Bank of Nova Scotia

TSX:BNS

Earnings Call Analysis

Solid Financial Performance Amid Market Challenges

Scotiabank reported strong Q2 earnings of $2.1 billion, with diluted EPS of $1.58 and a return on equity of 11.3%. Revenues rose by 5% due to growth in net interest and noninterest incomes. Despite higher credit provisions driven by a challenging macroeconomic environment, strategic efficiency initiatives kept expense growth moderate. Canadian banking showed margin expansion with a 7% deposit growth. International banking performed well, especially in Chile and Mexico. The bank expects continued elevated credit provisions, particularly in Canadian retail, due to higher interest rates. Overall, Scotiabank is poised for balanced growth with a solid CET1 capital ratio of 13.2%.

Solid Earnings Performance

The bank reported quarterly earnings of $2.1 billion and diluted earnings per share of $1.58. Revenues rose by 5% year-over-year, driven by growth in both net interest income and noninterest income. The return on equity was 11.3%, with a return on tangible common equity at 13.8%. These figures reflect a stable financial footing in a challenging economic climate.

Net Interest Income and Margin Expansion

Net interest income saw a 12% increase year-over-year, primarily due to robust deposit growth and margin expansion. The net interest margin expanded by 5 basis points year-over-year. Despite a decrease of 2 basis points quarter-over-quarter, this was mainly attributed to a lower contribution from asset and liability management activities.

Provision for Credit Losses (PCL)

PCL was $1 billion with a PCL ratio of 54 basis points, marking a 4 basis point increase from the previous quarter. Canadian Banking’s PCLs were up at 40 basis points, driven by higher provisions in the automotive finance and variable rate mortgage portfolios, revealing stress in areas impacted by higher borrowing costs and inflation.

Expense Management

Expenses grew 3% year-over-year mainly due to higher technology-related costs and inflation-driven personnel costs. However, a quarter-over-quarter decrease of 1% was observed, primarily due to seasonal factors affecting compensation.

Global Wealth Management

Earnings in Global Wealth Management stood at $387 million, growing 8% year-over-year. Revenue growth was underlined by higher fee-based and mutual fund revenues, though partly offset by higher volume-related expenses. Assets under management increased 6% to $349 billion, with assets under administration reaching $669 billion.

Global Banking and Markets

The segment saw earnings of $428 million, a 7% year-over-year increase. Nevertheless, capital markets revenues declined 5% quarter-over-quarter. Business Banking revenues also fell by 8% year-over-year. Strength was noted in underwriting and advisory fees, indicating effective client selection.

International Banking Insights

International Banking reported earnings of $677 million. Revenue was up 6% year-over-year, led by a 14% rise in net interest income, predominantly in Chile and Mexico, albeit offset by lower trading revenues. The international net interest margin expanded by 11 basis points quarter-over-quarter to 447 basis points.

Capital and Risk Management

The bank’s Common Equity Tier 1 (CET1) capital ratio stood at 13.2%, reflecting a 30 basis point increase quarter-over-quarter and a 90 basis point rise year-over-year. This improvement is credited to risk-weighted asset (RWA) optimization, ensuring a strong balance sheet to support future strategic initiatives.

Outlook and Strategic Initiatives

The bank continues to focus on disciplined capital allocation to high-return client segments and geographies. Despite headwinds from the current economic environment, the institution is positioned for growth with anticipated rate cuts in key Latin American markets and strategic deposit growth efforts.

Dividend and Capital Strategy

While no dividend increase was noted this quarter, the bank aims to resume dividend growth in 2025 in alignment with earnings growth projections. The Dividend Reinvestment Plan (DRIP) is expected to be turned off in the second half of the year, reflecting confidence in the capital build and returns from recent initiatives.

Earnings Call Transcript 2024-Q2

[John McCartney, executive]

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.

[L. Thomson, executive]

Thank you, John and good morning, everyone. We are pleased to share our Q2 results, which reflect solid earnings from each of our 4 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 the Canadian residential mortgage portfolio, while we have seen moderate growth in other personal and commercial portfolios. We continue to reposition our business banking portfolios with a view to optimize risk-weighted assets and profitability by client.

And importantly, return on risk-weighted asset metrics are trending positively on a year-to-date basis. The all bank loan-to-deposit ratio continues to improve as a result of $26 billion of deposit growth over the past year, driven largely from focused efforts on our Canadian and international banking retail franchises.

Deposit growth has now outpaced loan growth in Canadian and International Banking in each of the past 5 quarters. The bank's wholesale funding has been reduced by $34 billion year-over-year, resulting in a wholesale funding ratio below 20% down from approximately 23% in Q2 of 2023.

Turning to the credit environment. The impact of higher rates is increasingly weighing on consumers and to a lesser extent, our commercial and small business clients. Although we believe the monetary tightening phase of the rate cycle in Canada is now complete, our prior expectation for multiple rate cuts in the back half of the calendar year feels less certain. The reality of a higher for longer rate scenario will naturally result in a continuation of elevated credit provision in our retail portfolios, keeping us at the higher end of our 2024 PCL outlook of 55 basis points.

Our Commercial Banking and Global Banking and Markets portfolios remain stable from a credit quality perspective, although a continuation of the current rate outlook will weigh on economic activity and industry loan growth. In our key Latin American markets, we are now into the easing phase of the interest rate cycle.

Central Bank policy rates in Chile at 6% and Peru at 5.75% are down significantly from peak levels last year as inflation has been successfully managed lower. Mexico Central Bank has started to ease policy rates as aggressive tightening over the past 2 years has effectively lowered inflation and managed near-term GDP growth expectations to more sustainable levels.

The Mexican economy continues to demonstrate resilient growth in a tight employment market despite the impact of double-digit interest rates for the past 12 months. Our forecast do not anticipate recessionary conditions in any of our key operating geographies over the next few years.

We are well positioned to execute on our new international banking strategy and what we expect to be a more normalized economic growth environment throughout the region going forward.

A few highlights in terms of performance and strategic progress within each of our business lines. Our Canadian Banking business contributed approximately $1 billion of earnings in the period. Favorable business mix shift, asset repricing and deposit growth delivered solid margin expansion and resulting revenue growth in a period where overall loans were marginally lower year-over-year.

With continued focus on process and efficiency, expense growth was moderate this quarter, resulting in a positive year-to-date operating leverage of 3.1%, Our focus on relationships and more deliberate new client selection is driving an increase in the percentage of clients that we consider to be primary.

Our retail bank has added over 95,000 net new primary clients year-to-date and importantly, saw the lowest client attrition in 3 years as a result of more selective client acquisition and cross-sell initiatives. We are closely tracking client relationship depth and have seen meaningful progress with over 45% of all retail clients currently holding 3-plus products in the Canadian bank a 230 basis point increase from a year ago.

Our Scene+ loyalty program continues to drive deeper client relationships with 32% of new clients holding more than 3 products after 1 month with the bank. These higher-value Scene+ clients now represent over half of the new-to-bank clients across day-to-day banking and credit cards up from 40% last year.

At Tangerine, we continue to add new clients and see lower attrition rates with existing clients. Year-to-date, we're tracking well ahead of plan to add new clients in fiscal 2024. Importantly, primary client growth at Tangerine is up 15% year-to-date, with 35% of all clients now having 3 or more products with Tangerine.

Tangerine continues to set the industry pace in terms of mobile penetration with 64% of new client sign-ups happening exclusively through the mobile channel, up 11% year-to-date versus last year. Our commercial banking business saw a continued moderation of loan growth, up 5% against double-digit deposit growth.

Ongoing efforts on client selection and capital optimization contributed to a continued improvement in return on risk-weighted assets this quarter. We continue to believe there is material share gain and profitability growth potential in our domestic retail and commercial bank, which we expect to deliver at least half of the bank's earnings growth over the medium term.

Global wealth earnings of $387 million reflects strong performance from our asset management franchise, our integrated multichannel advisory business and continued outsized growth from our international wealth unit. Favorable returns in most global equity benchmarks and strong relative performance from our 1832 fund lineup, resulted in solid AUM growth in the quarter and supports continued flows into long-term investment products as the year progresses.

Assets under management in our international wealth business grew over 15% in the quarter through a combination of strong investment performance and over $1 billion of net sales in the period. Our Canadian wealth management advisory businesses, ScotiaMcLeod, MD Financial and our private investment counsel business are having great success delivering our fully integrated total wealth offerings to clients.

We have increased the number of financial plans delivered this quarter by 27% year-to-date, and we continue to add product specialists to deliver comprehensive solutions to clients. Clients with the financial plan are better prepared for the future are a significant driver of Net Promoter Score and twice as likely to have a multiproduct relationship with the bank.

We continue to see progress in strengthening the partnership between our wealth and Canadian retail channels with referrals up 15% year-over-year. In our Global Banking and Markets business, we reported resilient earnings of $428 million this quarter despite headwinds in the Canadian capital markets franchise that were largely offset by strong performance in our U.S. business.

The business continues to reposition the portfolio with a view to achieving better balance in our loan-to-deposit growth as well as align with our strategic geographic priorities and client return objectives. Deposits were lower by 2% in the quarter, while overall loan volumes were down 6% due to lower new origination activity, paydowns and additional delivered actions to strategically reposition the portfolio.

We were encouraged by GBM's performance in terms of growth in underwriting and advisory fee revenue in the quarter, an indication of more effective client selection and product coverage in our GBM business. We are also pleased to welcome Travis MacHen to our leadership team as our new Group Head of Global Banking and Markets.

Travis brings a career of U.S.-focused corporate investment banking experience with best-in-class global banks. In our International Banking business, we delivered strong results this quarter with a net earnings contribution of $677 million resulting in a year-to-date return on equity of 15%, up from 13.3% in the period last year.

Solid revenue growth was driven by continued margin expansion in most geographies, coupled with impressive expense discipline resulting in a significant improvement in the segment's productivity ratio to 51.1%.

Our capital repositioning continued in the period as risk-weighted assets in the business were lower by $2 billion while deposits were up 3% sequentially and 6% on a year-over-year basis. Our GBM LatAm contribution moderated to $290 million in the quarter, down from an exceptional $372 million contribution in Q1.

We are encouraged by the improved performance and profitability of the business as we look to drive even greater productivity through a more regional standardized operating model. In international retail, we have a significant client segmentation initiative underway to grow primary clients more selectively in the affluent, emerging affluent and top of mass segments.

While we expect this franchise repositioning, including client selection to be an ongoing process, we saw good progress on priority net client growth in the quarter. We continue to believe we have sufficient scale and capital deployed in our international banking business to profitably grow our retail businesses and capitalize on wholesale opportunities when favorable market conditions and client activity allow, as evidenced by solid results again this quarter.

In summary, the bank delivered solid financial performance in the quarter, while executing on key initiatives that will enhance profitability and set us up for a more balanced resilient growth over the long term. I would like to thank our team Scotiabankers globally who are delivering on our ambitious plan. As I continue to meet with our teams, it is clear our people understand the important role they play in driving the sustainable, profitable growth we've committed to delivering for our shareholders.

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 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 10 basis points, offset partly by a reduction of 5 basis points from the revaluation of securities. Lower risk-weighted assets primarily reflecting the benefits of RWA optimization activities contributed 15 basis points.

The Q1 capital floor add-on of $7.8 billion was eliminated by changes in book quality and LGD model updates that only impact the model risk-weighted asset numbers. The bank will continue to maintain strong balance sheet metrics as it executes on its strategic initiatives.

Turning now to the business line results beginning on Slide 8. Canadian Banking reported earnings of $1 billion, a decrease of 4% year-over-year as higher revenues were more than offset by significantly higher PCLs. 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 flat quarter-over-quarter and down about 1% from the prior year. The portfolio mix continues to evolve in line with our strategy as business loans grew 8% year-over-year, credit card balances grew 18% and personal loans grew 2%, while residential mortgage balances declined 5%.

We continue to see deposit growth as year-over-year deposits grew 7% and the loan-to-deposit ratio improved to 122% from 132% last year. Net interest income increased 12% year-over-year, primarily from solid deposit growth and margin expansion.

The net interest margin expanded 26 basis points year-over-year reflecting benefits of asset repricing, business mix changes and growth in deposits. Margin was stable quarter-over-quarter as asset margin expansion was offset by deposit margin compression. Noninterest income was down 11% year-over-year as the prior included elevated private equity gains and income from our equity interest in Canadian Tire Financial Services that we divested in October 2023.

The PCL ratio was 40 basis points, up 6 basis points quarter-over-quarter. Expenses increased 4% year-over-year primarily due to higher technology costs, personnel costs and expenses to support business growth. Quarter-over-quarter expenses grew 1%, primarily from higher pension and benefits and premises costs.

Turning now to Global Wealth Management on Slide 9. Earnings of $387 million grew 8% year-over-year, driven by higher revenues in Canada by a mutual fund piece and International Wealth partly offset by higher volume-related expenses. Quarter-over-quarter earnings were up 3%, primarily due to higher brokerage and mutual fund revenues across Canada and international partly offset by higher expenses.

Revenues of $1.4 billion were up $114 million or 9% year-over-year, driven by higher fee-based revenues, mutual fund fees from strong assets under management growth and higher net interest income from loan and deposit growth across our Canadian and international businesses.

Expenses were up 9% year-over-year due to higher volume-related expenses, sales force expansion and higher costs to support business growth. Part assets under management increased 6% year-over-year to $349 billion as market appreciation was partly offset by net redemptions. AUA grew 7% over the same period to $669 billion from market appreciation and higher net sales. International Wealth Management generated earnings of $66 million, up 19% year-over-year, driven by higher mutual fund fees in Mexico and strong deposit growth in Peru. AUA and AUM grew 10% and 15%, respectively, year-over-year.

Turning to Slide 10, Global Banking and Markets. Global Banking and Markets generated earnings of $428 million, up 7% year-over-year. Capital markets revenue was up 5% year-over-year, primarily from higher fixed income and global equities revenues, partly offset by lower FX and commodities revenues.

Quarter-over-quarter capital markets revenue was down 5% as global equities revenue were down 11%, partly offset by growth in FICC.

Business Banking revenues declined 8% year-over-year and 4% quarter-over-quarter, primarily due to lower corporate and investment banking revenues as the business continues to optimize capital deployment. Loans and acceptances were down 6% quarter-over-quarter to $115 billion, largely driven by borrowers accessing the debt markets to pay down loans and management's focus on ongoing balance sheet optimization.

Net interest income decreased 14% year-over-year, primarily due to lower loan volumes, partly offset by lower trading-related funding costs. Noninterest income was up 2% year-over-year, mainly from higher underwriting and advisory fees, partly offset by lower trading-related revenue from the impact of the proposed denial of dividend received deduction on certain shareholdings in Canada.

Expenses were up 4% year-over-year, due mainly to higher personnel costs and technology investments to support business growth. Quarter-over-quarter, expenses were down 3%, mainly due to seasonality of share-based competition, which was higher in the first quarter.

The U.S. business generated strong earnings of $271 million up $97 million or 55% year-over-year with strong contributions from both Capital Markets and Corporate and Investment Banking while managing risk-weighted asset growth. GBM Latin America, which was reported as part of International Banking reported earnings of $290 million, up 5% compared to the prior year, mainly from Mexico. The business also earned through a 7% year-over-year reduction in average assets.

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 $677 million, down 2% year-over-year. Revenue was up 6% year-over-year as net interest income was up 14%, mainly in Chile and Mexico, partly offset by a decline in noninterest income driven by lower trading revenues.

Net interest margin expanded 11 basis points quarter-over-quarter to 447 basis points driven by lower cost of funds from rate cuts and higher inflation benefits mainly in Chile. Year-over-year loans were down 2%, primarily in Brazil and Peru.

Total business loans declined 7%, partly offset by 6% growth in residential mortgages. Deposits grew a strong 6% year-over-year, primarily in Mexico, Chile and Brazil. Total personal deposits grew 2% year-over-year and nonpersonal deposits grew 8%.

The loan-to-deposit ratio improved to 124% from 138% in the prior year. The provision for credit losses was 138 basis points or $566 million down $2 million quarter-over-quarter. Expenses were up a modest 3% year-over-year driven by technology expenses and business and capital taxes despite a higher inflation environment. Year-to-date operating leverage was a positive 5.5%.

Turning to Slide 12. The other segment reported an adjusted net loss attributable to equity holders of $421 million, an improvement of $53 million compared to the prior quarter, mainly due to higher noninterest revenues mostly from mark-to-market benefits from investments in certain derivatives and lower expenses.

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

[Philip Thomas, executive]

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 launched several proactive measures across our collections function, including pre-delinquency solutions and new loss mitigation tools.

Turning to International Banking. International Banking PCLs were $566 million, down $8 million from the prior quarter. The Q2 PCL ratio was 138 basis points, up 3 basis points quarter-over-quarter. Our international business banking portfolio continues to perform well with PCLs down slightly from the prior quarter driven by strong performance across the region, slightly offset by continued market deterioration in Colombia.

Retail PCLs were in line with the prior quarter at $485 million, PCLs in Colombia increased offset by stable performance in Mexico, Chile and Peru. Central banks across the region continue to cut policy rates, which should have a positive impact in these markets.

Looking forward to the second half of the year, we expect on a full year basis to remain within our guidance of 45 to 55 basis points. However, we expect to remain at the higher end of the range in the next 2 quarters. In anticipation of a deteriorating environment in fiscal 2024, we increased ACLs from 78 basis points to 85 basis points in Q4 of fiscal 2023.

Additionally, over the last 4 quarters, we have built approximately $585 million in performing allowances. Driving elevated provisions, Canadian credit performance will continue to gradually work through the cycle, and in international markets, we believe credit performance will remain stable throughout the rest of the fiscal year. Overall, we are comfortable with our allowances and continue to manage our portfolios proactively.

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

[John McCartney, executive]

Great, thank you Phil. Operator please open the line for questions.

[Operator Instructions]

Operator?

[Operator]

[Operator Instructions]

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

[Ebrahim Poonawala, analyst]

I guess maybe a question, Phil, starting with you, just on credit quality. You mentioned impaired PCLs of 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 1 or 2 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 work come 2025. And within that, like where do you see the drivers of the lost content within your loan book?

[Philip Thomas, executive]

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 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 of those rate even if with those decreases in June, July, it will take a few quarters, maybe 1, 2, 3 quarters for it to start to really support the Canadian consumer. Maybe a little bit of math to help you have some numbers to help just deal 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 happened, that will provide good relief for the average consumer to start making payments on other products. But I think it's going to take probably 1 to 3 quarters depending on the consumer for it to really bear fruit.

[Ebrahim Poonawala, analyst]

And just on that fill 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 5-year rate? Like how do you think about the sensitivity between the 2? Should we be motoring the yield curve needing to move lower as well as through the BOC rate cuts?

[Rajagopal Viswanathan, executive]

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 3-year cohort, fixed rate, 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 5, 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.

[Operator]

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

[Doug Young, analyst]

Phil, looking at Slide 15, you talked 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 talked about higher GIL formations driven by higher new retail formations, mainly Chile and Mexico. Just trying to reconcile these 2 statements, I'm a little bit 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?

[Philip Thomas, executive]

So I'll start with your question on Slide 16. And what you see, a lot of our increasing deals this quarter in idea 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 the -- 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 presales 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 GIL's from that part.

In terms of the forecast, we're expecting we'll be at the sort of 54, 45 range for the next 2 quarters. And so I've been speaking more on the quarterly outlook. Sorry, 54 to 55 basis points for the next 2 quarters.

[Operator]

The next question is from Paul Holden from CIBC.

[Paul Holden, analyst]

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. Wondering how you're viewing the difference or similarities in potential payment shock for the fixed rate mortgage borrowers versus what you're seeing with the VRM today?

[Philip Thomas, executive]

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 3-year fixed term.

What we are looking forward to, though, in terms of as we look into 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 5%.

So we're already starting to see some consumers making choices in terms of how they're managing their savings. I think I've given this number in prior calls, but we still see our mortgage customers holding on to about 2 payments -- payment buffer within their deposit accounts. And on the fixed rate, it's about 3.5 to 4. 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. Hope that's helpful.

[Operator]

The next question is from Matthew Lee from Canaccord Genuity.

[Matthew Lee, analyst]

One regarding balancing primacy and growth. Canadian loans declined by 1% year-over-year in the quarter. I think part of that was a conscious effort to focus capital on areas you achieved primacy. Should we still be expecting to see accelerating loan growth in the back half of the year, maybe particularly on the mortgage front?

[Aris Bogdaneris, executive]

Matthew, it's Aris here. 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 originations. 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 3 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 multiproduct mortgage customers at origination and again focusing on renewals. 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 and Scene+. So hopefully that gives you a bit of a background.

[Operator]

The next question is from John Aiken from Jefferies.

[John Aiken, analyst]

Wanted to dive into the appendix, actually, Slide 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 noninvestment grade. First part of this is, is this just simple credit migration where some of the former investment grade has slipped into noninvestment grade given what's going on in the region.

And second part of the question, when do we think we can actually start to see the reversion of that in growth because presumably you're looking to grow the investment-grade part of the business? Or do I have that strategy incorrect?

[Rajagopal Viswanathan, executive]

Yes, I can start, John, it's Raj. What you're seeing in investment and noninvestment grade has got both qualities what you described. Yes, there is some level of migration that is happening both on the GBM book as well as in the international commercial book, we actually see it in the capital where we see nonretail 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 in small, right? I mean it's moving from 40% to 39% in investment grade and 60% to 61% in noninvestment 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 are trying to pull back on capital from a capital perspective.

And International Banking, as you know, every 3 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 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 which 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.

[Operator]

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

[Gabriel Dechaine, analyst]

Just a couple here. On international, a good NIM expansion this quarter. But with the 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, this is across the industry, of course, but your book, in particular, in the auto book, is it possible that we could see another bump up required to that performing ACL ratio just because of everything that's going on?

[Rajagopal Viswanathan, executive]

Gabe, it's Raj. I'll start on NIM and Francisco might have a comment or 2 to follow me and then Phil will take over on the performing ACL ratio. International Banking NIM, Gabe, you probably followed me quite a bit. A number of countries, multiple factors that moved the NIM up and down, inflation is a factor and so on. This quarter, the benefit came primarily from reduction in cost of funds.

And we had 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 it's largely done. You'll see some marginal benefits over there, but I think most of it's baked into the 447 basis points. That is about 2, 3 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 will bob around as International Banking NIM always does because of multiple factors. I think somewhere around that to maybe 450 is the top end, at least over the next 2 quarters because we're not expecting meaningful rate cuts like we've seen in the last 2 or 3 quarters. So that would be my sense of how the NIM will behave looking forward.

[Francisco Alberto Aristeguieta Silva, executive]

I would agree, Raj. This is Francisco. I think the one, the laggard is Mexico, we expect Mexico to cut rates 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.

[Philip Thomas, executive]

Gabe, Phil here. I hope you're well. So maybe just on the ACL question you asked. 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 4 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.

[Gabriel Dechaine, analyst]

That guidance range you gave -- sorry, that was for impaired or total, the 45 to 55?

[Philip Thomas, executive]

That's for total.

[Operator]

The next question is from Mario Mendonca from TD Securities.

[Mario Mendonca, analyst]

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.

[Rajagopal Viswanathan, executive]

Sure, Mario. 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 2 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 are 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.

[Mario Mendonca, analyst]

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.

[Rajagopal Viswanathan, executive]

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.

[Operator]

The next question is from Lemar Persaud from Cormark Securities.

[Lemar Persaud, analyst]

Maybe turning to Aris on a question on Canadian Banking. This cessation of SEDAR, is that going to weigh on noninterest 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 have -- you're going to see play out for the next couple of quarters.

[Rajagopal Viswanathan, executive]

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 SEDAR and the acceptances level starts going down, which should happen in an accelerated manner in Q3, yes, the noninterest revenue will go down, but it doesn't impact total revenue. It's kind of a geography that moves within noninterest 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 will 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. The part of the noninterest revenue, the Canadian bank is also down because we have lost the Canadian Tire Financial services income, which is between $16 million to $18 million a quarter. But that shift will happen just between revenue for the acceptances part of the business, but not necessarily impacted total revenue in any meaningful manner.

[Aris Bogdaneris, executive]

And just to add, Up to now, it's been 1/3 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.

[Lemar Persaud, analyst]

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

[Rajagopal Viswanathan, executive]

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 will have some impact as it transitions away.

[Operator]

The next question is from Mike Rizvanovic from KBW Research.

[Mehmed Rizvanovic, analyst]

I have a question for Raj, and I want to talk 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 in 2025, so 6 quarters from now, does this go down to something like sub 300? And if that's the case, what do we need to see on the -- maybe the shape of the yield curve to get you there?

[Rajagopal Viswanathan, executive]

Yes, the other segment this quarter, just to clarify, it benefited because of mark-to-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 1 rate cut we are expecting now in the second half of the year in Canada will remain around $450 million 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 line is compensated through the transfer pricing arrangements that we have to remove the volatility in the business line results. Each rate cut this time we have 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 in NII benefit in a full year.

So it gives you a little bit of perspective of 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 their NIM by about 2 basis points. So there is a dynamic between fixed rate borrowings that we have in fixed rate mortgages that will come up for renewal, that should help, if we have reasonable rate cuts call it 4 rate cuts, right, through to 2025, I would see that the other segment will not start with the 4.

The quarterly loss should be meaningfully lower. But it's tough to provide an estimate, like we said, it depends on how the various parts of the rate curve move right from the short end all the way to 5 years, but it should be a meaningful benefit in 2025 through the other segment.

[Mehmed Rizvanovic, analyst]

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?

[Rajagopal Viswanathan, executive]

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 was inverted. So the long end of the curve should go down meaningfully lower than the 25 basis point rate cut we might see at the short end of the curve. So we might lose something at the 3-year and 5-year point, but the significant benefit will come from the short end.

[Mehmed Rizvanovic, analyst]

If I could 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?

[Aris Bogdaneris, executive]

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 in to the banks.

So again, having multiproduct acquisition at the point of sale, I talked about mortgage 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 multiproduct 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 the Investor Day.

So yes, 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.

[Operator]

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

[Nigel D'Souza, analyst]

I wanted to follow up on the variable rate mortgages but from a different perspective. I think you mentioned those were 2022 vintages. So would you be able to shed some light on the LTVs for those mortgages? And what I'm getting at here is where those mortgages under water and your 100% LTV. There wasn't a payment, you have an adjustable payment structure.

And is there a correlation ultimately between the amount of equity and the LTV on that portfolio and the delinquencies and impairments you're seeing in that book?

[Philip Thomas, executive]

Nigel, it's Phil. Our average LTV on that portfolio is in the 50%, so it is quite low. At origination, the average FICO for those products were 800, and so it is 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 rates, they're making trade-offs 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, just customers has 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 stressful period.

[Nigel D'Souza, analyst]

So you're saying there's no correlation between LTV and delinquency rates?

[Philip Thomas, executive]

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

[Nigel D'Souza, analyst]

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

[Rajagopal Viswanathan, executive]

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 or 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.

So that's the distinction between the two but I'm happy to go into more detail with you one-on-one. You think you have more follow-up questions on that topic.

[L. Thomson, executive]

Raj, it's also important to note is the sensitivity disclosure that we've had $100 million for 25 basis points doesn't include the asset repricing.

[Rajagopal Viswanathan, executive]

It does not.

[L. Thomson, executive]

And so the tailwind here for the bank in the scenario where rates come down is pretty significant.

[Operator]

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

[Darko Mihelic, analyst]

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 update, and I think I heard you say that there is more work to be [indiscernible] when the floor kicks back in again. And what it is precisely that you're doing with respect to model updates?

[Rajagopal Viswanathan, executive]

I missed part of your question, you got cut off, but I think I got what you're looking for, 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 a quarter-to-quarter perspective.

But I'll call out 2 of the things, 1 of which you touched on, which impacted the elimination of the flow this quarter, one is client deselection. The way we have worked about client deselection, 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 3 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 AR BRWA only and does not impact the standardized calculation. It's split 2 ways. One I would call out as just parameter changes. Constantly, we look at our probability of defaults for our customers based on market info, own performance and so on.

So that resulted and there was some migration too in the nonretail book like I pointed out on a different question, which increased the AR BRWA, which is obviously insensitive under the standardized calculation. The other component is an LGD methodology change we actually put through.

And so that impacted it $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 are 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.

[Darko Mihelic, analyst]

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?

[Rajagopal Viswanathan, executive]

Yes, sure. I think I can give you the answer now. It's obviously due in 2025. The 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 tick up 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.

[Operator]

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

[Sohrab Movahedi, analyst]

Okay. 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 is a battleground for you? Is this an area that you're likely to deploy capital in, please?

[Francisco Alberto Aristeguieta Silva, executive]

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 our 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 resolved, 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.

[Sohrab Movahedi, analyst]

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

[Francisco Alberto Aristeguieta Silva, executive]

No, not at all. I mean if you look at the exposure we have in Brazil, as I said, 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.

[Sohrab Movahedi, analyst]

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

[Francisco Alberto Aristeguieta Silva, executive]

Yes, primarily GBM driven and market business. And again, you're going to continue to see us not only in Brazil, 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 increase 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 and close those global relationships not necessarily only in Brazil.

[Operator]

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

[Rajagopal Viswanathan, executive]

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.

[Operator]

The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.