Bank of Nova Scotia Earnings - Q2 2025 Analysis
Positives
- Deposits grew by 5% YoY, outpacing loan growth driven by an increase of 8% in non-personal deposits and 3% in personal deposits.
- Revenue increased by 18% YoY, driven by higher performance in both capital markets and business banking.
- Revenue increased by 12% YoY from higher mutual fund fees, brokerage revenues, and investment management fees, and higher net interest income driven by loan and deposit growth.
- The company delivered positive operating leverage for the fifth straight quarter while continuing to invest in businesses to drive longer-term sustainable growth and improve the client experience.
Q&A Highlights - Q2 2025
Analyst asked about the fundamental deterioration that has already taken place and what do management see realistically happening over the coming weeks and months as they think about write-offs and where impaired PCLs could be worse on impaired PCLs than 2025.
Management stated that they are confident that they are going to be in and around where they are today impaired for the remainder of the year. They are not seeing any major pockets of strain in any of their portfolios and they are feeling quite confident that the Canadian book is stabilized. They are also investing in new tools, technology, and people in the collections space to ensure they are prepared for this environment.
Analyst asked about what would get customer activity going and a world where customers would be less worried about the macro outlook.
Management stated that they are optimistic about the back half of this year and into 2026, particularly as they look at the inflection point with a little bit more loan growth. They also mentioned that making progress on USMCA would be helpful and that they have already seen a little bit more certainty in Canada with the prime ministerial transition.
Analyst asked about the company's credit conditions and whether they have deteriorated as abruptly as the slowdown.
Phil Thomas, Senior Executive Vice President and Chief Financial Officer, explained that while there has been some slowdown in credit conditions, it has not been as abrupt as the slowdown in the economy. He noted that the company is still seeing some positive trends in credit, such as deposit account growth and lower levels of spend, but also acknowledged that there are some signs of stress, such as customers being more cautious about their spending and switching to budget groceries. He also mentioned that the company has built an 18-basis-point performing allowance to prepare for potential future events.
Analyst asked about the company's focus on client primacy and whether it will affect the growth of its loan books.
Francisco Alberto Aristeguieta Silva, Executive Vice President and Chief Financial Officer, explained that the company is focused on creating sustainable results and reducing RWA allocation to certain clients and the International business. He noted that the company has been able to maintain strong earnings growth despite this reduction, and that it is moving towards a relationship-based approach with clients. He also mentioned that the company is not yet ready to grow its loan books, but that it is confident in its ability to do so in the future.
Analyst asked about the strategic investment in KeyCorp and potential synergies from that investment.
Lawren Scott Thomson, CEO of Bank of Nova Scotia, answered that the company is pleased to see the balance sheet repositioning and growth in NII going forward, which will contribute CAD 68 million in the quarter. He also mentioned that the regulatory environment in the US is changing, and tailwinds to the banking sector are expected, which will be beneficial for KeyCorp's earnings and for the Canadian regulatory landscape.
Analyst asked about the company's investment in Peru and Chile relative to Mexico or the United States.
Francisco Alberto Aristeguieta Silva, COO of Bank of Nova Scotia, answered that the company's strategy remains the same, and they are not looking to divert capital into these countries. Instead, they are optimizing their performance and generating shareholder value through regionalization and optimization of spending. The company has the resources it needs to deliver the power of its franchise and is looking to capture that value over the next three to five years.
Analyst asked about the bottom end of the capital ratio range.
Lawren Scott Thomson stated that the company is comfortable with a ratio of 12.5%, which is the bottom end of the range. He explained that the company has been able to execute on several transactions, including the Colombia and KeyBank transactions, and a share repurchase, and that running in the 12.5% to 13% range is the right capital ratio for the bank.
Analyst asked about the company's focus on term versus demand in the deposit equation and what they plan to do in the back half of the year to focus on the demand side.
The company is focused on improving their deposit mix and have everyone on deck working on this priority. They plan to continue to accelerate their efforts to improve the deposit mix in the back half of the year.
