Bank of Nova Scotia

TSX:BNS

Earnings Call Transcript 2020-Q4

[Philip Stephen Watson Smith, Senior Vice President of Investor Relations]

Good morning, and welcome to Scotiabank's 2020 Fourth Quarter and Full Year Results Presentation. My name is Philip Smith, Scotiabank's Senior Vice President of Investor Relations. Presenting to you this morning are Brian Porter, Scotiabank's President and Chief Executive Officer; Raj Viswanathan, our Chief Financial Officer; and Daniel Moore, our Chief Risk Officer. Following our comments, we'll be glad to take your questions. Also present to take questions today are the following Scotiabank executives. Dan Rees from Canadian Banking; Nacho Deschamps from International Banking; Jake Lawrence and James Neate from Global Banking and Markets; and Glen Gowland from Global Wealth Management. Before we start and on behalf of those speaking today, I will 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 Brian Porter.

[Brian Johnston Porter, President, CEO & Director]

Thank you, Phil, and good morning, everyone. I would like to begin my remarks today by reviewing the bank's progress over the course of fiscal 2020. I will then turn the call over to Raj to review our financial performance and to Daniel to discuss risk. I will then return after Daniel's remarks to conclude our presentation by discussing our outlook for the year ahead. I would first like to acknowledge our customers for their tremendous loyalty and support over the past 9 months during COVID. I would also like to recognize our employees for their incredible professionalism and dedication during a stressful and difficult period. 2020 was an unusual and challenging year which tested the global economy and the bank in many respects, but it also represented an important year for strategic progress and accomplishments that position the bank very well for the future. Many of these appear on Slide 4. When I reflect on this year, 3 words come to mind. The first is resilience, the second is strength and the third is opportunity. Beginning with resilience. When the year began, our repositioning efforts were substantially complete, and we were poised to demonstrate our full earnings power as a leading bank in the Americas. We had completed 4 divestitures in the first quarter and had fully integrated BBVA Chile and our wealth acquisitions.We hosted a very successful Investor Day in Santiago, Chile, which showcased our strategic progress, highlighted our competitive strengths and outlined the many opportunities for expansion and growth. Our first quarter results gave a clear indication of our progress and our growth path ahead. The rapid global spread of COVID-19 changed the outlook for 2020. It was not a scenario that anyone could have foreseen, but it was one which highlighted the resilience of the bank in many important areas. Our business operations performed extremely well. We transitioned smoothly to remote work environments. Our technology was robust and highly reliable. Our branch networks remained open for our customers throughout. Our resilience was also demonstrated by the strength of our customer support networks, including our branches, digital banking channels and call centers, which handled record volumes during the year. Our capital was also highly resilient. Our common equity Tier 1 ratio rebounded strongly in Q3 and Q4 to settle at 11.8% today. The ability of the bank to generate capital even during times of extreme uncertainty and market volatility is undeniable. Furthermore, this quarter has provided clear evidence of the resilience of our earnings. We are well on our way to returning to full profitability, and our performance this quarter represents positive earnings momentum that we expect to continue in 2021 and beyond. Lastly, our diversified business model played an important role in our resilience as a bank. When one of our business lines encountered difficult business conditions, another was there to offset that weakness. Due to the investments we have made in recent years, we now have 4 large-scale business lines that provide important diversification by business activity and by country during times of uncertainty. Moving now to strength. Our resilience is testimony to the underlying strength of the bank. Our asset quality is one of our key strengths. We are primarily a secured and investment-grade lender. And throughout the pandemic, we have seen the benefits of our risk appetite with few sources of weakness in our lending portfolios. While some of that can be attributed to the scale of government assistance and government support and customer support programs, I believe our asset quality stands out. For example, our risk-weighted assets are lower today than when the pandemic began and below the levels of a year ago. In addition, our gross impaired loan ratio has declined year-over-year. Our strength is also reflected in our ability to provide extensive customer assistance during a period of stress. At its peak, we provided over $120 billion of direct financial support to our customers, including approximately $90 billion of payment deferrals to our retail customers and approximately $30 billion of additional facilities to support our business customers. This support achieved its objective of providing important relief and promoting financial stability. I believe these actions will serve to further deepen our customer relationships for years to come. In fact, we were ranked as #1 in customer satisfaction for our response to COVID-19 among Canadian business owners. Finally, our strength in digital banking was evident this year as lockdowns and a focus on safety prompted more customers to rely on digital channels. This resulted in a strong increase in digital adoption to almost 50% of all customers in 2020, while digital sales accelerated to 36% for the year. These digital trends will continue to play an important role in the future of banking. We look forward to providing additional insights on our digital progress next quarter as we refine our digital metrics for 2021. Finally, I would like to discuss the opportunities we have before us as we embark on a new fiscal year. With any crisis comes opportunity. First, we have multiple opportunities to either reduce or moderate expenses through efficiency and prioritization initiatives in order to improve our operating leverage. Our industry-leading productivity ratio and the benign rate of expense growth in 2020 reflects the priority we give to expense management. This will be a key area of focus for us in 2021. Secondly, 2020 introduced many customers to digital banking for the first time. This has provided an acceleration in digital adoption, which will provide material benefits to both customers and the bank going forward. Finally, with the expected introduction of a vaccine and the economic recovery more fully underway, the focus in banking will shift from capital adequacy to capital deployment. The bank has multiple avenues for capital deployment as a leading bank in the Americas. These include organic growth in our existing businesses; share buybacks, when they are permitted; and acquisitions. I am confident we will take advantage of all opportunities that are in line with our strategy and enhance shareholder value. With that, I will turn the call over to Raj to discuss our financial performance.

[Rajagopal Viswanathan, Group Head & CFO]

Thank you, Brian, and good morning, everyone. I'll start on Slide 6. All my comments that follow, including the discussion of business line results, will be on an adjusted basis, which excludes acquisition- and divestiture-related amounts and other adjustments outlined on Slide 40. The bank ended the year with diluted earnings per share of $5.36. Pretax preprovision income was down a modest 1% or up 5% excluding the impact of divestitures. Earnings from our P&C businesses were impacted by higher provisions for credit losses on performing loans and lower revenue, driven by the pandemic. Global banking and markets had record earnings of over $2 billion, benefiting from strong revenue growth and prudent expense management. Global Wealth Management earnings of $1.3 billion were up 7% year-over-year or 8% excluding the impact of divestitures, driven by higher assets under management from stronger net sales and market appreciation and prudent expense management. Revenue was flat for the bank, and expenses were up modestly, that resulted in operating leverage being negative 0.6% or positive 1.0%, excluding the impact of divestitures. Moving to the all bank performance for the fourth quarter on Slide 7. The bank delivered over $1.9 billion in earnings and adjusted diluted EPS of $1.45 for the quarter, an increase of 39% from last quarter. Revenue decreased 6% from last year, but a more modest 2% from last quarter. Net interest income declined 2% as strong asset growth and higher contribution from asset liability activities was offset by the core banking margin being down 18 basis points to 2.22%, reflecting lower market and administrative rates in most markets year-over-year. On a quarter-over-quarter basis, the margin improved 12 basis points, primarily due to better asset liability management as business line margins remained stable. Noninterest income for the quarter decreased 10% or 5% year-over-year, excluding divestitures, driven by lower banking, insurance and other fee and commission revenues due to the slowdown in consumer activity as well as the negative impact of foreign exchange. These were partly offset by higher trading revenues. Sequentially, noninterest income increased in Canadian Banking, International Banking and Wealth Management that partly offset lower capital markets revenue, which had a record third quarter. Prudent expense management led to a 5% decline year-over-year or 3% excluding divestitures, due to lower professional fees, advertising and business development and the positive impact of foreign currency translation. The PCL ratio was 73 basis points, down 63 basis points quarter-over-quarter and up 23 basis points year-over-year. Daniel will discuss PCLs in more detail shortly. On Slide 8, we provide an evolution of our CET1 capital ratio over the quarter. The bank reported a Common Equity Tier 1 ratio of 11.8%, improving a strong 50 basis points this quarter and 70 basis points through fiscal 2020. This quarter's growth of 50 basis points was primarily driven by strong internal capital generation of 16 basis points and lower book size, mainly from higher repayment of business banking credit and lower market risk, risk-weighted assets. Turning now to the business line results beginning on Slide 9. Canadian Banking reported adjusted net income of $782 million, a strong rebound from Q3. Year-over-year residential mortgages grew 6%, though balances in personal loans and credit card receivables declined 16%. Business lending grew 6%, and total deposits grew 12%, outpacing asset growth. The net interest margin was stable compared to the prior quarter at 2.26%, but declined by 15 basis points year-over-year, driven by Central Bank rate cuts and changes to business mix. Noninterest income declined 7% due to lower banking, foreign exchange and insurance fees driven by the weaker economic environment. Expenses for Canadian Banking were down 3% year-over-year, driven mainly by lower advertising, business development and travel costs. The PCL ratio increased year-over-year by 9 basis points to 37 basis points, but declined quarter-over-quarter by 48 basis points. Turning to the next slide on International Banking. My comments that follow are based on results on a constant dollar basis, adjusted for the impact of divestitures. International Banking reported adjusted net income of $283 million. Compared to Q3, earnings increased significantly driven by lower provisions for loan losses. While revenue grew 2%, pretax preprovision income was down 3% or flat for the Pacific Alliance countries. Loan growth was 7% year-over-year and business lending grew 10%. Residential mortgages grew 9%, while balances in personal loans and credit card receivables declined 5%. Net interest margin declined 54 basis points, driven by higher liquidity, changes in business mix and the impact of rate reductions across the footprint. Compared to Q3, though, margin was stable. Noninterest income decreased 11%, driven by lower banking and credit card fees due to the slowdown in consumer activity, while investment gains and trading revenues were higher year-over-year. Compared to Q3, noninterest income increased by 18%, mainly driven by investment gains and a rebound in net fee and commission revenue. The provision for credit losses was $736 million, up 62% year-over-year, but down 41% quarter-over-quarter. Expenses declined 2%, mainly driven by lower personal costs and other cost management initiatives. Let me highlight that in a challenging year, International Banking pretax preprovision income was modestly down 4%, while the Pacific Alliance countries showed high resiliency in decreasing only 1%. Moving to Slide 11, Global Banking and Markets. Net income of $460 million was up 14% year-over-year, driven by strong asset and deposit growth and robust fixed income trading revenues. Very strong trading revenues and our underwriting fees over the last couple of quarters returned to more normal levels this quarter. For the full year, GBM had a record net income of $2 billion. Expenses decreased 8% year-over-year, primarily due to lower personnel costs for the business line. Adjusted operating leverage for the year was 22% as GBM had record revenue while maintaining strong expense management discipline. Turning now to Global Wealth Management on Slide 12. Adjusted earnings of $333 million were up 6% year-over-year, driven by strong net sales, higher trading volumes and market appreciation. Canadian Wealth Management earnings were up a strong 14%. Excluding the impact of divestitures in our international operations, assets under management was up 2% and asset under administration was up 4%. Canadian AUM grew 5% and AUA 3% during the year. Revenues were up 4%, excluding the impact of divestitures, with Canadian Wealth revenues up 6% year-over-year, driven by higher mutual fund fees due to strong volume growth. Expenses were down 2% year-over-year due to the impact of divested operations. Wealth Management results remain supported by strong investment fund performance. I'll now turn to the Other segment on Slide 13. The results also include the gains and losses on divestitures and asset liability management activities. The Other segment reported net income of $8 million compared to last year's net loss of $48 million. The improvement was due mainly to higher contributions from asset liability management activities, partly offset by higher noninterest expenses. I'll now turn it over to Daniel, who'll discuss risk management.

[Daniel Moore, Group Head & Chief Risk Officer]

Thank you, Raj, and good morning, everyone. I will begin my remarks on Slide 15. Today, my comments will address 3 important items. Firstly, our credit quality, which is performing as or better than expected. Secondly, our outlook for lower PCLs in fiscal 2021; and thirdly, our ACL build, which is complete. We concluded 2020 in a strong position with a stable portfolio that's well reserved. Our customer assistance programs have largely expired, and the credit performance of the customers exiting these programs remains very strong. As we ended the year, the bank reported total allowances of $7.8 billion, an increase of 53% over the past 3 quarters. This means we have appropriate coverage for estimated net write-offs through 2021. So we do not foresee a build in performing allowances in 2021. Our total provisions of $1.13 billion in Q4 were down over $1 billion from last quarter. The total provisions for credit loss ratio improved by 63 basis points over the same period. This is consistent with our guidance in Q3. Recall that we indicated that our Q4 PCL ratio was expected to be below Q2 levels. It's significant here to highlight that the impaired PCL ratio improved by 4 basis points to 54 basis points. On Slide 16, I'll give you some more detail on our performing and impaired PCLs. Let's start with the impaired PCLs. We reported $835 million in Q4, down from $928 million last quarter. This improved because of lower retail provisions in both Canada and International, both delinquencies and credit migrations have improved. Our performing PCLs were $296 million in Q4, down nearly $1 billion from Q3, roughly 80% of the decline was driven by retail, mainly in International. On the next slide, we provide additional details of our International retail credit performance by country. Our PCL ratios improved significantly in Q3 across most of our Pacific Alliance countries and the Caribbean and Central America, but they're still above historical average levels. Let's turn to our customer assistance programs on Slide 18. The bulk of these programs have expired this quarter as expected, and our outstanding year-end performance balances were approximately $15.7 billion. This is a decline of over 80% from its peak. As of the end of November, retail deferrals have already declined by over half to $5.3 billion. And the bulk of commercial deferrals expire by the end of Q1. What's important is that these programs provided relief to our customers through the pandemic. I'm pleased to note a very high percentage of customers are current on their payments after exiting the programs, and this reflects the strong credit quality of our portfolio. The high levels of payment activity we saw in Q3 continued into Q4 as more customer assistance programs expired. 97% of our retail customers remain current in Canada, for International Banking, it's nearly 90%, and for commercial, it's 99%. As I noted last quarter, our deferral exposure is skewed towards secured mortgage lending with low LTV. I also want to note that the credit performance of our unsecured personal and credit card exposure remains strong. Turning to the credit quality of our portfolio. It remains strong, as you'll see on Slide 19. Our GIL ratio of 81 basis points was flat against last quarter and declined by 3 basis points year-over-year. The main reason was retail. We saw a lower migration due to the customer assistance programs. In International and Commercial, we saw a small increase driven by a single account formation. GBM also reported slightly higher formations, but these were offset by lower GILs in retail, driven by customer assistance programs in both Canada and in International. On the bottom of Slide 19, you can see the all bank net write-off ratio has improved to 41 basis points, down 6 basis points from last quarter and down 8 basis points from a year ago. This was driven by Canadian and International Banking, both of which benefited from the customer assistance programs. In summary, 3 things are core to risk management at Scotiabank. Firstly, strong asset quality; secondly, having appropriate allowances; and third, being there for our customers when they need us most. Our foundation is solid because we've done all 3. We see strong deferral payment trends. We're adequately provided to absorb net write-offs for the second half of 2021, and we're seeing our customers return to current status in line with or better than our expectations. As we look to next year, our allowance covers estimated net write-offs and the build in our allowances is done. We expect our 2021 PCL ratio to average close to the level of prior years. I'll now turn the call over to Brian.

[Brian Johnston Porter, President, CEO & Director]

Thank you, Daniel. I would now like to discuss our outlook for the year ahead. Given the uncertainties related to the pandemic, it's quite difficult to forecast with any real precision. That being said, there are several important factors that make us cautiously optimistic for the year ahead. The first is the scale of economic stimulus in response to the pandemic. The scale of stimulus from interest rate cuts, wage support programs, pension fund withdrawals, to name a few, is unprecedented. For example, fiscal stimulus in Canada, the United States, Chile and Peru has averaged 17% of GDP, while monetary stimulus in Mexico and Colombia has averaged over 250 basis points. Policy actions by governments and Central Banks across our footprint have been numerous, decisive and powerful. The second is the impact of stimulus. We are seeing clear evidence that the stimulus is having the desired impact across our footprint. In Canada, retail spending has reached prepandemic levels. The housing market is experiencing robust growth and auto sales have largely recovered. Economic growth in the Pacific Alliance has bounced back with average Q3 GDP growth of 14% versus the prior quarter, with Peru posting a dramatic 30% GDP growth figure. As such, there is ample and growing evidence, the economic recovery in our core markets is well underway. The recovery will likely be staggered with different countries returning to positive year-over-year economic growth at different times. The pace of economic recovery in China and the United States and the rebound in commodity prices, such as energy and copper, also bode well for Canada and the Pacific Alliance countries, where we forecast GDP growth of over 5% for 2021. Finally, a vaccine will be introduced shortly, while our current outlook does not rely on an effective vaccine being introduced, any progress towards this goal will certainly improve our outlook. Turning now to our business line outlook. We expect 2021 will be a transition year towards a return to the full earnings power of the bank, supported by a return to normal PCL levels consistent with an economic recovery. Canadian Banking earnings are expected to continue its momentum in the next year from a strong rebound this past quarter, driven by good volume growth in mortgages and business banking, stable net interest margins and fee income growth aligned with the improvement of economic activity. We are encouraged by the recent signs of improved economic activity reflected in rebounding GDP growth in the Pacific Alliance, and we expect International Banking earnings to continue to grow throughout 2021 towards our targeted earnings levels. Wealth Management is very well positioned to continue to grow in line with this year, following the successful integration of our acquisitions and strong fund performance in 2020. GBM had record earnings this year, benefiting from market conditions and an elevated franchise from uptiering client relationships and market position. Looking forward to 2021, GBM is operating from a stronger platform and momentum is positive. The bank's capital position is strong and will remain so in 2021. As the focus shifts from capital adequacy to capital deployment, I am confident we are well positioned to take advantage of opportunities as they arise in line with our strategy. In closing, we started 2020 well with solid performance in Q1, and we ended the year in Q4 with strong earnings momentum. I believe these results are indicative of the earnings potential in quarters ahead. This concludes my formal remarks, and I will now pass it over to Phil for questions. Thank you.

[Philip Stephen Watson Smith, Senior Vice President of Investor Relations]

Thank you, Brian. Well, we will now be pleased to take your questions. [Operator Instructions]

[Operator]

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

[Ebrahim Huseini Poonawala, Director]

I guess I just wanted to touch upon the International Banking segment. And you provided a decent overview around your outlook for the markets. If you could respond to this question in 2 parts. One, given there's been a lot of COVID-related volatility, a lot of political noise, has anything around Peru and Chile changed, Brian, in your mind in terms of the growth outlook for these markets, for what it means for Scotia? And secondarily, I went back to my notes, Raj. And I think earlier in the year, before COVID, you expected earnings power for the International segment to be north of $500 million per quarter. I realize we're in a very different rate backdrop. Talk to us around what's realistic in this interest rate backdrop when we think about net income for the segment?

[Brian Johnston Porter, President, CEO & Director]

Okay. Thanks, Ebrahim. And I'll start, and I know Raj and Nacho may have some comments. Clearly, the political situation in Peru has stabilized. The new President is well-respected and is known very well in political circles. I would -- it's very -- in Peru, I know it's confusing to look at us from an outsider. But during our 20-plus years there, governments changed from center right to center left and the economies run from the center. So if you look at it, S&P has maintained the country's investment-grade rating. As I mentioned in my comments, GDP growth of 30% in the last quarter, and there's lots of torque in the Peruvian economy, and the economy is going to come back very strongly. That's going to be voted by record copper prices we see here today and the trade with China and the U.S. So in summary, if you look at not just Peru, but the Pacific Alliance, this region is extremely competitive on trade, low levels of private debt. There's less fiscal drag than the developed countries, and these countries have not had to raise rates to attract capital, that's an important point. So currencies are stable, appreciating versus the U.S. dollar over the past 6 months. So there's lots of torque left in these economies. We're starting to see it, and you'll see that follow through in our results.

[Rajagopal Viswanathan, Group Head & CFO]

So Ebrahim, it's Raj. I'll talk on some of the earnings projections that we talked about and then I'll pass it on to Nacho if he wants to speak about specific countries. You're right, we've indicated that the true earnings potential of this business should be north of $500 million per quarter. We've rebounded very nicely to $283 million this quarter. And we see sequentially, this is going to continue to improve quarter after quarter, Ebrahim. If you want to put a stake, I would say that $500 million should be achievable by Q4 of 2021 at net earnings. It's going to be driven by a couple of factors. Revenue growth is going to start because as retail starts coming back, which has been a drag because of the lack of economic activity, you're going to see that natural growth in our assets starting middle of next year in retail. Commercial will continue to be solid, we think, across the footprint. And most importantly, I think net interest margin, even this quarter, you saw it only drop 2 basis points across the footprint. We don't see large margin compression ahead of us. You might find a few basis points in a quarter or so, but nothing that should impact their revenue projections going forward. And finally, what I would say is on fee and commission revenue. It's a big part of revenues -- of earnings of the international bank, particularly when you think about the Caribbean, Central America, but also the Pacific Alliance. You've seen the noninterest revenue grow sequentially this quarter, and we'll continue to see that, which is completely linked to the return of economic activity, which is the same driver that will relate to the retail growth coming back across our footprint. Over to you, Nacho.

[Ignacio Deschamps]

No, I would just add maybe to your first question and complementing Brian's comments, Ebrahim, I think interesting about Peru markets have responded well after the election -- of the appointment of President Sagasti. And Peru issued a bond, a sentinel bond after that a year -- a week ago, that was oversubscribed and it achieved a record interest rate relative to other emerging markets. So I think it's a very positive sign that markets have responded well. It is going to be a transition government, and here we have a presidential election in April in Peru. I would also highlight that on the market side, the continued growth of China is a -- which are -- is the most important trade partner to Chile and Peru is a positive driver as well as the U.S. economic recovery for the Mexican, for Mexican manufacturing exports. And overall, as Raj said, I expect that by the end of 2021 we will be around $500 million. And in addition to the recovery of -- rather recovery of fees and volumes, I also expect expenses to be a positive driver. As you saw in the quarter, year-over-year expenses went down, and digital has significantly accelerated. So that is helping us to keep our whole year PTPP flat in the Pacific Alliance countries.

[Operator]

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

[Gabriel Dechaine, Analyst]

Daniel, thanks for all the commentary on the PCL outlook and some goalposts as well. Just wondering, like we've been kind of conditioned to expect the first half to be the peak or similar to Q2, I guess, for impaired provisions. Now it sounds more like 2021, end of year, could it actually be into 2022? Just want to get a sense of timing there. And then I'll throw on the quick one on expenses. Do you expect a flattish expense growth next year?

[Daniel Moore, Group Head & Chief Risk Officer]

Sure, Gabriel. Thank you. I'll start with the timing on the net write-off and I'll hand off to Raj on expenses, obviously. Yes, you're right. We would see -- we've seen net write-offs start to increase. That will continue into Q1. But we anticipate it would grow into Q2 and peak in Q3 given the government guarantee programs and other impacts coming through. But what's important here, I think, is that as we look at these deferral programs coming off, our customers, as I indicated, are really performing very well and coming back to current very, very quickly. So we will be down at the end of Q1 to really a very small number, about $1.1 billion of our retail customers in deferral. As I said, we're seeing 97% of those in Canada coming back to current, 99% of the commercial, about 90% in international. And that's what we've used to drive some of our analysis on our allowances. And perhaps also importantly, we don't see a high percentage dependency on serve in those deferral expires. So we don't think there's any cliff effect leading in our deferral numbers either. I'll hand it over to Raj now on our expenses.

[Rajagopal Viswanathan, Group Head & CFO]

Sure. Gabe, I'll try to give you a little bit of perspective of how we see expenses flowing through in 2021. But more about 2020 to start with, so it gives you a bit of context. 2020, our expenses grew only 1%. So that's a lot of expense management discipline that the bank has. We've always talked about it needs to grow in line or take a skew from revenue as well as prioritization. So we have demonstrated that in 2020. We expect to do that again in 2021 as well. At this time, we don't see expenses growing of any significant magnitude in 2021 across the bank. It's going to be flat or comparable to 2020. Lots of opportunities across the footprint. Nacho talked about his business, where we have opportunities to quickly get some expense gains. Likewise, we have diligent investments we need to make, both in Canadian Banking and GBM, but we have enough opportunities across the expense base to ensure that our expense growth remains very low, perhaps comparable to 2020 levels as we finish '21.

[Operator]

The next question is from John Aiken from Barclays.

[John Aiken, Director & Senior Analyst]

Nacho when we look at the decline in the average loan balances in your segment, can you talk to how much of that was driven by lower demand, and how much of that was actually Scotia potentially pulling back from the marketplace just to see how risk was going to settle out?

[Ignacio Deschamps]

Sure. Well, let's look at it first the whole year because I think it's very important to see that we had a 10% increase in our loan book in the year. And this was same as in Canada was driven by the growth of business banking and mortgages. Indeed, in Q4, we had an important decline of 7% of business banking loans as our corporate customers paid back their short-term lines. But I see this as temporary. I expect now business banking and mortgages to continue the good momentum into 2021. Due to the pandemic, the lockdowns, unemployment rising there was a lower growth, actually only 2% growth whole year in unsecured lending. That will take a little bit longer, but I expect that as economies recovers, it will gradually come back. And that by the end of 2021, we should be growing solidly, both in wholesale and retail and at the similar pace.

[Operator]

Next question is from Mario Mendonca from TD Securities.

[Mario Mendonca, MD & Research Analyst]

I'm sorry. Can hear you me now?

[Ignacio Deschamps]

Yes, we can hear you.

[Mario Mendonca, MD & Research Analyst]

Sorry about that. Daniel, I want to go back to what you were referring to on PCLs your guidance, to make sure I understand it correctly. You suggested the PCLs ratio should be back to what it had been in prior years. That throw me off -- or threw me off a little bit, just because I would expect that as the deferral periods expire and as you suggested, we would see impaired losses actually climb throughout 2021. Are you contemplating any release of the performing loan loss allowance to actually cause the performing -- the total PCLs ratio to be consistent with prior year?

[Daniel Moore, Group Head & Chief Risk Officer]

Yes, that's the dynamic, obviously, that we expect from the IFRS 9 accounting, Mario, is that through this period, we've built our performing allowances as we looked at our performance of our portfolio and forecast performance. As you go into the realization of net write-offs, you have these accounts that migrate to these various stages in IFRS 9. And so as they migrate, they move from performing stage 1, 2 into stage 3. And so those build ups in the performing gets offset by the increase in the stage 3 as they go to net write-off. And so that counterbalance between the 2 will drive the net total PCL to levels that are close to or just above our previous PCL levels for the whole year on average. And that's why we're confident when we look at these numbers in saying that while it's been a pretty dramatic credit story in 2020, that story has been written, and we're now done with the ACL build.

[Mario Mendonca, MD & Research Analyst]

Okay. So just going to the impaired then for a moment. The increase in the impaired, is there anything you can offer there? Like how much higher than in prior years, just so we can get a flavor for the -- like how those 2 dynamics play out?

[Daniel Moore, Group Head & Chief Risk Officer]

Yes. I think if you look at the total over the year, the increase in impaired and ultimately, the increase in net write-offs, of course, as a result of that, will be in line with, but less than our build in the allowances that we've had over the course of this year because we're going to maintain some level of those allowances for the longer enduring structural damage that we see in the economy that can go beyond 2021.

[Operator]

The next question is from Lemar Persaud from Cormark Securities.

[Lemar Persaud, Research Analyst]

It looks like deferrals in International Banking have not rolled off quite as much as expected in Q3. Maybe Nacho, you could talk to which countries the extensions are granted in? And if there's any risk of having the deferrals extended further? And maybe...[Technical Difficulty]

[Brian Johnston Porter, President, CEO & Director]

Sorry, Lemar, yes.

[Ignacio Deschamps]

Yes, happy to answer. Look, as Daniel mentioned, in international, as of October 31, we had a $6 billion in active deferrals. But I estimate that as of yesterday, November 30, it will decline -- we have declined to less than $3 billion, and 50% of that related to mortgages and concentrated in Mexico and Chile, where the programs started later, or were extended by regulation. So in other words, Lemar, by -- as of yesterday, we should be 90% of the balances should have expired. And the payment behavior has been strong with around 90% at current. It's also probably important to highlight that the early withdrawal of pensions in Peru and Chile has been very a positive to help customers resume their payments. It amounts to more than $35 billion in both countries. So overall, the assistance programs have had a positive effect and are helping customers regain their financial health.

[Operator]

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

[Doug Young, Diversified Financials and Insurance Analyst]

I'll try and keep this quick. The -- Brian, you mentioned in your prepared remarks, buybacks as one way to deploy capital and acquisitions. And so any thoughts that you can provide us in terms of when you might think restrictions on buybacks or dividend increases might come off? And when you think of acquisitions, is that lower down on the toning pool when you think about the ways you're going to deploy capital?

[Brian Johnston Porter, President, CEO & Director]

Okay. Thank you for the question, Doug. I think the superintendent was pretty clear in terms of allowing buybacks and dividend increases in his speech last week. But from our perspective, we have our 2 top priorities in terms of capital allocation and are investing in our own businesses, and we're doing a lot of that. And examples are in investment in our retail sales force in HFA, our mortgage unit, here in Canadian Banking and Global Wealth Management in terms of our sales force there as well. And there's lots of opportunities for us to invest in our own business. So that would be point one. Second would be share buybacks. We think our stock on a valuation basis is incredibly cheap. We understand the value in the organization and the earnings potential of this organization. So those would be the top 2 priorities for the bank from a capital allocation perspective. And anything to do with any acquisition or potential acquisition is just sheer speculation. We're focused on driving our own business here right now.

[Operator]

The next question, Darko Mihelic, RBC Capital Markets.

[Darko Mihelic, MD & Equity Analyst]

My question is for Dan Moore. And maybe, Dan, as a preface, this is to help me understand the adequacy of your reserve. So I'm looking at your deferral program, and what I'm interested in is, not the percentage of the current, but I'm interested in the percentage that is not current. And I was wondering if you can help me understand what is that number? And if they all went to impaired eventually, what would that loss be, how would that stack up against your ACL?

[Daniel Moore, Group Head & Chief Risk Officer]

Yes. So firstly, on the -- let's be very clear on the customers that are current, those have essentially all made a first payment, okay? So they have -- they're cash flowing, and we feel good about that return to current for those with those customers. Secondly, your question was on the coverage and how we feel about the coverage? We've had, Darko, a 63% build in our performing allowances over the course of this. We feel that's very adequate. And a couple of metrics to your question on that. First of all, if I look at business banking, we've got 28 quarters of coverage now realizing, obviously, historical losses will not come up with the future losses, that feels pretty good. Secondly, on the stock of the the expired customers, if I assume that all those expired customers go all to my deferred customers, so it's some deferral, if they all go to delinquency with a rate that is consistent with the 30-day delinquency rate that we've seen so far. And furthermore, all those to be delinquencies go fully into net charge-offs. So a pretty conservative assumption for the whole book of business. On retail, I've got for cards, 2x coverage and for loans, 3.5x coverage. So that's pretty strong coverage ratio on those extremely conservative assumptions. So that's one fact of the ongoing metric that we can use, Darko, to think about how strong our allowances are, and that's what gives us confidence in our outlook and our credit quality going forward.

[Darko Mihelic, MD & Equity Analyst]

Okay. So -- but just to be clear, Dan, the numbers that are currently have not made a payment, they're currently not classified as impaired. How big is those -- is that number across the various books?

[Daniel Moore, Group Head & Chief Risk Officer]

Currently, the -- it's less than 1 -- it's about or less than 1%, Darko, of the customers that have not made a payment that have expired and returned to current.

[Darko Mihelic, MD & Equity Analyst]

Okay. Okay. I may follow up with you.

[Daniel Moore, Group Head & Chief Risk Officer]

Yes, happy to. Okay.

[Operator]

The next question is Scott Chan from Canaccord Genuity.

[Scott Chan]

Maybe Nacho, just on the International and maybe kind of tying with your expense comment. I noticed the branch count was down significantly and then it kind of depleted overall 10% quarter-for. How much of that was due to divestitures? And how much of that was due to core kind of core from your actions on your part?

[Ignacio Deschamps]

Well, I would say, Scott, it has to do mostly with the digital dividend. There's some impact of the integration synergies, but really it is because the way consumers have adopted technology due to COVID is truly unprecedented. And we have seen in the Pacific Alliance countries for the average age of our customers is around 30 years old, a tremendous growth, both in digital adoption that has gone from 35% to 46% and digital sales that have gone to 30% to 50%. So this is a trend that accelerated. But if you see our last 4 years, we have reduced gradually our branch network by 150 branches in the past 4 years. So this accelerated during COVID due to the acceleration of digital. Branches continue to play a key role. And actually, the -- one of the key changes is that we are onboarding digitally customers end-to-end in branches, and that is increasing in not only customer experience, but it's also increasing productivity and improving efficiency. So this is what has happened. And I expect that this will continue more gradually in future years, but I expect our expenses will continue to go down in 2021.

[Operator]

Next question is from Sohrab Movahedi from BMO Capital Markets.

[Sohrab Movahedi, Analyst]

Just wanted to go to Dan Rees. He's had it easy a little bit, so I thought I'd catch up with them. Dan, as Brian mentioned in his remarks that there's going to be some good continued momentum in your business. Obviously, a good rebound quarter-over-quarter, but what does that mean? And what are going to be the drivers of that momentum for you, if I think about it both from an earnings and maybe a volume growth perspective?

[Daniel Llewellyn Rees, Group Head of Canadian Banking]

Thank you, Sohrab. Look, we're expecting both in Q1 and through the course of next year, our 2 largest loan books will continue to expand. We were really pleased with their performance in Q4, and we've seen good momentum in November already. And here, specifically, I'm speaking about mortgages or our real estate secured lending program in general, where we have the market-leading step program, where we take a full collateral charge, which allows us to cross-sell higher-margin generating product as well as the mortgage. And of course, our commercial loan book, we're really pleased with how the balance sheet performed. You're not seeing much by way of kind of unexpected turn off in terms of deferrals or formations or net write-offs or stage 3. So those 2 books will continue to grow through the course of next year. Looking at fee income, which I know is a subject of interest often for The Street when looking at our portfolio, we saw noninterest revenue sequentially in Q4 improve nicely. That's both as a result of banking fees and retail small business and commercial coming back online. We're very pleased with the sales performance that we're seeing in our mutual fund business as well as credit cards and insurance where we're undersized, and we still see opportunity to return to our natural share. So in addition to those comments, I would just double underlying Québec, we established some time ago that we're a little out of balance in terms of our regional prospects. We've been making steady improvements brick by brick at building our franchise in Québec, and the performance this year and expectations for next year continue to be very good.

[Sohrab Movahedi, Analyst]

And Dan, just on the margins, you think you should be able to maintain it given the mix that you have from here or do you foresee more margin pressures?

[Daniel Llewellyn Rees, Group Head of Canadian Banking]

I think the outlook for margins for the Canadian bank, I think, are good for next year. We think -- we're pleased that we stabilized this quarter. And I think as the mix continues to improve, we're optimistic with regards to fiscal '21.

[Rajagopal Viswanathan, Group Head & CFO]

I think, Sohrab, to be specific we had margin in Q4 was 226 basis points, that's what we expect to continue throughout 2021 for Canadian Banking.

[Operator]

The next question is from Paul Holden, CIBC.

[Paul David Holden]

I'll try to keep this quick. As we think about the International Banking and the return to that $500 million quarterly run rate, I want to get a better understanding of how travel and FX transactions and other fees you generate from travel might play into that? Like do we have to assume a return to normalization on travel? Or are there offsets, such as the expense reductions you've been focusing on that helps you get to the $500 million even if travel remains subdued?

[Ignacio Deschamps]

Thank you for your question. Well, I think it is beyond travel. Let me put it this way. We are still, today in Q4, 20% below our fees and commissions than we had a year ago. So I see this as an opportunity that this gap will gradually reduce as these economies recover. And as I said, there's been already a strong rebound. And actually, we had an 8% increase in net fees and commissions in the quarter. So this is going to be a gradual recovery. Of course, as travel recovers, particularly in the Caribbean, that will have a positive impact in the second half of 2021.

[Operator]

The next question is from Mike Rizvanovic from Crédit Suisse Securities Canada.

[Mehmed Rizvanovic, Research Analyst]

I wanted to go back to Nacho on the Pacific Alliance. So I'm just focused a bit on the commercial loan growth, and I know it's been a challenging period the last few months. But if I compare your growth versus industry peers, and it's really in all 4 countries, it looks like there has been quite a bit of underperformance. I'm wondering if you can talk to that a little bit? Just on a high level, it looks like there is some sort of derisking going on just given that underperformance versus peers. Can you provide some color on that, please?

[Ignacio Deschamps]

Sure. No, it's a good question, but I really feel -- yes, I feel very comfortable with our level of growth. There's some distortion of growth because of government guarantee programs for new lending. And some of our peers have a greater participation. I feel very, very comfortable with the level of participation because we provided it to our clients that need it. But if you exclude that, I think we are performing very well relative to peers and with a good balance with profitability. See actually, our performance relative to peers in terms of revenues, in terms of NIM, in terms of PTPP is very strong in the Pacific Alliance countries, especially in Mexico and Chile. Once this support from government programs offshores, I expect you will continue to see our growth aligned with the market. And retail, as I mentioned already, has a -- it will be slower. But it will gradually pick up as customers come out of customer assistance programs and employment recovers as it is already trending.

[Operator]

The last question will be from Ebrahim Poonawala from Bank of America Securities.

[Ebrahim Huseini Poonawala, Director]

Just Brian, you mentioned capital deployment becoming a factor next year. I was just wondering if maybe, Raj, you can address, CET1 at 11.8%, what's your outlook in terms of as impairments rise, RWA inflation impact, around the capital ratio? And remind us where you think the bank should be operating 12 months from now if the macro outlook is improving, what's the steady state CET1 that you'd like to operate the bank at?

[Rajagopal Viswanathan, Group Head & CFO]

Thank you, Ebrahim. Strong capital rebound this quarter as we saw 11.8%. I talked earlier about stress test that we run to see when the economy recovers and so on, what could be the structural damage across our portfolio. The analysis always seems to indicate, it's no more than 40 basis points, Ebrahim. And when we think about capital deployment that will happen next year with growth, but also backed up with strong internal capital generation, which, as you know, is about 10 basis points per quarter for this bank with normalized earnings, we think our capital ratio would be certainly north of 11.25% closer to -- about 11.40% as we think through next year. It's a little difficult to answer what is the optimal capital. I think optimal capital, we've been through the largest stress test that you can imagine in this last year and with the exception of 1 quarter where our capital ratio of 10.9%, it's been comfortably north of 11%. So we'll be informed by that as we think through, but it's going to be something around the 11% range, I would assume. But as capital deployment opportunities arise for us, we think that it's very easy to manage our capital while consistently deploying it to -- provide returns to all our shareholders. Thank you. All right. Thank you, everyone, for participating in our call today. On behalf of the entire management team, I want to thank our investors and analysts for participating in our call today. I also want to thank all our employees for their continued focus and hard work to deliver to all our stakeholders, and our customers and shareholders for their loyalty and support. We wish you all a safe and happy holiday season and look forward to speaking with you again at our Q1 2021 call in February 2021. Have a great day, everybody.

[Operator]

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