Bank of Nova Scotia

NYSE:BNS

Earnings Call Analysis

Scotiabank Q3 Financial Performance and Strategic Investments

Scotiabank reported Q3 adjusted earnings of $2.2 billion, with earnings per share of $1.63, demonstrating strong performance driven by higher net interest income and non-interest revenue. Canadian Banking contributed with $1.1 billion of earnings, up 6% year-over-year, supported by deposit growth and loan margin expansion. Wealth Management saw a notable 11% increase in earnings to $415 million. The bank made a strategic investment in KeyCorp, expected to add over $0.25 to EPS in its first full year. Despite higher credit costs, Scotiabank remains focused on disciplined capital deployment and strong balance sheet management, setting the foundation for future growth in 2025.

Solid Financial Performance and Revenue Growth

In the third quarter of 2024, Scotiabank reported adjusted earnings of $2.2 billion, translating to $1.63 per share. This represents a solid year-over-year revenue increase of 5%, driven by a 6% growth in net interest income, boosted by net interest margin expansion, and a 4% growth in noninterest income. Return on equity stood at 11.3% while return on tangible common equity was 13.7%. Despite a slight quarter-over-quarter decline in net interest margin by 3 basis points, primarily due to lower margins in International and Canadian Banking, the management expects margins to improve modestly in the next quarter, with further expansion anticipated beyond as rate cuts take full effect.

Canadian Banking: Strong Growth Amid Challenges

Canadian Banking delivered strong results with $1.1 billion in earnings, reflecting a 6% year-over-year growth. Loans and acceptances were up 1% quarter-over-quarter while net interest income increased by 11% year-over-year. Business loans grew by 7% and credit card balances surged by 16%, although residential mortgage balances saw a marginal 2% decline. Personal deposits increased by 5%, contributing to an overall deposit growth of 8%. The loan-to-deposit ratio improved to 120% from 129% the previous year, highlighting robust deposit growth. Despite higher loan loss provisions and increased expenses, the business achieved a positive operating leverage of 3.1% year-to-date.

Continued Momentum in Global Wealth Management

Global Wealth Management reported impressive earnings of $415 million, marking an 11% increase from the previous year. This growth was driven by higher brokerage revenues, net interest income in Canada, and increased mutual fund fees. Year-over-year, revenues surged by 10%, with a corresponding 9% rise in expenses due to higher volume-related costs, expansion of the sales force, and elevated technology expenses. The assets under management (AUM) and assets under administration (AUA) both grew by 10%, reflecting increased market appreciation despite net redemptions. The international wealth business contributed significantly with an 11% earnings growth, primarily from higher mutual fund fees and robust loan and deposit growth in Latin America.

Global Banking and Markets: Resilient Performance

Global Banking and Markets generated $418 million in earnings, although this was a 4% decline year-over-year due to lower fixed income revenues and the removal of the dividend received deduction. On a positive note, business banking revenues grew by 8% year-over-year and 9% quarter-over-quarter, buoyed by higher corporate and investment banking activities, including underwriting and advisory fees. Despite a 5% quarter-over-quarter drop in loans and acceptances to $109 billion, net interest income increased by 16% year-over-year, driven by improved corporate lending and deposit margins.

International Banking: Strategic Repositioning

The International Banking segment delivered earnings of $674 million, which is a 6% increase year-over-year. Revenue increased by 6%, largely due to a 7% rise in net interest income in key markets like Chile, Mexico, and Peru. Even though loans were down 2% year-over-year, deposits grew by 4%, leading to an improved loan-to-deposit ratio of 126%, down from 135% the previous year. This segment is benefiting from productivity efforts and strategic capital repositioning, achieving a strong 4.6% positive operating leverage year-to-date despite the challenging macroeconomic conditions in some international markets.

Robust Balance Sheet and Capital Management

Scotiabank reported a Common Equity Tier 1 (CET1) capital ratio of 13.3%, up 10 basis points from the previous quarter and 60 basis points year-over-year. Total risk-weighted assets increased to $454 billion from $450 billion in the prior quarter, driven by growth in balance sheet assets and undrawn commitments. The bank’s efforts to enhance its capital position have also been evidenced by the reduction of its wholesale funding requirement by $33 billion over the past year.

Outlook and Strategic Initiatives

Looking ahead, Scotiabank remains focused on disciplined capital deployment, particularly in its priority segments of Canadian Banking and Wealth Management, while maintaining a strong balance sheet. Management is optimistic about modest net interest margin improvements in the coming quarters and sees potential earnings growth in 2025 as rate cuts take effect and the economic environment stabilizes. Furthermore, the bank's investment in KeyCorp underscores its commitment to strategic growth in the North American corridor, providing optionality and potential income increase over time.

Earnings Call Transcript 2024-Q3

[John McCartney, executive]

Good morning, and welcome to Scotiabank's 2024 Third 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 your 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.

[L. Thomson, executive]

Thank you, John, and good morning, everyone. We are pleased to share our Q3 results, which demonstrate another quarter of progress and focused execution against our strategy. Through a challenging market environment, we achieved quarter-over-quarter EPS growth and continued positive operating leverage. Our results reflect the strength of our balance sheet while demonstrating revenue acceleration led by performance in our Canadian Banking business and ongoing positive momentum in Global Wealth. Importantly, we are seeing the profitability benefits of our shifting focus from volume to value. Let me take a moment to recap a few key enterprise initiatives. Personal and commercial deposit growth. We remain laser-focused on developing primary client relationships. And while we expect this to be an ongoing and incremental journey, we are well underway with P&C deposit growth across our Canadian and international retail businesses up 7% on a year-over-year basis.

Since we started this journey 18 months ago, deposits in our Canadian Banking business are up $43 billion. Capital discipline. We are deploying our incremental capital to our priority businesses, in line with our medium-term objectives. We are starting to see the benefits of this repositioning with strong revenue and earnings growth in Canadian Banking and Wealth and a sharpened focus on returns in GBM and International Banking. Today's results demonstrate our ability to generate earnings growth while focusing on disciplined capital deployment to priority client segments.

Cost and process efficiencies. Our efforts to increase our productivity will be an important contributor to meeting our medium-term profitability metrics. All bank positive operating leverage driven by cost discipline in Canadian international banking will be an important driver of results going forward. And finally, maintaining a strong balance sheet remains a high priority. Through the challenging rate environment over the past 18 months, we have strengthened our balance sheet with CET1 capital, ACL coverage and liquidity metrics, all at significantly improved levels.

Turning to our Q3 results. The bank reported adjusted earnings of $2.2 billion or $1.63 per share in the quarter. The bank delivered solid top line revenue growth again this quarter, driven by higher net interest income and noninterest revenue. We are realizing on the productivity initiatives that are already underway at the bank. Specifically, in our international and Canadian retail businesses, our productivity ratio has improved by 210 basis points and 130 basis points, respectively, on a year-to-date basis.

Credit costs are at the high end of our previously communicated range as we see the impact of sustained higher rates on our retail portfolios. In our international markets, we expect to see credit conditions begin to stabilize in response to the monetary easing over the past few quarters, and we remain focused on delivering favorable risk-adjusted margins and returns. Despite higher credit costs, it is important to note that risk-adjusted margins have trended higher year-to-date in both Canadian and International Banking.

Loans grew sequentially in the Canadian bank, in line with our strategic objective to deploy capital to our priority businesses and with our profitable primary relationships. Loan balances trended lower in International Banking and GBM. This lending discipline, coupled with early success in what will be a relentless ongoing effort to strengthen our deposit franchise is already showing clear progress. Our wholesale funding requirement has been reduced over the past year by $33 billion resulting in a 250 basis point reduction in our wholesale funding ratio.

A few performance highlights across each of our businesses. We were pleased with the strong performance of our Canadian Banking business, which delivered $1.1 billion of earnings in the quarter, up 6%. Pretax pre-provision earnings grew 11% year-over-year. We are making good progress towards our medium-term 1 million new primary client growth objective in domestic retail and 500,000 primary client growth target in Tangerine. Year-to-date, we've added 143,000 net new primary clients in our Canadian retail and Tangerine franchises.

Although balances in the Canadian residential mortgage portfolio are down slightly year-over-year, we have clearly reached an inflection point as we've seen the success of our multiproduct mortgage plus offerings result in sequential residential mortgage growth. Specifically, 82% of mortgage originations in Q3 were mortgage plus offerings with new clients averaging an additional 3.1 products. Mortgage portfolio retention rates have also improved 190 basis points year-over-year to over 90%.

Enhancing the profitability of our Canadian Banking franchise will be a key driver of shareholder value creation. I was encouraged by the sequential 150 basis point improvement in Canadian Banking return on equity this quarter.

Global Wealth delivered a very strong contribution of $415 million this quarter as a result of continued franchise momentum in our Canadian wealth business, led by growth in our advice channels as well as double-digit growth from international wealth. Our Canadian wealth management advisory businesses saw a 19% increase in earnings year-over-year, led by very strong performance from ScotiaMcLeod and Private Banking. We continue to invest in adviser growth and technology within ScotiaMcLeod and have recently achieved our record assets managed in that channel. Our total wealth approach to providing full client solutions is driving growth in assets and relationship depth with new and existing clients. Financial plans in place, for example, which we know reflect stronger relationships and importantly, better outcomes for our clients are up 29% year-over-year. Stronger collaboration and client cross-sell were highlighted as a clear priority for our domestic businesses at our Investor Day.

We've seen good success in terms of the partnership between our businesses, driving a 21% year-to-date increase in closed referrals from the Canadian retail bank to our wealth business. These are tangible, measurable metrics that confirm our advisers are working more successfully with their clients and with partners across our organization to bring more value to those clients. We expect to see similar significant benefits from the partnership between Global Wealth and our Commercial Banking business going forward.

In our Global Banking and Markets business, we reported solid earnings of $418 million this quarter despite lesser activity in the capital markets business, offset by stronger corporate banking and U.S. business results. I have been impressed by GBM's ability to substantially earn through the headwind created by the elimination of the dividend received deduction this year. We were encouraged by strong growth in our fee businesses. Underwriting and advisory fees were up over 30% on both a year-over-year and year-to-date basis, benefiting from the continued build-out of our product capabilities in the U.S. capital markets business.

A critical component of our client primacy strategy is a more connected transaction banking capability across our primary markets to generate higher deposit growth. ScotiaConnect, our new cash management platform will elevate our capabilities in both Mexico and Canada with our focus now squarely on enhancing capabilities in the U.S. to make it easier for our multinational, corporate and commercial clients to do business with us.

In our International Banking business, we delivered strong earnings up 6% or 9% PTTT growth year-over-year, representing a solid 14% return on equity despite elevated credit costs and more normalized GBM LatAm results compared to prior quarters. We continue to reposition capital deployed within our international footprint. Customer deposits grew 4% year-over-year, while loans were managed 2% lower. The resulting loan-to-deposit ratio in International Banking was down 9 points to 126% over the period. We are pleased with the early results of our productivity efforts, expense control and capital repositioning in this business. We are confident that the retail client segmentation initiative is underway and our plans to develop a more regional standardized operating model will position our international banking business well for improved efficiency and greater profitability going forward.

Our International Banking business is doing more with less, generating impressive earnings growth with lower capital deployed. Since the beginning of the year, risk-weighted assets deployed by the region are lower by $6.7 billion.

Turning to the current economic environment. Interest rate increases over the past 2 years are now weighing on consumers, and to a lesser extent, on our commercial and corporate clients. In Canada, we expect the economy to improve modestly in response to further monetary easing, but remain below average historical growth rates for the foreseeable future. We do expect policy rates in Canada to trend gradually lower into mid-next year, providing welcome early relief to the Canadian consumer and driving a likely rebound in home and vehicle sales activity.

U.S. data in recent weeks has resulted in a repricing of the entire yield curve, suggesting much lower policy rates in the near term than were expected a few months ago. This will be a benefit to our earnings in 2025. The larger economies in our Latin American footprint are all now well into a period of monetary accommodation. Central Bank policy rates in Chile at 5.75% and Peru at 5.5% have continued lower from double-digit levels last year, and Mexico and Colombia have more recently lowered policy rates as well.

The LatAm region has experienced relative political stability and stronger growth than anticipated this year because of proactive policy action in this cycle and should benefit further going forward from a strengthening global economy. We are not anticipating recessionary conditions in any of our key operating geographies in the foreseeable future.

In closing, I would like to provide a few additional thoughts on the recent announcement of our agreement to purchase an approximately 14.9% interest in KeyCorp, a leading U.S. regional commercial focused banking franchise. This investment is consistent with our commitment to reallocate capital from developing into developed markets with a focus on the North American corridor. Our investment in KeyCorp represents a low-cost, low-risk approach to deploying capital in the U.S. banking market at a time when valuations are favorable and as the regulatory and competitive environment evolves. The additional primary capital will allow KeyCorp to optimize their balance sheet and be more front-footed in growing their business, which will also result in increased income to Scotiabank over time. This capital-efficient transaction is expected to add greater than $0.25 to EPS in the first full year of ownership and approximately 45 basis points to Scotiabank's return on equity.

Given both confidence in our capital plan and greater clarity on future capital requirements, we evaluated a range of capital deployment options, including share buybacks. The investment in Key is 65% more EPS accretive than the buyback alternative and 20 basis points better from an ROE perspective. The capital impact of a full transaction will be approximately 50 to 55 basis points. We believe that in the current environment, a 12.5% CET1 ratio represents an appropriate capital level at which to run the bank, 100 basis points above the regulatory minimum. Therefore, shareholders need not be concerned about Scotiabank holding excess capital as we continue to execute on our North American corridor strategy.

Our investment in Key is financially attractive to our shareholders in the near term and add strategic value in terms of optionality on future U.S. platform growth in the long term. It is also important to note that our organic growth plans within our well-established U.S. Global Banking and Markets business remain unchanged. We continue to enhance our U.S. capital markets product offering in highly rated market segments. Our recent mortgage capital market team hire within our structured credit business is the most recent example.

In summary, I am pleased with the bank's results this quarter in terms of delivering positive earnings progression while at the same time, building balance sheet strength despite a challenging economic backdrop. We are making measurable progress against our strategic plan and our performance in 2024 sets a strong foundation for the resumption of organic earnings growth in 2025, in line with our Investor Day commitments. With that, I will turn it over to Raj for a more detailed financial review of the quarter.

[Rajagopal Viswanathan, executive]

Thank you, Scott, and good morning, everyone. All my comments that follow will be on an adjusted basis, which exclude the following items: the loss, mostly relating to goodwill associated with the sale of CrediScotia, our consumer finance business in Peru, which the bank expects to receive regulatory approval in fiscal 2025; a legal provision related to certain value-added tax assessed amounts relating to certain client transactions that occurred prior to the bank acquiring the Peruvian subsidiary; and the usual acquisition related to intangible amortization amounts.

Moving to Slide 6 for a review of the third quarter results. The bank reported quarterly earnings of $2.2 billion and diluted earnings per share of $1.63. Return on equity was 11.3%, and return on tangible common equity was 13.7%. Revenues were up 5% year-over-year as net interest income grew 6%, driven by net interest margin expansion, while noninterest income grew 4% year-over-year. The all bank net interest margin expanded 4 basis points year-over-year. Margin was down 3 basis points quarter-over-quarter, driven mainly by lower margins in International Banking and Canadian Banking as well as higher levels of low-yielding liquid assets. We expect the margin to modestly improve in Q4 and expand beyond Q4 as the benefits of the rate cuts are fully realized.

Noninterest income was $3.6 billion, up 4% year-over-year, primarily from higher wealth management revenues, underwriting and advisory fees and the positive impact of foreign exchange. The provision for credit losses was approximately $1.1 billion, and the PCL ratio was 55 basis points, up 1 basis point quarter-over-quarter. Expenses grew 5% year-over-year driven by higher personnel costs, from inflationary adjustments and amortization and other technology-related costs that support business growth. Quarter-over-quarter, expenses were up a modest 1% driven by amortization and other technology-related costs and professional fees. The productivity ratio is 56% this quarter, in line with the prior quarter and year-to-date operating leverage was a positive 0.9%.

Moving to Slide 7, which shows the evolution of the CET1 capital ratio and risk-weighted assets during the quarter. The bank's CET1 ratio was 13.3%, an increase of 10 basis points quarter-over-quarter and 60 basis points year-over-year. Total risk-weighted assets was $454 billion, up from $450 billion in the prior quarter, driven by growth in balance sheet assets and undrawn commitments, book quality changes that were partly offset by lower market risk. Earnings contributed 16 basis points, the DRIP contributed 11 basis points and the revaluation of securities through OCI contributed a further 7 basis points. This was offset partly by higher risk-weighted assets consuming 11 basis points and FX and other impacts of another 11 basis points. As a reminder, the Q3 dividend that the bank announced this morning will be the last dividend eligible for the DRIP discount.

Turning now to the business line results beginning on Slide 8. Canadian Banking reported earnings of $1.1 billion, an increase of 6% year-over-year as higher revenues were partly offset by higher loan loss provisions and expenses. The business generated another quarter of positive operating leverage, resulting in year-to-date positive operating leverage of 3.1%.

Average loans and acceptances were up 1% quarter-over-quarter and roughly in line with the prior year. Business loans grew 7% year-over-year, credit card balances grew 16%, while residential mortgage balances declined 2%. We continue to see deposit growth as year-over-year deposits grew 8%, including an increase in personal deposits of 5%. The loan-to-deposit ratio improved to 120% compared to 129% in Q3 2023. Net interest income increased 11% year-over-year, primarily from solid deposit growth, margin expansion and the benefit from conversion of bankers' acceptances due to the cessation of CDOR. Net interest margin expanded 16 basis points year-over-year driven by higher loan margins and favorable changes to business mix. Margin was down 4 basis points quarter-over-quarter as asset margin expansion was more than offset by lower deposit margins reflecting the impact of rate cuts and mix shifts.

Noninterest income was down 1% year-over-year, primarily due to lower banking fees impacted by the bankers' acceptances converting to loans, partially offset by higher deposit and mutual fund fees and insurance revenue. The PCL ratio was 39 basis points, down 1 basis point quarter-over-quarter. Expenses increased 5% year-over-year, primarily due to higher technology, professional and personal costs.

Quarter-over-quarter expenses grew a modest 1%, primarily due to the impact of 2 more days in the quarter, higher professional fees that were offset by good expense management controls.

Turning now to Global Wealth Management on Slide 9. Earnings of $415 million were up 11% year-over-year, driven by higher brokerage revenues and net interest income in Canada and higher mutual fund fees across the Canadian and international bulk businesses, partly offset by higher expenses, largely volume related.

Quarter-over-quarter earnings were up 7%, primarily due to higher brokerage revenues and mutual fund fees and net interest income, partly offset by higher expenses. Revenues of $1.5 billion were up 10% year-over-year, driven by higher brokerage revenues and net interest income as well as higher mutual fund fees driven by AUM growth.

Expenses were up 9% year-over-year due to higher volume-related expenses, sales force expansion and higher technology costs to support business growth. The spot AUM increased 10% year-over-year to $364 billion as market appreciation was partly offset by net redemptions. AUA grew 10% over the same period to $694 billion from market appreciation and higher net sales. International Wealth Management earnings of $68 million were up 11% year-over-year, driven by higher mutual fund fees primarily from Mexico and strong deposit and loan growth across Latin America.

Turning to Slide 10. Global Banking and Markets generated earnings of $418 million, down 4% year-over-year, significantly impacted by the denial of the dividend received deduction. Capital Markets revenue was down 8% year-over-year, primarily from lower fixed income revenues that were partly offset by higher FX.

Quarter-over-quarter, capital markets revenue was down 5% from lower fixed income revenues, partly offset by higher equities and foreign exchange revenues. Business Banking revenues grew 8% year-over-year and 9% quarter-over-quarter due to higher corporate and investment banking, including higher underwriting and advisory fees. Loans and acceptances were down 5% quarter-over-quarter to $109 billion, reflecting market conditions and management's continued focus on balance sheet optimization.

Net interest income increased 16% year-over-year primarily due to higher corporate lending and deposit margins and higher loan fees. Noninterest income, however, was down 4% year-over-year due to lower trading-related revenue, including the impact from dividend received reduction, partly offset by higher fee and commission revenues.

Expenses were up 5% year-over-year due mainly to higher personnel costs and technology costs to support business growth as well as the impact of foreign exchange. Quarter-over-quarter expenses were up a modest 2%, largely driven by higher personnel costs.

The U.S. business generated strong earnings of $244 million, up 12% year-over-year, driven by higher corporate and investment banking revenue, equities revenues and lower funding costs partly offset by higher expenses. GBM Latin America, which is reported as part of International Banking reported earnings of $285 million, down 9% compared to the prior year and down 2% compared to the prior quarter.

Moving to Slide 11 for a review of International Banking. My comments that follow are on an adjusted and constant dollar basis. The segment delivered earnings of $674 million, that was up 6% year-over-year. Revenue was up 6% year-over-year as net interest income was up 7%, mainly in Chile, Mexico and Peru.

Net interest margin expanded 33 basis points year-over-year. NIM was down 5 basis points quarter-over-quarter, mainly due to lower inflation benefits in Chile and the impact of rate cuts that reduced asset margins in excess of lower cost of funds.

Year-over-year, loans were down 2%, primarily in Chile and Peru. Total business loans declined 7%, partly offset by 5% growth in residential mortgages. The deposits grew 4% year-over-year, primarily in Mexico, Chile and Colombia. Nonpersonal deposits grew 5%, while personal deposits grew 1% year-over-year, mostly term. The loan-to-deposit ratio improved to 126% from 135% in the prior year.

The provision for credit losses was $589 million, translating to 139 basis points, up only 1 basis point quarter-over-quarter. The expenses were up 4% year-over-year, driven mainly by higher salaries and employee benefits and technology costs.

Quarter-over-quarter, expenses were flat as the business continues to see the benefits of restructuring, prudent expense management and the focus on regionalization that offset the challenges of operating in a high inflationary environment. Year-to-date operating leverage was a very strong positive 4.6%.

Turning to Slide 12. The Other segment reported an adjusted net loss attributable to equity holders of $465 million compared to a loss of $421 million in the prior quarter. Net interest income was in line with last quarter and is expected to improve going forward, benefiting from rate cuts. The noninterest revenue declined mainly due to lower noninterest revenue and higher expenses.

I'll now turn the call over to Phil to discuss risk.

[Philip Thomas, executive]

Thank you, Raj. Good morning, everyone. All bank PCLs were 55 basis points, slightly above last quarter and are expected to remain around this level for Q4. As we look to finish 2024, we continue to maintain our prudent approach in responding to the evolving macroeconomic landscape, but we are encouraged by the following trends. Stable delinquency rates in Canada, despite elevated unemployment and household expenses, flat net write-offs in GIL quarter-over-quarter in International Banking despite a mixed macroeconomic environment. Healthier balance sheet for our borrowing clients with both quarter-over-quarter and year-over-year deposits growing faster than loans.

The resulting all-bank PCL of approximately $1.1 billion was up $45 million quarter-over-quarter. We continue to maintain sufficient allowances for credit losses. Over the last 4 quarters, we have increased total allowances by approximately $800 million, of which $500 million was for performing loans, bringing our ACL coverage ratio to 89 basis points, up 11 basis points from last year.

Canadian Banking PCLs of $435 million were up a modest $7 million but down 1 basis point quarter-over-quarter as increased provisions for performing loans were partially offset by lower impaired provisions. Canadian retail PCLs were flat quarter-over-quarter, with decreased impaired provisions offset by an $84 million performing build.

Canadian retail clients continue to show resilience and are managing their budgets prudently as discretionary spending hovered around 20% of total spending for the last 6 quarters. Expected rate relief will serve as a tailwind. Product performance remains strong in the meantime. The number of tail risk clients in our mortgage portfolio continue to improve sequentially and represents less than 1% of our total retail loan balances.

The bank has set aside allowances to cover expected losses on these accounts. 90-day delinquency in our variable rate mortgage portfolio has increased by a modest 2 basis points quarter-over-quarter. Our fixed rate mortgage portfolio has maintained a stable 90-day delinquency rate of 15 basis points, and our variable rate mortgage performance gives us confidence in our books credit quality. We are comfortable with the amount of allowances for the fixed rate mortgage portfolio.

Turning to International Banking. International Banking PCLs were $589 million, translating to a PCL ratio of 139 basis points. Total retail PCLs were stable and in line with expectations. We are encouraged by the performance in our retail portfolio as delinquency remained flat quarter-over-quarter for the first time in 2 years. Our clients remain resilient given the macroeconomic environments in the region. We remain confident in our clients' resilience as central banks continue managing inflation across our footprint. The overall portfolio continues to perform as expected, and we continue to remain within the top end of our outlook for the full year 2024.

With that, I'll pass it back to John for Q&A.

[John McCartney, executive]

Great. Thank you, Phil.

Operator, could you please queue up questions.

[Operator]

The first question is from Ebrahim Poonawala from Bank of America.

[Ebrahim Poonawala, analyst]

I guess maybe, Raj, for you, just around the net interest margin outlook. So I heard your comments earlier. If we get a series of rate cuts from the Bank of Canada, which is expected at this point, give us a sense of the trajectory of where you see both the Canadian NIM playing out over the next 4 to 6 quarters and the consolidated NIM? And I'm assuming the corporate segment has to play a role somewhere in there with wholesale funding costs coming down?

[Rajagopal Viswanathan, executive]

Happy to do that. A couple of points before I start on you where this would go. So we disclosed in our Analyst Day saying every 25 basis points is about $100 million of benefit in the NII over the full fiscal year. To be clear, it doesn't go as equal each month, a little bit back-ended because of our assets and liabilities reprice.

The second thing is we've seen 2 rate cuts in Canada, in the full quarter benefit of it shows lower wholesale funding benefits that come from cost of funding reductions over there. As you know, most of these are on a 90-day repricing schedule. So we'll see some benefits in Q4 in the Other segment, but we'll see the full quarter benefit starting from fiscal -- first quarter in fiscal 2025 and through. And likewise, for every rate cut that will happen both in Canada and the United States.

Our current forecast is we should have two more rate cuts in Canada before the end of the calendar year, and likely starting in the United States in September, two rate cuts for the remainder of the calendar year and four more rate cuts for 2025 and so on in both countries. So all of these benefits should show up in the Other segment, as you point out.

Even this quarter, if you look at the Other segment, Ebrahim, the NII number, the loss is exactly the same as last quarter. So it's plateaued in our opinion and the benefits should start showing up starting next quarter. The Canadian banks division NIM will continue to show some level of decline because deposit margins will go down in a declining rate environment, as you know. But it will pick up as the asset repricing starts happening in line with the fixed rate mortgages, the schedule is 2025 and 2026, but likely towards the latter part of 2025. So that's the dynamic you will see in the business line.

The International Banking NIM, I suspect would be around the range that we operated this quarter. And as you know, it moves around a little bit, multiple factors, different countries, inflation, many things that impact IB NIM, but I think it will be around the levels that you saw this quarter. So the summary would be we should start seeing NII and NIM benefits modestly in Q4 and then see it accelerate through 2025.

[Ebrahim Poonawala, analyst]

Got it. And I guess maybe a separate question, maybe for you, Scott, the investment you made, I think, caught folks by surprise. Just I think to me, the fact that Scotia was back to playing offense. And just was wondering if you could give us an update like the two core pieces in terms of the strategic sort of priorities. One, give us a mark-to-market on where we are in improving the deposit franchise within Canada? Like early signs of success, like outside of rates coming down, what's actually happening from an execution standpoint? And then with Travis coming on in the Capital Markets business, is there kind of a heightened focus in terms of growing the U.S. dollar business going forward?

[L. Thomson, executive]

Sure. So there's three parts to that. So I'll start with the Key investment. I'll give it to Aris on the deposit franchise. And then Travis, maybe you could talk about the fee business in the U.S. So on the Key investments, we've gotten increased confidence over the last quarter in terms of the capital -- capital fee in terms of what we need to run from a CET1 ratio with the Basel deferrals and frankly, the strength of our balance sheet. And so we evaluated a whole bunch of redeployment options to capital, and the investment in Key was the most financially attractive and the best for our shareholders.

And there's a page in the Investor Day, which highlights the differences relative to a share repurchase. So that's first and foremost. I think the second aspect of that, however, is it's a low-cost, low-risk way to get into the U.S. market in a market that's very uncertain right now, both from a political or regulatory and economic perspective. And so the ownership interest in Key, which you know has a 5-year stand allows us to dip our toe in the water, learn about the market and actually get the benefits of NII from developed market earnings over time, which has been part of the strategy in the North American corridor.

We are going to continue to focus and Travis will come to this on growing our U.S. GBM business, particularly through the fees side of that business. So with that, maybe, Travis, you can start on outlook for the U.S. business, then we'll come to Aris on the deposits.

[Travis MacHen, executive]

Sure. This is Travis. Thanks for the question. As Scott mentioned, we see great opportunities in the U.S. Obviously, one of the largest markets we see increased connectivity between our Canadian and U.S. clients where we can capitalize on some of the fee opportunities that come across. And you saw a week or so ago, we did announce an investment in a new team there. So as we start to build our expertise in our products, I think you'll see continued growth in the U.S. above some of other markets within GBM.

[L. Thomson, executive]

Aris, do you want to talk about the deposit growth?

[Aris Bogdaneris, executive]

We grew and Scott alluded to this. In the last year, we've added more than $28 billion in deposits to the Canadian business. And you see it primarily in the loan-to-deposit ratio has gone down, I think, from 130 to 120 or 8 or 9 points. And this is something I mentioned back at Investor Day about building a more balanced business, and we start to see that now quarter-on-quarter. . I think what I particularly want to highlight is in the third quarter, we actually saw day-to-day banking balances grow, and that is a new development, but is an offshoot of all the work we've done whether it's booking, our mortgage originating, our mortgages and getting the mortgage plus and driving deposit first strategies and day-to-day banking strategies when we lend.

We see it in the commercial banking business, small business, retail. And so you're starting to see day-to-day balances despite the difficulty in the market and the consumer, we're seeing these balances grow. We added, I think, 60,000 net day-to-day banking clients in the third quarter. So the strategy is working, and it's a continuous focus of ours in all our channels to build this deposit day-to-day banking muscle and then land on the back of it.

I think today, 56% of our mortgage customers have a day-to-day banking account. And conversely, 46% of our term deposit holders have a day-to-day banking account. So this continues to be the focus and will continue to be a focus going into next year, and we'll build more product muscle. We'll build more incentives in the branch network.

We're also, of course, focusing, as I mentioned, also during Investor Day to get more mutual fund sales out of our branch network. And that also showing early signs of success. The mutual fund sales coming out of our branches increased on a gross basis, 44% year-on-year. So again, this balanced business model, we continue to push, and we're seeing successes and will continue going into the following quarters.

[Operator]

The next question is from Gabriel Dechaine from National Bank Financial.

[Gabriel Dechaine, analyst]

On the International segment, I think you were saying that the margin is going to be kind of in and around this level for the foreseeable future. I don't know if you said anything similar about the loan loss ratio.

[Philip Thomas, executive]

Dave, it's Phil. I hope you're well. Good to hear you. The -- we are -- as I said earlier, I'm really encouraged by what we're seeing in IB, GIL flat, net write-offs flat. So that's an early positive sign. I'll give you guidance into Q4 and then happy to come back next quarter and sort of give more clear guidance into '25. But we're generally seeing things as I look into next quarter in line with this quarter.

[Gabriel Dechaine, analyst]

Okay. Now if I look further ahead, and your loss right now is kind of in line-ish with historical levels. There's been obviously some volatility there over the years, but kind of eyeballing it looks at a normalized level, if you will. Yet your consumer portfolio, not the mortgage, but the -- mostly unsecured consumers, is still nearly 20% below where it was in the pre-COVID days. . Just wondering why maybe beyond next quarter, if you factor in the rate cuts, you factor in the portfolio, the changes to the portfolio mix, why that loss rate couldn't actually trend lower in the segment? Or is there some other factor I'm not considering?

[Philip Thomas, executive]

No, I think -- I mean, listen, you you've done a thorough analysis there. Francisco and I have been very focused on developing high-quality in our portfolio. We've been very focused on primary customer acquisition. We're focusing on sort of our mass and top of mass segments. And so we're encouraged by what we're seeing, Dave. And I think the -- there's more to come from me next quarter on outlook.

[Gabriel Dechaine, analyst]

Okay. I wasn't that thorough actually, but thanks for that.

[Operator]

Next question is from Paul Holden from CIBC.

[Paul Holden, analyst]

A couple of questions. Maybe just continuing with international. I think if you look at the macro backdrop, particularly in Chile and Peru, seems to be improving. And then also, there's a focus on the client primacy. So what I'm trying to figure out is, as the demand environment improves for loans, but put that against sort of your strategy, how should we think about balance sheet growth for international in 2025? Is this somewhere where balance sheet will still be flattish? Or can we expect some decent growth next year?

[Rajagopal Viswanathan, executive]

Well, thank you for the question. A couple of thoughts. The first is 2025, going back to our commitment at Investor Day was part of our transitional year. So you're going to see throughout 2025, as you've seen in '24, the combination of refocusing of our targeted penetration effort on existing relationships on particularly top of mass, emerging affluent and affluent.

While an exercise of client deselection drives a reprofiling of our balance sheet. So the net effect has been an overriding reduction of ROA all delivered, all intended towards focusing on the right clients and the right returns. That exercise will continue throughout 2025, where we're going to be very deliberate on where we place balance sheet, both on retail commercial and GBM, ensuring that we have a balanced relationship where lending is not the driver or the anchor, but rather the ability to transact on a day-to-day basis with our clients.

So you will see on the commercial and GBM side, a deliberate focus on cash management penetration, and on the retail front, it will be about a balanced relationship where payroll, investments, insurance and ultimately transactional credit drive the relationships. So you will see 2025 as a flattish balance sheet year just because of the net effect of deselection and refocusing of our portfolio.

[Paul Holden, analyst]

Understood. That's a helpful answer. Second question, and I guess it's for Phil. If I look at Slide 34 shows Canadian retail PCL trends? And what I see here is sort of I think it's suggesting that the impaired are actually starting to improve? Well, I think you're pretty conservative still on total provision. So does that suggest that at a point in time when macroeconomic forecast start to improve. There is potential for performing allowance releases. Would that be a correct assessment?

[Philip Thomas, executive]

It's a great question, Paul. And obviously, it's something we're spending a lot of time thinking about right now. I have to say the numbers came in as we had expected quarter-over-quarter, but I continue to be impressed by how resilient the Canadian consumer has been through this period, the trade-offs that they continue to make. We see that coming through our VRM portfolio for sure.

I think I've been signaling auto -- stressing the auto portfolio for about a year now, and I was really encouraged this quarter to see we're finally stable as it relates to net write-offs and in that portfolio. So have we turned a quarter? I mean one quarter is not a trend, but I'm really encouraged by what I'm seeing for this quarter. And even as I look into next quarter, I see stability in these portfolios moving forward.

[Operator]

The next question is from Jill Shea from UBS.

[Jill Glaser Shea, analyst]

For Raj, I appreciate all the color on the margin dynamics. And just hoping to follow up on the Corporate segment, more specifically, you had the adjusted bottom line results coming at the negative $465 million this quarter, which was in line with the guidance that you had laid out previously. Just wondering if you could put a finer point on how to think about bottom line results as we move forward and get policy rate cuts.

[Rajagopal Viswanathan, executive]

Yes. Thanks, Jill. I think the Corporate segment is something that earlier we have talked about somewhere around the $475 million range. Bottom line is the right number for this year. And it's going to improve significantly next year. It's in line with the NII improvements driven by the rate cuts that we talked about a little earlier on the wholesale funding benefits that will translate and show up in the corporate funding segment. . I think just near term, next quarter, likely around this range. A couple of other comments on the corporate segment. It's got multiple components, as you probably know by now. There is a lot of transfer pricing movements that happened between the corporate segment and others. There's the investment gain, sometimes there's mark-to-market gains that happen, highly difficult to predict over there. And the investment gains have been fairly small in the last few quarters because we've been holding on to it for NII income, and that's kind of the change in philosophy on how we want to manage the portfolio going forward.

But mark-to-market gains are a little hard to predict, particularly in a volatile environment. So near term, I think this would be about the right number, somewhere around the $450 million to $475 million range. And we'll talk in November, but directionally should be significantly better in 2025.

[Operator]

The next question is from Mario Mendonca from TD Securities.

[Mario Mendonca, analyst]

Help me understand what proportion of your business and government loan book would be on your watch list. And I'm curious as to what that is currently versus what it's been in the past.

[Philip Thomas, executive]

Yes. Thanks, Mario. It's a good question. We continue to focus on high investment-grade corporate lending. Business in government, we have very little on the watch list right now. There's maybe -- there's a few things that I'm watching mostly on the commercial side of the business, but I'm feeling really good about where we are on the corporate side. Obviously, we're a very disciplined organization from a credit perspective.

We are very conservative in terms of how we approach these segments. There's -- we're seeing downgrades, some downgrades higher than upgrades, obviously, during this period. But I've got no major file on my desk that I'm working out right now. We are looking at -- there's a couple of pockets of softness in Canada on the commercial side. Agriculture would be one of them and transportation. And then we're watching some pockets in some of our Latin America markets as well. But there's nothing that's standing out to me that I'm losing sleep on the corporate side right now.

[Mario Mendonca, analyst]

It would be fair to say that it would be well below what, like far less than 5% of your corporate -- of your business and government loan book, the watch list that is like well below 5%.

[Rajagopal Viswanathan, executive]

Yes.

[Mario Mendonca, analyst]

Okay. Yes. maybe sort of a follow-up question on the auto side. I like others have been waiting for unsecured Canadian consumer credit to accelerate materially at some point and drive every bank's PCL higher. And it just seems like that's not happening. And I guess what I want to ask you, you said that you've been surprised or encouraged by the resilience of the Canadian consumer. Do you think that rates have dropped sufficiently, or maybe the outlook for rates has the -- outlook for rates that they will be lower over the next, say, 12 months. Is that sufficient that we could be looking at a bit of a no landing scenario for the unsecured Canadian consumer, that we will never see that spike in losses. Is that a possibility now?

[Philip Thomas, executive]

It's a really interesting question. I have been a proponent of the soft landing as I sort of look through what -- how the Canadian economy is performing. And interestingly enough, when I look at our credit card repayments -- I mean we've got a really small credit card portfolio compared to our peers.

But credit card payments have actually been improving. And the -- as people have been saving money, they've actually been paying off their credit card fairly regularly, which is encouraging.

Again, I mentioned auto before. That's always been the bellwether. We focused really on our credit card portfolio. We focused on sort of higher prime, super prime FICOs in terms of our origination strategies there. But I've got -- I'm not seeing any major concerns coming through the Canadian unsecured credit card portfolio. I mean we're looking at our lines of credit really closely as it relates to our people drawing down on those lines to make payments to the mortgages, that sort of thing. But again, I'm super encouraged by the fact that this quarter those levels of delinquency or any stress seem to be leveling off.

[Aris Bogdaneris, executive]

I just -- I'd like to add to something that Phil said, it's Aris here. I think from my experience in unsecured, rates matter, but what matters most is unemployment and how that tracks. And I think when we look at unemployment, that's a real bellwether in how the unsecured book will perform. Obviously, rates matter, but I think you also have to look at the unemployment picture going forward.

[Operator]

The next question is from Darko Mihelic from RBC Capital Markets.

[Darko Mihelic, analyst]

My question is directed to Francisco. And I'm just trying to maybe get a gauge for where you are in your journey with respect to maybe the proper term is deselecting clients. When I look at your revenue growth and I go back to Investor Day and I think about kind of the way you were depicting it, there was a momentary point in time where there would be stress in your revenues because you were reducing certain portfolios or selling things.

And I just want to maybe think about that for a moment and get your perspective on whether or not there could be some revenue pressures coming up or whether or not you're far enough along the journey that maybe you don't have to do more. So I don't know if there's a proportion, you can tell me, I don't think you ever actually told us how much revenues you expected to lose from removing certain books of businesses and so on and so forth.

Hopefully, you get the idea of where -- what I'm asking, and you can give me some perspective on where revenues can go from here knowing that maybe there's some pressures around the corner or maybe there isn't? Hopefully, my question makes sense, Francisco.

[Francisco Alberto Aristeguieta Silva, executive]

It does. Thank you for it. I think the first thing to position here is the decision-making process for us is about profitability and returns. Given the amount of capital we have deployed in the region. To get to where we need to be, it has to be a combination of making the right decisions on the clients we can compete and win for business on a balanced relationship while being significantly more efficient in serving those clients.

On the first portion of that, we have done a lot of work in understanding segmentation better and that is generating our ability to tackle the wallet of those clients, be it in GBM, in commercial, in retail or in wealth on a more integral fashion. And that is resulting in the performance you're seeing this year, which in spite of the fact that we have been restructuring and repositioning our organization, we have been able to capture a disproportionate amount of business coming our way, therefore, having revenues grow at 6% in the quarter, 7% year-on-year.

We believe that performance to be sustainable in that range. Now the most important aspect of the progress is in expenses as well. We have been able to maintain expenses flat quarter-on-quarter. And when you look at year-on-year, 4% growth on an environment that has inflation north of 5% on average, creates the opportunity to continue operating leverage while we reposition the business.

So overall, we are on track to where we need to be in terms of repositioning our client franchise for primacy and multi-product. While on the 5-year horizon, targeting the $800 million expense roll rate reduction. We are on track also to position our organization by the end of 2025 to be reorganized, refocused from the client perspective and embracing a different level of efficiency. And when you look at our productivity, where we started the journey at Investor Day, we were at 53. This quarter, we are at 50.9. We committed to be at 45. So we're making powerful progress here across the three important components of our strategy.

[Darko Mihelic, analyst]

And so specifically then with respect to portfolios or businesses that you'd look to dispose of, would you say that you are kind of complete with that process? Or could there be a continuation on that process? And I'm just thinking about potential revenue headwinds from some dispositions that may or may not be coming in the next, say, year?

[Francisco Alberto Aristeguieta Silva, executive]

Yes. Well, again, going back to the principles that are driving our decision-making primarily returns on profitability, we're not done. We need to make sure that our portfolio across the board contributes to the higher ROE we targeted and sustainable return revenue growth and profitability. So we are making progress in the assets or with the assets that have been underperforming. But as we committed on Investor Day, when we don't see a path to getting to where we need to be, we would redeploy it. And that remains our disciplined way forward. That has not changed.

[Operator]

The next question is from Lemar Persaud from Cormark Securities.

[Lemar Persaud, analyst]

My first question maybe for Travis here. One of the things I've been watching closely is this evolution of mortgage growth at Scotia to kind of suggest that we might be moving past some of these profitability actions, let's say, in the domestic retail business. This quarter, you guys mentioned that you've turned the corner on mortgage growth sequentially.

So my question is, has Scotia then crossed an inflection point here in domestic P&C because it sounds like you're trying to go in that direction? Or should we just look at it as you're happy on the progress, but it could be a bumpy road as we move forward in Q4 and into 2025? So thoughts there would be helpful.

[Travis MacHen, executive]

Thank you for the question. So let me give you just a brief summary of the mortgage business to date. We added $5 billion spot in the third quarter in terms of volume growth, net. That compares to $2 billion in the second quarter. So you see from $2 billion to $5 billion as we start to ramp up a bit. This is obviously the mortgage market is heating up, rates are coming down, there's activity there. You're right, July was an inflection point where the actual balances of our mortgage business are now starting to grow, and it will continue into the fourth quarter.

I think Scott alluded to it earlier. 71% of our new originations are coming from our brokers, but more importantly, 90% of that volume is coming with additional products and day-to-day accounts, et cetera. We're focused our branches on retention, and the retention rates we're seeing are very strong. We've also added something new virtual retention specialists. So this is a group of folks who are virtually-based and are driving retention across the country.

This whole idea that we've been talking about for a while now about value versus volume, you see it actually in the mortgage P&L, where revenue growth is double-digit, 20% year-on-year as we focus on margin, quality customers, et cetera. So will this continue? Yes, it will continue into the fourth quarter.

We'll probably see a slightly higher growth rates, slightly, but we're not driven by market share. We over-index on mortgages for many years. We're interested in strong relationships with our brokers, strong retention, multiproduct and focusing on value over time. So that is really the story. And so have we turned the point? Yes. But we're just going to continue what we've been doing up to now and maintain this model that we're trying to build this balance. I hope that answers your question.

[Lemar Persaud, analyst]

Yes, that's helpful. And then what about like earnings growth at your segment level, like regardless of the mortgage business, just taking it up to the segment level. Should we expect increased earnings growth as we kind of move forward into 2025? Like I'm just trying to think through that as well.

[Travis MacHen, executive]

Well, again, earnings is driven by, of course, the volumes and revenue, the costs, the PCLs, they're all in combination as Phil talked about, it will be interesting, and we're watching how the PCLs will evolve that will have a big impact on the profitability going forward. But I think what we continue to see, again, is day-to-day banking growing, retail customer primary growth continuing, good cost discipline. This is operating leverage 3 quarters in a row is positive as we really focused on our customer-facing channels to optimize them, branches, contact centers, mobile advisers. We're working all the levers is what I'm trying to say. And we continue to hopefully see the ROE improving and the RAM improving all the quality metrics that we monitor.

[Operator]

The next question is from Nigel D'Souza from Veritas Investment Research.

[Nigel D'Souza, analyst]

I wanted to touch on the EPS accretion that you had on Page 18, comparing the buyback versus KeyCorp. Could you help me understand why $2.3 billion was used in that calculation rather than $3.9 billion for the buybacks and the $80 million in net funding costs, what that represents?

[Rajagopal Viswanathan, executive]

Yes. Sure, Nigel. It's Raj. It's a good question. It's the $2.3 billion we use, that equates to the 50 to 55 basis points on capital. If you want to do the comparison to the Key transactions. So that's apples-to-apples. If I use the $3.9 billion, it will equate to about 70 to 75 basis points of capital. Therefore, it's a different basis to use and likely not comparable for the outcome.

So that said, the $80 million is actually quite simple. It's really the funding cost of the $2.3 billion or you can look at it as the opportunity cost. The $2.3 billion is invested in some securities, what's the return that we would lose. And that's the after-tax number that we have calculated based on average. I think it will work out to somewhere between 4.8% to 5%, I think if you did the math.

[Nigel D'Souza, analyst]

Okay. I guess where I was going with that is I'm trying to understand why not look at the actual capital outlay and then you look at the Key accretion, why isn't the opportunity cost netted off against that as well to reduce the benefit by $80 million, but maybe something to follow up offline.

[Rajagopal Viswanathan, executive]

I can actually help you now because the Key income that we have shown, the $300 million to $350 million has got 3 components. It's the potential equity pickup that we will have, net of the cost of funds relating to what we are deploying, which is on the entire $3.9 billion proceeds that we will deploy and it's got a benefit because of interest rate mark accretion that will come through after we do purchase price accounting. So that's got cost of funds too included in it, and it's a net number.

[Operator]

The next question is from Sohrab Movahedi from BMO Capital Markets.

[Sohrab Movahedi, analyst]

Okay. I appreciate we've gone over time. I have two hopefully quick questions. Scott, I think the 12.5% CET1 being the right level. And so does that suggests that the optimization exercise in GBM is complete now, we shouldn't expect to see further rationing of credit and RWA there? That's the first one.

[L. Thomson, executive]

No. I mean, listen, I think GBM optimization, I wouldn't actually characterize it as an optimization, I would characterize as a focus on primary clients with relationships where we can add value to the client and it's beneficial for the shareholder as well. And so we're going to continue to be very disciplined on how we allocate our capital. That's going to allow us to continue to allocate capital to primary client relationships where there's a mutual win-win, and it will continue to allow us to build capital for the overall bank, which we then can then redeploy into other uses. So that would be a continuing strategy similar to how Francisco talked about IB and similar to how Travis talked about the fee business that we're talking about in GBM.

[Sohrab Movahedi, analyst]

And so I guess that leads me into the Key investment and some of the tangential benefits over there. So is the expectation here that some of the balance sheet would reside with Key, for example, and you'll get some fee businesses? Is that the way to think about it, if this is executed on kind of to dreamlike levels?

[L. Thomson, executive]

No, not at all. I mean the Key investment I would separate from our GBM organic growth. Key investment, as I talked about near-term accretion better than a share repurchase gives us some optionality over time in a low cost, low risk fashion. In terms of our GBM business, you see what we're doing on the fee, the fee side, where we're up 30% year-over-year, 30% year-to-date, continue to build up the capital markets capabilities in really attractive businesses, and the capital market is higher, that Travis referenced is another example. The CLO business is another example. So I would separate our GBM organic opportunities and that Key investment, those are different strategic paths.

[Sohrab Movahedi, analyst]

Perfect. And Scott, a couple of times, I think, on this call on the August 12, I think, you've talked about the optionality that longer term, Key, I think, provides. Can you talk to prior experience of the bank with options like this and how shareholder accretive they've been over time?

[L. Thomson, executive]

Yes. I mean I think you're referencing how we entered into Mexico, which obviously has been a great outcome for the bank. I think it's a 25% type ROE business, and we're positioned well. That wasn't in my mind, as I thought about this transaction. We thought about this transaction, again, as financially accretive, good for shareholders and optionality long term. Remember, there's a 5-year standstill. And so that's a long ways out. Right now, we're going to focus on building out our GBM business organically with a fee focus, optimizing the capital we deploy to that business to make sure we're getting good returns for our shareholders.

[Operator]

The next question is from Doug Young from Desjardins Capital Markets.

[Doug Young, analyst]

Hopefully I'll keep this relatively quick. Just focus on International Banking. And I guess, there's two questions. One, there was -- there seems to be a bit of an uptick in PCLs in Mexico, just hoping you can give a little bit of color. Is this impaired, is this corporate or retail? Just so you can give some color. And then second, Colombia still continues to lose money, and just hoping maybe you can get -- provide a bit of an update on the plans for this particular region.

[Philip Thomas, executive]

Doug, it's Phil. I'll start and then I'll hand it over to Francisco. In the case of Mexico, that's one account in the -- one commercial account in the retail sector that's driving that increase.

[Francisco Alberto Aristeguieta Silva, executive]

Yes. on Colombia, thank you for the question. Two things to keep in mind. First, we are a reflection of the markets we serve. The Colombian market has been challenged throughout last year. We continue to believe the challenge will remain for the next 2 to 3 years. As you look at the system performance, around half of the banks in the system are consistently losing money.

And what we've done is focus on a number of decisions that allow us to improve our efficiency and performance in country, and to that effect, what we've done with great discipline is reduce expenses 2% year-on-year, generate positive operating leverage, and remain on a very disciplined approach as to how we deploy our credit in a very challenged market. So that is the path forward, is continue to operate on a difficult environment, trying to improve our position consistently over time. We maintain our view that to the extent that there's no improvement, we will redeploy, and that is the principle we apply to all the businesses we run.

[Operator]

There are no further questions on the line. I will now turn the call back to Raj Viswanathan.

[Rajagopal Viswanathan, executive]

Thank you. On behalf of the entire management team, I want to thank everyone for participating in our call today. We look forward to speaking again at our Q4 call in December. This concludes our third quarter results call. Have a great day.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time.