customers, and we've implemented a number of loss mitigation programs to help them through this structure period.

So, just to clarify, you're saying there's no correlation between LPD and delinquency rate it's mindful?

No, it's tough to hear you. But I think the answer to your question is no.

Okay. So, and then just a quick follow-up on the NII sensitivity. I noticed that, yes, there's a $100 million benefit for 25 basis points decrease, but I believe there's a decline in NII for 100 basis points decrease in rate. So, just wondering what's driving that dynamic in your hedging program, where there's a benefit for - 25 basis points decrease, but then there's a negative impact for 100?

Hi, Nigel, it's Raj. That's actually a simple answer. Because one of it is a parallel shift, right? Unless we believe that there's going to be a complete parallel shift up and down in an inverted rate environment, yes, the 100 basis points plus and minus, like we say, will happen. But that's not what we expect. I think what's more meaningful is the short end of the curve. That's the distinction between the two. But I'm happy to go into more detail with you one-on-one if you think you have more follow-up questions on that topic.

And Raj, it's also important to note is the sensitivity disclosure we've had, $100 million for 25 basis points, doesn't include the asset repricing? It does not. And so, the tailwind here for the bank in the scenario where rates come down is pretty significant.

Okay. That's helpful. That's it from me. Thank you.

Thanks, Nigel.

Thank you. The next question is from Darko Mihelic from RBC Capital Markets. Please go ahead. Your line is now open.

Hi. Thank you for taking my question. I know we're running out of time here. I'm just wondering, Raj, if you can spend a little bit more time to elaborate on the capital floor add-on, and specifically, you suggested that it was eliminated, because of changes in book quality and model updates. And I think I heard you say that there was more work to be [Technical Difficulty] when the floor kicks back in again. And what it is precisely that you're doing with respect to model updates? Thank you.

Yes. Sure, Darko. I missed part of your question. You got cut off. But I think I got what you're looking for. The impact at the end of Q1 of the floor was $7.8 billion, approximately 23 basis points, if you recall. As I also mentioned previously, the floor impact inherently will move due to a number of factors. Movement in ARB capital relative to the standardized equal and movement in ACL versus GL. So a lot of things impact the floor, unfortunately, which makes it very difficult to follow from quarter-to-quarter perspective. I'll call out two of the things, one of which you touched on, which impacted the elimination of the floor this quarter. One is client de-selection. The way we have worked about client de-selection, when we think about profitability, we have tried to calculate it or recalculate it based on 72.5% floor. Because that's ultimately where we're going to land up, and see if the client will continue to remain profitable. So the focus of the business across all three business lines is to look at those clients who will not be profitable under the standardized 72.5% risk-weighted asset capital requirements. So they've been deselecting those clients, which has the greatest impact and therefore benefits the floor when we look at it from period-to-period. The more important thing that impacted this quarter is model changes of $4.5 billion that impact ARB, RWA only and does not impact the standardized calculation. It's split two ways. One I would call out is just parameter changes. Constantly we look at our probability of defaults for our customers, based on market influence as our own performance and so on. So that resulted and there was some migration too in the non-retail book like I pointed out on a different question which increased the ARB, RWA which is obviously insensitive under the standardized calculation. The other component is an LGD methodology change we actually put through. So that impacted at $4.5 billion. The PD changes or the parameter changes, which we call book quality impacted a little over $4.5 billion. It just added up to $7.8 billion, which was our floor. Every quarter, Darko unfortunately, you're going to see this move around. The floor should not get engaged in Q3, Q4 for sure, because it has directionally it's supposed to go the other way based on the actions we're taking. But again, Q1, '25 is going to be a 2.5% floor. We'll see how we trend up towards that and we'll update you on what could be the impact in Q1, '25 as well as in Q1, '26. Our capital plans looking forward through to 2026 comfortably cover all these impacts as we think about what, are the minimum ratios we'd like to run and how we can support the business growth. So, we feel pretty good about where we are today and the impact of the actions we have taken on our capital ratios.

Thank you, Raj. I appreciate that. And one last quick one in here. Would it be reasonable for next quarter to get some sort of an estimate on the possible impact of the minimum tax?

Yes, sure. I think I can give you the answer now. It's obviously due in 2025. Impact is not expected to be material like, some of the jurisdictions where it's not at 15%, which is what the OECD wants. There will be some pickup in that tax bill. But we really don't have too many jurisdictions, which are outside of the 15% Darko. But I'm happy to provide more details, but it won't be material at all. That I can tell you.

Okay. Thank you very much.

Thank you. The next question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead. Your line is now open.

Okay. Thank you very much for squeezing me in. I think most of the questions were asked and answered. Just one clarification. I think, Raj, you mentioned Brazil at least once in your remarks. I think you talked about it in the context of good deposit growth. Is Brazil a battleground for you? Is this an area that you're likely to deploy capital in, please?

Francisco, thank you for the question. We have built a sound franchise in Brazil focusing on the right clients. We have a great team on the ground. But that responded to a strategy of asset growth, which is not the strategy we're focused on now. The focus with Brazil is to ensure that one, returns increase, primacy drives the clients we serve, and it's an integral part of a connected franchise. We don't expect capital to be deployed in Brazil going forward. We do expect returns to continue to improve, and we have every confidence in the quality of the team that, we have on the ground to get that result. And we're seeing it already. Seeing tremendous progress there. But ultimately, Brazil is about how can, that franchise continue to contribute to a connected strategy that serves multinational clients, not about incremental capital at all.

So we won't have, Francisco, a quarter where you say PCLs are higher, because of impairments in Brazil, for example?

No, not at all. If you look at the exposure we have in Brazil, as I said, it has been very well managed. All primary strong clients in terms of quality, global names primarily that do business in Brazil, and that we serve elsewhere. So no, we do not anticipate at all a PCL issue in Brazil.

And so this would be in support of GBM LatAm operations?

Yes, primarily GBM driven and markets business. And again, you're going to continue to see us, not only in Brazil, by the way, but certainly in Europe and Asia, is this drive of multinational banking really at the heart of who we serve, and how we serve them. This will be in connection to increased share of wallet, across all of our footprint with these names. So we will not be focused on, for example, Brazilian names that operate only in Brazil. We will be focused on names that operate across our footprint that, also have a presence in Brazil. And we will be aiming to deploy capital, to close those global relationships, not necessarily only in Brazil.

I appreciate you taking my questions. Thank you.

Sure.

Thank you. There are no further questions registered at this time. I would like to turn back the meeting over to Raj.

Thank you very much. On behalf of the entire management team, I want to thank everyone for participating in our call today. And we look forward to speaking again at our Q3 call in August. This concludes our second quarter results call. Have a great day.

Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.