Scotiabank's Q3 2025 Earnings Call: Contradictions Emerge in Capital Deployment, Credit Outlook, and International Banking Strategy

The above is the analysis of the conflicting points in this earnings call

Date of Call: August 26, 2025

Financials Results

• Revenue: Up 12% YOY; net interest income up 13% YOY (all-bank NIM +22 bps YOY, +5 bps QoQ); noninterest income $4.0B, up 10% YOY
• EPS: $1.88 per diluted share (adjusted), up 15% YOY

Guidance:

- Expect strong earnings growth in 2025; detailed outlook to come on Q4 call.- CET1 to remain comfortably above 13% while continuing NCIB buybacks; capital deployed first to organic growth, then credit buffers, then buybacks.- Internal capital generation targeted at ~15–20 bps per quarter through 2026 (and improving over time).- Canadian Banking NIM expected to see small sequential gains absent further BoC cuts.- International Banking NIM to remain ~4.45–4.50%; Q3 benefited from Brazil rate arbitrage.- Canadian Commercial optimization largely complete; pivot to growth in 2026.- International Banking pivoting to growth in 2026 with disciplined returns (wallet-share/GTB-led).- Corporate/Other losses to trend lower; benefits from rate relief accrue here.

Business Commentary:

Operating Segment Performance:* - Global Banking and Markets (GBM) reported earnings of $473 million, up 29% year-on-year, with revenue increasing by 21%. - The growth was driven by a 54% increase in capital markets revenues and higher fixed income trading and advisory fees.

• Trading Revenue and Strategy:
• The bank's trading revenues were up by 50% for the year-to-date, contributing significantly to the overall revenue growth.

• This growth can be attributed to the strategic focus on enhancing capital velocity and fee income, particularly in fixed income trading.

• International Banking Expansion:

• The International Banking segment saw earnings increase by 7% year-on-year, with net interest margin expanding by 13 basis points.

• This is due to discipline in expense management and improved margins from favorable rate dynamics in Latin American countries.

• Capital Generation and Buyback:

• The bank's CET1 capital ratio increased by 10 basis points quarter-over-quarter, ending at 13.3%, supported by strong internal capital generation of 13 basis points.
• The bank focused on optimizing capital, enabling share buybacks and indicating a commitment to maintaining strong balance sheet metrics.

  

  Sentiment Analysis:

  • Management reported adjusted EPS up 15% YOY and PTPP up 17% YOY, sixth straight quarter of positive operating leverage, and CET1 at 13.3% after buybacks. NIM expanded YOY and QoQ; GBM earnings rose 29% YOY with strong trading and fees. International ROE reached 15% (+180 bps YOY). While credit outlook remains cautious, impaired PCL ratio improved to 51 bps (-6 bps QoQ) and performing build normalized to 4 bps.

  Q&A:

  • Question from Ebrahim Huseini Poonawala (BofA Securities): With CET1 at 13.3%, will you lean harder into buybacks, and is sub-13% CET1 off-limits?
  • Response: CET1 is strong; priorities are organic growth, credit buffers, then buybacks. NCIB will continue, but CET1 to stay comfortably above 13% near term.
  • Question from Ebrahim Huseini Poonawala (BofA Securities): Which business is progressing slowest versus Investor Day and what accelerates execution?
  • Response: IB and GBM are ahead with balance-sheet optimization and fee momentum; Canada is improving but will focus on commercial/transaction banking to drive growth into 2026–2027.
  • Question from John Aiken (Jefferies): What’s driving negative credit migration internationally—any specific region/sector?
  • Response: Pressure is mainly in Mexico; Peru and Chile are stable with no trade-related impact noted.
  • Question from John Aiken (Jefferies): Are improved domestic credit card delinquencies seasonal or structural?
  • Response: Improvements reflect tighter originations and stronger collections; consumer health is mixed with stress among younger cohorts.
  • Question from Matthew James Lee (Canaccord Genuity): When can Canadian Banking achieve positive operating leverage, even with muted industry loan growth?
  • Response: Targeting positive operating leverage starting next year as tech and digitization investments begin to pay back.
  • Question from Gabriel Dechaine (National Bank Financial): Outlook for Corporate/Other given potential rate cuts—could it approach breakeven?
  • Response: Losses should improve (around low-$40M next quarter); rate relief benefits accrue here; objective is stable, low loss as funding costs are allocated to segments.
  • Question from Gabriel Dechaine (National Bank Financial): Is commercial de-banking done and will deposits remain competitive?
  • Response: Commercial optimization is largely done; expect market-like growth in 2026. Core checking/savings deposits are growing while term balances decline; focus remains on primacy and margins.
  • Question from Doug Young (Desjardins): PCLs beat prior guidance; how should we think about impaired PCL trends into Q4 and 2026?
  • Response: Trends improved, notably in Canadian retail (auto, LOC), but management remains cautious given macro/trade uncertainty.
  • Question from Doug Young (Desjardins): What is a through-the-cycle internal capital generation target?
  • Response: Expect 15–20 bps per quarter through 2026, improving as accretive businesses (Wealth, GBM) scale.
  • Question from Paul David Holden (CIBC Capital Markets): How sustainable is the strong FICC/trading quarter?
  • Response: Volatility and equity strength helped, but the franchise is being built to be more durable; not every quarter repeatable, but higher, steadier baseline expected.
  • Question from Paul David Holden (CIBC Capital Markets): Do higher formations imply higher impaired PCLs next quarter?
  • Response: No; formations are being worked through and aren’t expected to translate into higher loan losses.
  • Question from Jill Elizabeth Glaser Shea (UBS): Should Canadian NIM keep improving with deposit mix gains?
  • Response: Expect small sequential NIM improvement absent BoC cuts; further rate cuts would pressure Canadian NIM.
  • Question from Jill Elizabeth Glaser Shea (UBS): International Banking NIM has trended above the 4.45–4.50% range—sustainable?
  • Response: Base range remains ~4.45–4.50%; Q3 upside was Brazil arbitrage; focus on core deposit growth and primacy.
  • Question from Darko Mihelic (RBC Capital Markets): How far along is client deselection and when does growth resume?
  • Response: Commercial deselection is largely complete; retail is being re-segmented; pivot to disciplined growth is targeted for 2026.
  • Question from Darko Mihelic (RBC Capital Markets): Is growth shifting toward non-investment-grade exposures?
  • Response: No; growth will be return- and wallet-share-led with strong cash management attachment, not lower credit quality.
  • Question from Sohrab Movahedi (BMO Capital Markets): Which segment will outgrow over the next six quarters?
  • Response: International is pivoting to 5–7% growth with disciplined returns; Canada to drive significant NI growth into 2026–2027 via operating leverage, with Wealth as a key connector.