Bank of Nova Scotia

TSX:BNS

Earnings Call Transcript 2021-Q4

[John McCartney]

Good morning, and welcome to Scotiabank's 2021 Fourth Quarter Results Presentation. My name is John McCartney, I'm Head of Investor Relations here at Scotiabank. Presenting to you this morning are Brian Porter, Scotiabank's President and Chief Executive Officer; Raj Viswanathan, our Chief Financial Officer; and Phil Thomas, Chief Risk Officer. Following our comments, we will be glad to take your questions. Also present to take questions are the following Scotiabank executives. Dan Rees from Canadian Banking; Glen Gowland from Global Wealth Management; Nacho Deshanfrom International Banking; and Jake Lawrence from Global Capital Markets. 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.

[Brian Johnston Porter, President, CEO & Director]

Thank you, John, and good morning, everyone. I will begin with a review of the bank's performance and progress over the course of fiscal 2021, after which Raj will review the financial year in more detail, including our outlook for fiscal 2022. Phil Thomas, our Chief Risk Officer, will follow Raj with commentary on risk performance. and outlook. We will be pleased to take your questions following my closing remarks. The 2021 fiscal year was, indeed, the transition year to the full earnings power of the bank we anticipated. In fact, at the all bank level and adjusted for divestitures, earnings were 18% higher than fiscal 2019, and pretax pre-provision earnings were 8% higher. Our business lines have returned to, or exceeded pre-pandemic earnings levels. Loan growth has been strong, in line with customer preferences. Our loan growth is focused on secured lending, higher-quality unsecured retail lending and maintaining a high-quality corporate and commercial loan book. This will generate consistent revenue growth while keeping PCL ratios well below historic levels. Our ability to deliver strong pretax pre-provision earnings in fiscal 2021 despite the realities of transition in many of our markets speaks to our high asset quality and diversified platform. The pandemic period has been a comprehensive test of both customer behavior and our ability to deliver a superior digital offering across our footprint. J.D. Power recently recognized Scotiabank as #1 in Canadian online banking satisfaction. We were also named Best Digital Bank in Mexico at the Global Retail Banking and Innovation Awards. The pace of digital adoption and lack of migration back to traditional channels as the pandemic recedes has given us confidence to further accelerate our platform transformation towards digital channels in international banking. Digital transformation is a top line growth engine, a cost-efficiency lever and a driver of enhanced customer experience. Raj will speak in more detail to this quarter's restructuring charge and related benefits driven by this accelerated adoption of digital channels in international banking. Credit quality in the bank remains very strong. Gross impaired loans are now below pre-pandemic levels, with formations in the quarter substantially below pre-pandemic levels. Loan growth has accelerated, and we expect PCLs to continue to trend lower. Phil Thomas will have more to say on this shortly. Our common equity Tier 1 ratio remained strong at 12.3%, driven by strong internal capital generation. With OSFI lifting capital restrictions and our confidence in future earnings growth, we have increased our quarterly dividend by $0.10 this quarter, and we will recommence our normal course issuer debt program immediately. As we have indicated prior to the pandemic, we will review our annual dividend in the second quarter. The bank has successfully exceeded our 4 medium-term financial objectives of EPS growth, ROE target, positive operating leverage and strong capital ratios. We are proud of our performance. Great progress on our commitments to strengthen the communities in which we operate was also evident through various social and sustainability efforts in fiscal 2021, as we were recognized by Global Finance for outstanding leadership in sustainability, transparency, and recognized by Refinitiv as being among the top 25 most diverse and inclusive global companies. Before I turn the call over to Raj, I want to take a moment to acknowledge the severe weather-related events in British Columbia. Like many Canadians, we've been following the news with real concern. And our thoughts are with our customers, our colleagues and their families, and we will continue to stand by them over the coming weeks and months. With that, I'll turn the call over to Raj for the financial review.

[Rajagopal Viswanathan, Group Head & CFO]

Thank you, Brian, and good morning, everyone. Before I begin, I'd like to note that all my comments on the bank and business line results are on an adjusted basis. As I did in the past few quarters, quarter-over-quarter performance in some sections given the economic impact of the pandemic during most of 2020. I will also refer to numbers excluding the impact of FX in many areas as this has an important impact to the year-over-year comparatives. You will recall last quarter, we added Slide 40, which discloses the impact of foreign currency to key income lines. This remains relevant this quarter. Starting on Slide 5, on fiscal 2021 performance. The bank ended the year with adjusted diluted earnings per share of $7.87 and a return on equity of 15%. Pretax pre-provision income was up 2%, or up 5% excluding the impact of foreign exchange. Revenue was flat or up 3%, excluding the impact of FX, and expenses were down 1% or up 1% excluding the impact of foreign exchange, resulting in a positive operating leverage for the year. From a business line perspective, earnings from our P&C businesses, which were impacted by higher provisions for credit losses last year, recovered significantly in 2021. Canadian Banking earnings increased 60% and International Banking earnings increased 83% on a full year-over-year basis compared to 2020. Global Banking and Markets maintained momentum in fiscal 2021, reporting earnings of $2.1 billion driven by good contributions from capital markets and corporate and investment banking. Global Wealth Management earnings of $1.6 billion was up 23% year-over-year, driven by record results across both advisory and asset management businesses. In 2022, all bank revenue is expected to benefit from good mid-single-digit loan growth, modest margin expansion and higher noninterest income benefiting from improving economic conditions. The provision for credit losses ratio is expected to be below fiscal 2021 levels. The bank is focused on prudent management of expense growth to generate positive operating leverage. I'll review the performance for the quarter, starting on Slide 6. Let me address a couple of key expense items that add up to $188 million this quarter. It was recorded in the other segment and disclosed in Slides 20 and 21. These impacted the reported net income to common shareholders by $129 million after tax and earnings per share by approximately $0.10. The bank recorded a restructuring charge of $126 million, primarily related to the cost of reducing approximately 10% of the branches and approximately 7% of full-time employees mainly in the middle and back offices, driven by the accelerated customer adoption of digital channels and process automation within International Banking. These efficiencies are a result of our commitment to simplify processes and optimize distribution channels to run businesses more effectively while meeting changing customer needs. We expect the charge will result in expense savings of a similar amount in 2022 in International Banking. In addition, the bank recorded a settlement and litigation provision of $62 million pretax in connection with the bank's former metals business. All my comments that follow will exclude the impact of these 2 items. The bank reported another strong quarter with earnings of $2.7 billion and diluted earnings per share of $2.10, an increase in EPS of 45% year-over-year and 4% quarter-over-quarter. All operating segments reported strong results again this quarter, reinforcing the strength of our diversified platform. Return on equity improved to 15.6% this quarter, while pretax pre-provision earnings increased 4% year-over-year. Revenues were up 2% year-over-year, or up 4% excluding the impact of foreign currency translation. Revenue was down a modest 1% compared to last quarter, mainly due to lower trading-related revenues. Net interest income was down 1%, or up 2% excluding the impact of FX. This increase was driven by strong loan growth in our Canadian Banking and Global Wealth Management businesses, as well as higher margins achieved in GBM, offset by slightly lower margins in International Banking. The all bank net interest margin declined 6 basis points quarter-over-quarter to 2.17%, driven by business mix changes in Canadian Banking and International Banking and lower contributions from asset liability management activities. Noninterest income increased 7%, driven by higher banking fees, wealth management revenues, income from associated corporations and investment gains. Quarter-over-quarter, noninterest income was down 2%, due mainly to lower trading revenues and underwriting and advisory fees. The PCL ratio continued to decrease, falling to 10 basis points for the quarter, representing a decline of 63 basis points year-over-year and 14 basis points quarter-over-quarter. The improvement reflects changes in business mix and a more favorable credit and macroeconomic outlook across the footprint. Year-over-year adjusted expenses increased a modest 1%, driven by higher performance-based compensation, professional fees, advertising and technology-related costs to support business growth. These were partly offset by the impact of foreign currency translation, logo personnel and premises costs. On an adjusted basis, the productivity ratio was 52.8% this quarter compared to 53.3% a year ago, while operating leverage was a positive 1.5% for the fiscal year. Turning now to Slide 7. We provide an evolution of our common equity Tier 1 ratio over the quarter. The bank reported a strong common equity Tier 1 ratio of 12.3%, up 10 basis points compared to the prior quarter and 50 basis points from 1 year ago. The bank's capital ratio benefited from strong earnings that supported high organic risk-weighted asset growth of approximately $7 billion across all the businesses. In 2022, the bank will continue to maintain strong capital ratios while deploying capital to grow organic risk-weighted assets across all the business lines, buying back stock, and keeping dividend within our target payout range of 40% to 50%. Turning now to the business line results beginning on Slide 8. Canadian Banking reported very strong earnings of $1.2 billion, up significantly year-over-year and 15% quarter-over-quarter. Pretax pre-provision earnings grew 14% year-over-year and 3% quarter-over-quarter to $1.6 billion. The increase was underpinned by strong revenue growth, offset by modest margin compression. Revenue increased 10% year-over-year as net interest income and noninterest income grew by 7% and 22%, respectively. Net interest income grew 3% quarter-over-quarter driven by a strong 5% growth in mortgages, 2% growth in business loans and higher deposit margins. Net interest margin declined modestly by 3 basis points quarter-over-quarter, driven by the shift in the loan portfolio mix towards mortgages. Loan growth accelerated to 10% year-over-year, led by residential mortgages, which grew 13% and business lending, which increased 11% year-over-year, in line with the strategic priorities of the business. It is notable that credit card balances grew 4% quarter-over-quarter. Noninterest income declined 2% quarter-over-quarter due primarily to lower business banking fees and income from associated corporations. Expenses increased 6% year-over-year, largely due to technology and business development costs to support growth. Noninterest expenses declined 1% quarter-over-quarter, driven by lower personnel costs, partially offset by higher advertising and business development costs. The whole year operating leverage was strong at 2.9%. The PCL ratio decreased to negative 10 basis points, driven by an improving credit and macroeconomic outlook. In 2022, Canadian Banking's earnings growth is expected to be driven by strong loan growth, higher fee income, supported by improving economic conditions and a rising rate environment. Turning now to Global Wealth Management on Slide 9. Earnings of $392 million were up a strong 18% year-over-year. The performance has been underpinned by strong net sales momentum and market appreciation across business lines and record earnings in Canadian Asset Management. Revenue grew a strong 16%, underpinned by higher mutual fund fees, brokerage revenues and private banking loan growth, while noninterest expenses grew 14%. Global Wealth Management delivered its eighth consecutive quarter of positive operating leverage. The operating leverage for the year was a positive 3.1%. Canadian Wealth Management continued its strong growth once again, up 18% year-over-year with broad-based growth across all business lines. We have now had 11 consecutive quarters of double-digit year-over-year earnings growth in Wealth Canada. International Wealth also grew a strong 24% year-over-year on a constant dollar basis. Assets under management and assets under administration both increased 19% to $346 billion and $597 [ billion, respectively, driven by positive net sales and market appreciation. In 2022, Global Wealth Management earnings are expected to grow through strong asset management and private banking volume growth along with continued momentum across advisory businesses. Moving to Slide 10, Global Banking and Markets. Global Banking and Markets generated earnings of $502 million this quarter, up 9% year-over-year, its fourth consecutive quarter of earnings in excess of $500 million. Revenue declined 6% from Q3, primarily driven by lower capital markets revenues, while net interest income increased 1%. Loans grew 2% quarter-over-quarter and deposits were up a strong 3%. Expenses in the quarter were down 5% and the productivity ratio remained strong at 50.3% for Q4. GBM LatAm, which is reported as part of International Banking, generated earnings of $180 million this quarter, in line with the prior quarter. On a full year basis, GBM LatAm earnings increased 11%. Global Banking and Markets expects to continue to deliver earnings growth in 2022, driven by capital markets revenue and loan volume growth and disciplined expense management. Turning to the next slide on International Banking. My comments that follow are on an adjusted and constant dollar basis. International Banking reported net income of $535 million, up 10% quarter-over-quarter. The earnings are now well above the target we have set for the end of fiscal 2021. The pace of economic recovery and improvement in business conditions continue to accelerate through the quarter. Quarter-over-quarter, our loan book growth accelerated to pre-COVID, with commercial up 4% and mortgages up 3%, while unsecured retail loan balances remained flat after 6 quarters of decline. Pretax pre-provision earnings for the business line increased 1% and from the prior quarter. We are seeing the positive trend in net interest income, up 1% quarter-over-quarter and 2% in Pacific Alliance countries despite a modest net interest margin compression. Revenue declined by 1% quarter-over-quarter as these positive trends in net interest income was more than offset by a $35 million decline in capital markets revenue that was elevated last quarter. The provision for credit losses ratio declined quarter-over-quarter by 9 basis points to 91 basis points. Noninterest expenses declined 6% year-over-year or 3% quarter-over-quarter, driven by lower salaries and employment benefits, technology costs and other expenses. The tax rate was low this quarter at 19% compared with 22% in the prior quarter, driven by benefits from high inflation in Chile and Mexico. On a constant dollar basis, in 2022, International Banking revenue growth will be driven by good loan growth, and expanding net interest margin, benefiting from interest rate increases and improvement in fee revenues. Combined with prudent expense management, including the benefits from the digital investments and the restructuring charge, the business is expected to generate positive operating leverage in 2022. With provision for loan losses expected to remain low, the business is expected to generate good earnings growth in 2022. Now turning to the other segment. We reported an adjusted net loss of $35 million, down $43 million from last year due to higher corporate expenses. Looking forward to 2022, the other segment earnings is expected to be impacted by lower investment gains that were elevated in 2020 and 2021. With that, I'll now turn the call over to Phil to discuss risk.

[Phil Thomas]

Thanks, Raj, and good morning, everyone. Before I get into the details of the quarter, I'd like to highlight the key themes from a credit perspective. Credit performance is expected to remain strong as portfolio performance and economic drivers continue to improve. -- reflected in early-stage delinquency rates being well below pre-pandemic levels. Under this backdrop, we expect a PCL ratio of 25 basis points range for fiscal 2022. And for International Banking, we expect a PCL ratio of approximately 95 basis points, well below pre-pandemic levels of approximately 140 basis points. Our asset quality remained high, driven by customer demand for retail secured borrowing in Canada and in International Banking. Secured lending in our retail portfolio remains higher than pre-pandemic levels at 95 in Canada and 71 in International Banking, driven by higher mortgage volumes. Credit card spending and unsecured loan balances have started to grow in both Canadian Banking and International Banking. We have seen strong corporate and commercial demand across our footprint, and most of our portfolios continue to be investment grade. Together, these factors have contributed and will continue to maintain the bank's high asset quality and low PCL. As mentioned, the overall credit quality of our portfolio continues to trend higher due to business mix changes driven by strong growth in retail secured lending and high corporate commercial lending. As you can see on the slide, our GIL and net write-off ratios continue to decline. The GIL ratio improved 6 basis points to 67 basis points. Net write-off ratio improved to 34 basis points in Q4, down 54 basis points pre-COVID driven by lower retail write-offs in both Canadian and International Banking. The bank is also expecting write-offs to remain lower than pre-pandemic levels through fiscal '22. We ended the year with allowances for credit losses of $5.7 billion, which is higher than pre-pandemic levels of $5.1 billion. The ACL ratio is now 86 basis points compared to 82 basis points prior to the pandemic. The ACL ratio will continue to trend lower through fiscal '22 due to our expectation of lower write-offs compared to historical trends. In particular, the quality of our retail portfolios remain strong and the macroeconomic outlook in Canada and in international continues to be favorable. In addition, we would note that allowances for credit losses for the International Banking retail portfolio are more than sufficient. During the quarter, performing ACLs declined to $340 million, excluding the impact of foreign currency. Of this, approximately $320 million was released this quarter due to improving credit performance and better macroeconomic outlook, while the remaining moving to impaired ACLs. Impaired ACLs declined $104 million from last quarter, primarily due to lower delinquency trends and lower impairment across all markets in our retail portfolios. Let me now turn to Slide 16 and PCLs. Our total PCLs declined $168 million, and the total PCL ratio was 10 basis points, down 14 basis points from the prior quarter. Impaired PCLs were $511 million in Q4, down $330 million from last quarter. The decrease was driven by international retail, mainly in the credit card portfolio. Impaired PCLs for Canadian retail banking declined sequentially as well, mainly in the auto portfolio. Turning to performing PCLs, we had a net reversal of $343 million in Q4. As I previously mentioned, approximately $320 million was released this quarter due to improving credit performance and the better macroeconomic outlook. This reflects better credit quality and the benefit from an improved macroeconomic outlook. I would now like to provide some comments on fiscal 2022 and 2023 outlook. We expect strong credit performance to continue, with improved credit metrics driven by higher credit quality of originations as well as a favorable macroeconomic environment. We are mindful of reports of a new variant of concern termed, Omnicron, but remain comfortable with our allowances, which provide for pessimistic COVID-19 scenarios, including both a sharp rise in cases and a longer duration. We expect the ACL ratio to trend lower than pre-pandemic levels, reflecting a higher credit quality portfolio. The all bank total PCL ratio will remain low through fiscal '22 in the 25 basis point range, with impaired PCLs expected to be in line with Q4 2021. Specifically, in International Banking, the total PCL ratio is expected to be approximately 95 basis points for fiscal 2022. As recoveries continue to moderate next year, we believe 2023 will reflect more normalized PCL levels ratios for the bank. We expect these to be in the mid-30s basis point range, again, reflecting the improved credit quality and business mix shifts as we emerge stronger from the pandemic. I will now turn the call over to Brian for closing remarks.

[Brian Johnston Porter, President, CEO & Director]

Thank you, Phil. We had a strong finish to the year and are confident in our ability to deliver for all our stakeholders in 2022. As outlined by Phil, our credit portfolio profile has significantly improved compared to pre-pandemic. It is more secured, and combined with the higher credit quality of the new bookings, we expect the 2022 PCL ratio will be approximately 25 basis points and mid-30 basis points for 2023. We fully expect a strong momentum in our Canadian Banking business to continue, aided by strong loan growth and a higher interest rate environment. The recovery in our international banking business is evident. This will be further supported by interest rate increases, continued asset growth as well as a strong economic rebound. Global Wealth is benefiting from both strong investment management capability. The business performance has been strong with significant growth achieved in both AUM and AUA. GBM is anticipating growth this year, taking full advantage of our unique Americas client franchise. The business is expected to generate earnings growth driven by solid loan growth, and capital markets activity supported by an advisory pipeline that remains strong. In short, we are optimistic that fiscal 2022 will be a year of solid earnings growth, across each of our operating businesses. With that, I'll turn the call over to John for Q&A.

[John McCartney]

Thank you, Brian. We'll now be pleased to take your questions. [Operator Instructions] Operator, can we have the first question on the phone, please?

[Operator]

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

[Ebrahim Huseini Poonawala, Director]

I guess, Raj, maybe if we could just touch upon the margin outlook, both in Canada and IB. We saw about 30 basis points of compression give us some clarity around what you expect, particularly where in Lat Am, we've seen rate hikes sequentially, how we should expect the margin and NII to trend in IB as well as the BOC Bank of Canada moves in April with a hike, what that means for the Canadian margin? And remind us if there's anything around hedging on the top of the house that could mitigate the benefit from margin expansion and higher rates?

[Rajagopal Viswanathan, Group Head & CFO]

Sure, Brian. Thanks for your question. So I'll start at the all bank, and then I'll work my way through the business lines, if that's helpful to you. All bank, we absolutely expect margin expansion sequentially quarter-over-quarter throughout 2022 from the 217 basis points that we reported this quarter. That's going to be driven by multiple factors, and I'll now jump into the business lines. The Canadian banking margin expansion, we have conservative assumptions at this time, although we do believe that rate increases will happen earlier than our assumptions. So you should see some modest margin expansion throughout 2022 in that business, which is at 220 basis points now as you think about it quarter-over-quarter. Now some of it is impacted by business mix. Mortgages have been growing significantly faster than other businesses, likewise business banking. We love it, but except that it does impact the margin expansion. And once credit card balances, as we noted, 4% quarter-over-quarter will start helping the margin expansion through '22, but modestly. International Banking's margin is absolutely at the lowest point at this time at 369 basis points. It's going to grow sequentially, multiple reasons. You talked about margin -- sorry, rate increases that have already started happening in that footprint. The full quarter benefit of which we should start seeing from Q1 onwards and through 2022. And we believe there are more rate increases coming across the footprint based in Chile, Mexico or Peru. Although Chile and Mexico probably has the most impact of the margin from rate increases that happened in that region. So if you put all these things together, we believe that there will be margin expansion. And like I mentioned in my previous calls, we are positioned for rate increases even from a hedging perspective. So the hedges will not be a headwind, Ebrahim, it won't be a tailwind because we've had a lot of benefits in '21, which will be probably comparable in '22 from the balance sheet has been hedged. So I don't see it as a headwind, but I do believe that the business line margin expansion should be -- should fall to the bank's margin expansion toward 2022.

[Ebrahim Huseini Poonawala, Director]

And just as a follow-up, Roger, if I can. Structurally, the IB margin, it was around high 4s back in 2018, '19 because of the portfolio mix. Is that like a low 4s number? I mean, I know it's dependent on where rates go. But should we think about that margin going back at least into like the 4.25% range over the course of the next 4 to 6 quarters?

[Rajagopal Viswanathan, Group Head & CFO]

Yes. I think as we look through '22, you should definitely see margin expansion, like I said, from the 3.69% that we reported this quarter, it will get likely to the 3.80% to 3.90% level, I think, Ebrahim, based on all the assumptions that I detailed earlier. And then we'll see how '23 the loan mix changes. If there's more unsecured lending growth in the markets over there. And even in Q4, we really grew in line with the market in all segments, whether it's mortgages, commercial or unsecured lending that should help with the margin. But what I can say with almost certainty is the 4.50% is a number that might take a very long time to get to because our business makes us shifted. But I'll also tell you something. International Banking margin is very complicated. So many countries, inflation is a big factor, lots of rate changes, we have capex across the entire footprint over there. So it's a little hard to predict margin. But what I can tell you is you'll see sequential margin expansion through '22 and into '23 as well.

[Operator]

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

[Gabriel Dechaine, Analyst]

A couple of questions. One, on this restructuring charge in International. I know you're -- I mean you get the rationale, it makes a lot of sense, but how you handle any political sensitivity that there might be around these types of charges, especially the climate down there, if that's a consideration? And if so, what do you do about it? How do you downplay that concern?

[Ignacio Deschamps]

Gabriel, this is Nacho. Well, really, we are -- we have been -- this is a trend of optimizing our distribution for the past few years, and we have been reducing our branches in line with the market. I would like to remind everyone that the labor markets there are much more flexible. And so we can adapt to higher demand, lower demand. And the rationale really for the restructuring charge, as you say, is really to accelerate cost reduction initiatives because digital continues to expand at a very accelerated pace. Since COVID started, we have seen a tremendous growth of digital adoption that has gone from 35% to 50% now in most of the countries, Chile and Colombia, above 65%. And digital sales of retail products have almost doubled from 30% to 60%. So we are very confident that this restructuring charge will generate savings in 2022 similar to the charge, as Raj mentioned, by reducing 10% of the branches and 7% of full-time FTEs. And we are also investing in middle and back office in terms of machine learning, robotics that will also generate additional efficiencies. So in summary, we don't expect any reputational problems, and this is a cost reduction opportunity driven by accelerated digital adoption and expansion of process automation.

[Gabriel Dechaine, Analyst]

My other question, I guess it ties in to the -- some of the credit performance guidance like the lower ACL ratio you than the pre-pandemic that you expect in the coming year and presumably 2023, the lower loan loss rate here in next year and in 2023 than you had pre-COVID? Is there also a statement in there that you're just not expecting the unsecured lending categories to come back until much later than some people expect? So -- and that's also reflected in that guidance in Canada and international, where a lot of these balances are way below pre-COVID levels?

[Phil Thomas]

Gabriel, it's Phil Thomas. Nice to hear your voice, and thanks for the question. As we look out for the next 2 years, we've seen significant growth in our retail portfolio in the secured lending business. So we've gone from 6% to 71% in real estate secured lending. We've also looked at how do we deepen the customer relationship through the acquisition of mortgages. So we're seeing a lot of great opportunity deepening through the mortgage acquisition through the -- and then providing more products and services through their like unsecured lending. We also have been investing heavily in international and data and analytics as well as digital, and we've been seeing some great uptick through this. And through that, we know our customers better. We're able to get and understand their profiles and their behaviors, and it's allowing us to have even higher quality of originations. And the normal course of business, too, we look at how we're managing our portfolios. And there's always going to be times where we're going to exit some higher-risk portfolios that we don't like. And we're going to build up portfolios that we think have a higher risk-adjusted return for the bank.

[Ignacio Deschamps]

If I -- this is Nacho. Maybe to follow up. We are seeing -- of course, as Phil mentioned, there has been a balance -- mix adjustments in our balance business mix adjustments, sorry, in our balance sheet. But we are seeing right now strong growth in all segments. -- We -- I think that's the highlight for International Banking. The last 2 quarters, we grew 0.5% per quarter. We're growing 3%, 4% in commercial, 3% mortgages and unsecured was flat after 6 consecutive quarters declining. And already, we are seeing unsecured loan growth this quarter in Colombia and in Chile. So we are expecting strong balanced loan growth in all segments in 2022.

[Gabriel Dechaine, Analyst]

So if I summarize denominator effect, a lot more secured loans pushing those ratios down and some lending activities that you're no longer doing?

[Ignacio Deschamps]

Yes. That's the right way to look at it.

[Operator]

The next question is from John Aiken from Barclays.

[John Aiken, Director & Senior Analyst]

I wanted to dive into the increase in the card balances that we saw in the quarter, obviously, a positive all around. Do you think that this was just the general economic activity recovering? Or do you think that you were actually able to gain some market share over the quarter?

[Daniel Llewellyn Rees, Group Head of Canadian Banking]

Dan here. I think we gained market share during Q4. We're certainly pleased with the average balance growth. I would underline spot growth in the quarter in cards grew month-on-month all 3 quarters. We are seeing the revenue pickup in Q3 and in Q4 show up through the fee line as opposed to the interest income line. So as the prior question went on unsecured revolving credit in Canada, we are hopeful to see signs of revolving balances reemerge, particularly through the big holiday spending season. But on share gains in the quarter in cards, we're pleased with how we took share in purchase volume in particular.

[Operator]

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

[Doug Young, Diversified Financials and Insurance Analyst]

Brian, you've been very vocal about not wanting to take restructuring charges in the past. So I'm just curious. I understand the rationale behind this, but I'm just curious as what's changed from your perspective? And are you more willing to look at taking restructuring charges in other business lines like Canadian Banking to adjust to a more digital world.

[Brian Johnston Porter, President, CEO & Director]

No. Look, thank you for the question, Doug. I think that comment of mine in terms of restructuring charge dates back to 2016 or 2017. So we've covered a lot of ground since then, including a pandemic. And what became evident to Nacho, Raj and I and others around the table is, obviously, the pandemic changed a lot of things in terms of customer preference. We've talked earlier about secured lending and clearly digital has picked up internationally is that our digital sales in our International Business have doubled since 2019. That's a big number. So when you look at our business out -- looking out over the next 2 or 3 years, and wanting to perform for our shareholders, we felt that this was -- we're respectful of our shareholders. It's not a big restructuring charge, but it's in keeping with us wanting to deliver for our shareholders. So you're not going to see any further restructuring charge. That I can assure you. We don't take this lightly, but we thought it was the best thing for the business. And I think the big takeaway for The Street and the analyst community is that the acceleration and adoption of digital internationally is at a much faster rate than here in Canada in terms of customer preference, and we have to be aware of that and cognizant of that. And you don't see that in our numbers in terms of profitability and efficiency.

[Doug Young, Diversified Financials and Insurance Analyst]

And if I could just follow up on the cost saves, I don't know if this is [indiscernible], but on the cost saves from the international banking charge, what regions will this mostly flow through? And so what I'm getting at is, when I look at your pretax pre-provision earnings, it's down really materially in Peru. And I think you talked about -- and most of this is due to lower revenues. You've got -- FX has been a pressure there. You talked about the unsecured loan book mix changing. What I'm trying to get a sense of, is more of this directed at Peru and Colombia where you've seen more pressures? Or can you kind of talk about just where the changes in the cost saves will be starting to flow through by region?

[Ignacio Deschamps]

Sure. This is Nacho. It is really across the board. All of the countries we are seeing opportunities to accelerate the optimization of our distribution network, offer the same experience to our customers in branch and through digital assets in our web and mobile. So this is across international banking, including the Caribbean. And in terms of revenue, while this is going to, of course, have a significant impact, as Raj mentioned, in our operating leverage as we will expect to be positive next year and a significant improvement in the productivity index. We are very positive about our revenue outlook in 2022 based on a high single-digit loan growth in all segments, NIM expansion, as Raj mentioned, and consistent fee recovery next year.

[Operator]

The next question is from Paul Holden from CIBC.

[Paul David Holden]

I want to try to tie together a couple of the discussions around International Banking with respect to this shift in loan mix. So what you've told us is we should probably expect lower NIM, but also lower PCLs because of that loan mix shift. I guess what we're trying to get at is, what does that mean in terms of the earnings power for International Banking? Is it net neutral? Or one would assume that those secured loans require less RWA so maybe you can put on a higher higher leverage, and therefore, offset the lower NIM? I think some thoughts around that might be helpful.

[Rajagopal Viswanathan, Group Head & CFO]

Sure, Paul. This is Raj. I'll start, and then I'll hand it over to Nacho for -- he might have a more granular perspective. I think you hit on a few things. I think the level of capital that the international will absorb will go down, and that should improve the ROE in general of the business, and that's a key factor for us. But we also -- we don't think about NIM in isolation, as you mentioned. We look at NIM and PCL ratios or risk-adjusted margin. And if you went back a few years, if you made 440, 450 basis points, we gave up 140 basis points on PCL, and we know both are going to trend lower. So yes, a slight give probably on this adjusted margin in the short term like through 2022. But as the business mix continues to evolve, we believe, from a risk-adjusted margin perspective, we will be close to where we started, if not better. And it also gives us a lot of comfort when we can have consistency in earnings and less volatility in the numbers that we have put across the international banking business. So lots of factors whether it's capital, whether it's volatility in earnings, a good quality book, which will drive consistent growth in earnings, a number of factors we look at as we determine how to shift our risk appetite. Brian, is that a comment you'd like to add?

[Brian Johnston Porter, President, CEO & Director]

Sure. As the audience knows, we've done a lot of work in the past few years in terms of repositioning the international business. And part of that included exiting 20-plus countries, selling 5 businesses in the pension-related businesses, et cetera, and consumer finance, which is a small, very specialized business. We exited or downsized the business in Chile, the DR, and we were about to do it in Peru, and unfortunately, the pandemic hit. Small business, about $1 billion of outstandings. It's smaller than that today. The business did not perform as well as we would have liked in terms of what we had in our stress testing. So we did what you think we do. And we're exiting the business, downsizing the business and moving on. So we've taken that through write-offs. And the rest of our unsecured businesses in Chile, Mexico, the Caribbean performed well within our expectations, and we're pleased with their performance. So this would be -- I would describe it more as housekeeping. It's taken care of, it's done, it's written off. And as Raj said, focused on producing consistent and predictable results for our shareholders. And so what comes off the PCL line comes off the margin line. And so if you take 40 basis points off the PCL line that comes off the margin line. But I want to stress there are ample levers for us to grow our business internationally. You're seeing that, as Nacho said, in the commercial loan growth this quarter was 4% behind that, corporate loan growth was 8% in international quarter-over-quarter. So there's lots of opportunity for us. in the division. This was a tweak to risk appetite, as I call it, falling out of the pandemic, and we're optimistic about our prospects for growth going forward.

[Paul David Holden]

Okay. Second quick one, if you don't mind. And that's just -- do you have any indicators around the prospects -- short-term prospects for the Caribbean business? It's -- looks like it's continuing to lag here, but the data points I'm seeing suggests that travel is expected to improve at least sequentially still below pre-pandemic clearly, but starting to see a nice uptick in travel. Any comments there would be helpful.

[Ignacio Deschamps]

No, absolutely. We are following very closely tourist arrivals are significantly increasing into the Caribbean markets. Also, bookings are very high for the winter. So definitely, we expect an improvement in the performance of the Caribbean where we still have around $20 million opportunity in terms of fee income. We have large market share participation in terms of credit debit cards. So with tourism, we expect a significant improvement in 2022.

[Operator]

The next question is from Mario Mendonca from TD Securities.

[Mario Mendonca, MD & Research Analyst]

Probably for Nacho. With the bank's decision, and I think you've telegraphed it well over the last few quarters to maybe pull out of some unsecured lending lines. I can't tell in sitting in IC here in Toronto, whether that could have a knock-on effect for loan growth and just business growth generally in IB. What I'm getting at specifically is if you pull out of that area, does it have -- could it impact loan growth elsewhere simply because of any kind of bundling mechanisms that maybe are a little more prevalent in North America -- sorry, in Canada. Does that -- does that phenomenon exist in international banking?

[Ignacio Deschamps]

Mario, no, definitely, as Brian mentioned, these are very small portfolios that we exited because they were high risk. But I can tell you that we are seeing very strong growth in International Banking in the Pacific Alliance countries alliance or better than the market. Actually, our loan growth this quarter was better than the market in the 4 Pacific Alliance countries. So we will -- we expect to have growth in commercial, in mortgages and in personal and credit cards next year. Like in Canada, the credit cards have been delayed because there's still a lot of liquidity. Consumers have a strong balance sheet. But this is fading away, and we expect this -- we are already seeing stronger credit demand, but we are well positioned within our risk appetite to have strong loan growth in all of the segments next year.

[Mario Mendonca, MD & Research Analyst]

Okay. Somewhat different type of questions moving to Canada. I try not to get too fussed by some of these charts that I look at where I look at mortgage growth relative to income growth in Canada. And I know you can make a lot of mistakes getting too nervous about mortgages in Canada. There's plenty of people that have. But it really is starting to stand out. The kind of growth in housing prices in Canada relative to income growth, those charts are going to look awfully troublesome. From the bank's position, you're very close to the mortgage market. Is this not an area where we should become a little more concerned just seeing how much housing prices have started to outstrip growth in Canada? Does it concern you that we're setting up sales for some grief down the road?

[Daniel Llewellyn Rees, Group Head of Canadian Banking]

Mario, it's Dan Rees here. I'll start and then others want to add in. First of all, we were very pleased with the mortgage performance in the quarter. Originations were stronger than we expected as well as retention, which is an item we've been reengineering through the business for the last number of quarters. And so that supported the substantial quarter-over-quarter growth. Our outlook for mortgage growth next year is to begin to slow. We do believe that supply underpins price appreciation. And while that persists, should rates rise sooner in the year, as I think many of us are expecting, we expect that to soften demand. When we think about the importance of what's happening around the household table, it's worth mentioning that what we saw throughout the entire COVID period, as individuals were working from home, they gained a greater appreciation for their #1 asset, which is the home. And so the growth in upsizing, the purchase of second properties and entering the market was, in some fashion, supported by gifts inter-generationally through families, and that's an important source of equity movement, which we think supports mortgage growth from here, including through the risk lens. And to underline in our quarter and all year long, we did not see a HELOC book growth, which I know is an area of concern. And the final point I would make on the subject of risk metrics, both at origination and at refi and renewal, FICO scores continue to be high in the order of 800 and they're higher in the broker channel than our proprietary channel.

[Mario Mendonca, MD & Research Analyst]

One final -- I'll maybe quick on this one. The normal course issuer bid before the restrictions on buybacks, NCIBs were announced, but often not used. Maybe Brian or Raj, how do you look at this NCIB? Is it the bank's intention to actually buy 2% of the shares? Or it's just another tool toolkit?

[Brian Johnston Porter, President, CEO & Director]

Mario, thank you for the question. I said in my remarks, we're going to be activating our NCIB immediately. And just by way of background, if you go back a few years ago to our acquisition of M.D and Jerasoski, we issued 34 million shares, we repurchased at about $77. We repurchased 27 million, so we've got a delta of 7 million there, which we intend to buy back. And obviously, our average cost is lower on those buybacks. So we'll be prudent around price, but it's our intention to be very active in the market.

[Operator]

The next question is from Scott Chan from Canaccord Genuity.

[Scott Chan]

I just wanted to focus on your other main secured book in Canada, auto. It seems like growth has been very strong relative to the market compared to what I see perhaps gaining market share. If you could comment on that. And then in terms of the credit side, it seems that it's been a very strong indicator in this quarter and past subsequent quarters. And maybe kind of speak to the outlook there in terms of the clientele.

[Daniel Llewellyn Rees, Group Head of Canadian Banking]

Sure. Thank you for the question. And I'm glad you've raised it. We sometimes speak here internally, but the importance of seeing cards come back online, which you saw in the quarter. But as the market-leading position in cars and auto loans, we were especially pleased with how we performed through the revenue line this year, notwithstanding all of the media attention appropriately so on the supply chain. We saw revenues grow in the full year, up 5% year-over-year, notwithstanding difficulty getting product to dealer lots. We were pleased with the risk metrics, both at origination and right through to account management and collections in the auto business. We're active -- becoming more active in the used car market selectively, where as you can imagine, margins are higher. And what's perhaps most important to underpin is as supply comes back online, we know customer demand is substantial. Preorder bookings for vehicles are the highest that they have ever been and direct-to-consumer channels are roaring. And I think as new Canadians arrive in Canada, and bear in mind, close to 0.5 million did this year with another $500,000 in F '22, the first thing they want to purchase beyond opening a bank account with Scotia is a vehicle. And so as population grows, we're optimistic about the size of that market growing. And with our market-leading position and a great performance on margin management, we think that's got more upside for us than the peer group.

[Scott Chan]

Great. And just one clarification question. Raj, in your opening remark, you talked about savings International as a result of the restructuring charges in fiscal 2022. I didn't catch what you referred to or if you could quantify that, please?

[Rajagopal Viswanathan, Group Head & CFO]

Yes, absolutely. I think the charge was approximately about $126 million, Scott, as this quarter. We expect that to completely fall to the bottom line as expense savings within International Banking in 2022.

[Operator]

The next question is from Lemar Persaud from Cormark Securities.

[Lemar Persaud, Research Analyst]

So my question is probably for Raj. It sounds like the margin guidance at the top of the house incorporates the benefits of some rate hikes in Canada international. And if that's correct, what if there aren't any further [indiscernible] international or we don't see anything play out domestically? Does the higher margin guidance for 2022 still stand? Or is it really dependent on those rate hikes?

[Rajagopal Viswanathan, Group Head & CFO]

Thanks, Lemar. I think the rate hikes that have already happened in the International Banking segment will definitely flow through in 2022. So that's definitely a positive when you think about Q4 '21 numbers. The Canadian margin assumptions that we have had is really towards the latter half of the year and most economists now believe it could be much earlier. But if it didn't happen, I'll give you a little bit of perspective. 25 basis points of rate increases in the Canadian bank is about $50 million of annualized NIAT. So really, if you think about margin expansion or the contribution to NII based on the assumptions we made, is probably not material at all. It's a nice to have, but I still think there will be margin expansion [indiscernible] by the International Banking segment compared to Q4 '21.

[Lemar Persaud, Research Analyst]

Okay. Great. And then my next question is, are you really concerned about the level of inflation? It's garnering a lot of these headlines that we've seen over the past a couple of months now. Is it the bank's view that this inflation we're seeing right now is transitory, so it's not really a concern? And if it is a concern, are you guys taking actions to protect the bank against runaway inflation?

[Rajagopal Viswanathan, Group Head & CFO]

Yes. I think our economists view is there's some level of transitory inflation in the numbers that we're seeing, be it here or across the footprint. And that we believe will normalize once you see some of the supply chain issues normalize, and that could be in a quarter or 2 away from our perspective. So we do think inflation will be higher. And if you look at some of the forecast, I think we have it in our analyst deck, too. Inflation is expected to be above 2%, which is the Bank of Canada's target rate from our perspective. [indiscernible]? Yes, from the expense line, right? Because expenses are going to be higher, simply driven by inflation. But as a bank, I think we've always done very well on the expense line. We know how to prioritize. We know how to take the expense queue or the growth queue from the revenue growth expectations that we have. So it will likely result in higher expenses in 2022, but will get normalized in other lines as we look across the expense lines. So that's how I would characterize it, but a lot more to happen. I think there's a lot of sort of conversations across low around inflation, and we'll see what central bank actions are taken to court those.

[Operator]

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

[Sohrab Movahedi, Analyst]

Just wanted to quickly go back to Nacho. Nacho the restructuring charge, $126 million pretax, let's call it, I don't know, $18 million after tax. Is it as simple as if this initiative had been in place than the segment earnings, for example, this quarter could have been $20 million higher?

[Rajagopal Viswanathan, Group Head & CFO]

Let me start, Sohrab, and then I'll pass it on to Nacho. I think, as you know, international banking or any other business and lots of puts and takes. But the restructuring chart specifically, yes, you're right. It should fall complete to the bottom line. So it will be about $20 million after tax per quarter. But international banking has other -- we think PCL is going to be a tailwind for sure. We know revenue is going to be higher. But there's 2 items I'd call out that we want to be cautious about. One is foreign currency. Now, this year, we had a huge impact on FX. You heard me say FX more time than I've ever done on previous calls because it's a huge headwind that we had in '21. We'll see how '22 plays out. So that could be a headwind. The other one is the Q4 2021 tax rate. We benefited because of the high inflation and how it plays out from a tax perspective in International Banking. So depending on inflation it could be a nonfactor, it could be a headwind, it could be a tailwind, it could be any one of these 3 things. But directly to answer your question, yes, the expenses should fall to the bottom line and impact the quarterly results positively.

[Sohrab Movahedi, Analyst]

Okay. And then so Nacho, when you think about the International segment, I guess, across specific Alliance region and the Caribbean, if you were going to focus us on maybe 1 or 2 geographies, which 2 would you say you're most excited about over the coming year that you want us to pay particular attention to and not get distracted necessarily by headlines that may come out of elsewhere outside of those 2 jurisdictions?

[Ignacio Deschamps]

Sohrab. Good morning, Luc. Very excited about Mexico and Chile. Mexico and Chile are well above recovered levels in terms of PTPP earnings. And we are seeing and expecting the recovery in Peru next year. And as I mentioned before, we also expect a recovery in CCU. So overall, I'm definitely positive about the momentum in loan growth in International Banking, and I think you will see the full power of earnings of IB during 2022.

[Operator]

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

[Darko Mihelic, MD & Equity Analyst]

Just a very quick question for Nacho with respect to the deposit growth. Your deposit growth is rather lackluster. And just wondering, is that a reflection -- I mean when you look at, for example, your Canada business, your deposit growth exceeds loan growth, right? And, in your instance, it's like 1%. So does that have an impact on revenues going forward, specifically, I'm just thinking about fee income and whether or not you've closed the fee income gap? And more importantly, is there an underlying issue here? And what I mean by issue, and I'm hoping you can help me with -- help me understand this better. We know the Canadian consumer on the other side of this pandemic has really saved quite a bit. The government response, perhaps, may have been overdone, and we're looking at labor shortages in Canada and everyone is really on a very solid footing. I'm not as certain about that with respect to the International Banking business, and I kind of sense that the deposit growth being so weak may be a bit of an underlying reflection of that. So can you maybe talk to; a, what the low deposit growth means for your business; and b, am I correct in assuming that the consumer just is not on -- the other side of this pandemic is nowhere near as solid as a Canadian or U.S. consumer?

[Ignacio Deschamps]

Thank you for your question. Well, the reason we are seeing a decline in deposits are relatively flat this quarter. It's basically due to corporate deposits. And this is because we have been managing liquidity. We have excess liquidity, and we are managing also net interest margin. But the behavior of the consumer is very similar to Canada. In the quarter, we saw 2% growth Q-over-Q. And especially in savings and checking accounts, we have seen an increase of 18% year-over-year. So it's a very strong growth in terms of personal deposits across the Pacific Alliance countries, especially in Peru and Chile. And I expect that will continue. We have a lot of opportunities to grow deposits, particularly saving checking accounts through digital, small business and of course, corporate and commercial.

[Darko Mihelic, MD & Equity Analyst]

And just a quick follow-up, Nacho. I mean some of the programs that were instituted for the pandemic in many countries actually involved dipping into your pension funds and so on. Does that mean on the other side that rather than being free to spend, people will focus their efforts on replenishing pension funds and so on? Is there any impact there that I should be thinking about?

[Ignacio Deschamps]

No. The liquidity of the pension funds, I think a lot of that has been channeled to mortgages. There's a -- mortgage growth has been very strong, 9% growth year-over-year, and we expect that to continue also to repay loans. Part of that liquidity is also reflected in billings of credit cards that are still below pre-COVID levels, low in revolving levels. But the expectation in the market is that during 2022, this liquidity will gradually fade away. There are not significant disbursement of pension funds expected in the next year compared to what has happened during COVID.

[Darko Mihelic, MD & Equity Analyst]

And that's not concerning or an issue?

[Ignacio Deschamps]

No, it is not.

[Operator]

There are no further questions registered at this time.

[Rajagopal Viswanathan, Group Head & CFO]

Thank you, everyone, for participating in our call today. On behalf of the entire management team, I want to thank everyone for participating in our call. We look forward to speaking to you again at our Q1 2022 call in March. And this concludes our fourth quarter results call. Have a great day.

[Operator]

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