Investor Presentation - Fourth Quarter 2018 - Scotiabank Global Site
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Investor Presentation Fourth Quarter 2018
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
From time to time, our public communications often include oral or written forward- (including cyber-attacks) on the Bank’s information technology, internet, network access,
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securities legislation. Forward-looking statements may include, but are not limited to, business involves making loans or otherwise committing resources to specific
statements made in this document, the Management’s Discussion and Analysis in the companies, industries or countries. Unforeseen events affecting such borrowers,
Bank’s 2018 Annual Report under the headings “Outlook” and in other statements industries or countries could have a material adverse effect on the Bank’s financial
regarding the Bank’s objectives, strategies to achieve those objectives, the regulatory results, businesses, financial condition or liquidity. These and other factors may cause
environment in which the Bank operates, anticipated financial results, and the outlook for the Bank’s actual performance to differ materially from that contemplated by forward-
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expressions of future or conditional verbs, such as “will,” “may,” “should,” “would” and Report, as may be updated by quarterly reports.
“could.”
Material economic assumptions underlying the forward-looking statements contained in
By their very nature, forward-looking statements require us to make assumptions and this document are set out in the 2018 Annual Report under the headings “Outlook”, as
are subject to inherent risks and uncertainties, which give rise to the possibility that our updated by quarterly reports. The “Outlook” sections are based on the Bank’s views and
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accurate, that our assumptions may not be correct and that our financial performance reviewing these sections. When relying on forward-looking statements to make
objectives, vision and strategic goals will not be achieved. decisions with respect to the Bank and its securities, investors and others should
carefully consider the preceding factors, other uncertainties and potential events.
We caution readers not to place undue reliance on these statements as a number of risk
factors, many of which are beyond our control and effects of which can be difficult to Any forward-looking statements contained in this document represent the views of
predict, could cause our actual results to differ materially from the expectations, targets, management only as of the date hereof and are presented for the purpose of assisting
estimates or intentions expressed in such forward-looking statements. the Bank’s shareholders and analysts in understanding the Bank’s financial position,
objectives and priorities, and anticipated financial performance as at and for the periods
The future outcomes that relate to forward-looking statements may be influenced by
ended on the dates presented, and may not be appropriate for other purposes. Except
many factors, including but not limited to: general economic and market conditions in the
as required by law, the Bank does not undertake to update any forward-looking
countries in which we operate; changes in currency and interest rates; increased funding
statements, whether written or oral, that may be made from time to time by or on its
costs and market volatility due to market illiquidity and competition for funding; the failure
behalf.
of third parties to comply with their obligations to the Bank and its affiliates; changes in
monetary, fiscal, or economic policy and tax legislation and interpretation; changes in Additional information relating to the Bank, including the Bank’s Annual Information
laws and regulations or in supervisory expectations or requirements, including capital, Form, can be located on the SEDAR website at www.sedar.com and on the EDGAR
interest rate and liquidity requirements and guidance, and the effect of such changes on section of the SEC’s website at www.sec.gov.
funding costs; changes to our credit ratings; operational and infrastructure risks;
reputational risks; the accuracy and completeness of information the Bank receives on
customers and counterparties; the timely development and introduction of new products
and services; our ability to execute our strategic plans, including the successful
completion of acquisitions and dispositions, including obtaining regulatory approvals;
critical accounting estimates and the effect of changes to accounting standards, rules
and interpretations on these estimates; global capital markets activity; the Bank’s ability
to attract, develop and retain key executives; the evolution of various types of fraud or
other criminal behaviour to which the Bank is exposed; disruptions in or attacks
TABLE OF CONTENTS Scotiabank Overview 4 • Canada’s International Bank 5 • Well-Diversified and Profitable Business 6 • Medium-Term Financial Objectives 7 • Why Invest in Scotiabank? 8 • Increasing Scale, Improving Focus 9 • Track Record of Earnings and Dividend Growth 10 • Strong Capital Generation and Position 11 • Progress in Digital Banking 12 • Corporate Social Responsibility 13 Business Line and Financial Overview 14 • 2018 Financial Performance 15 • Q4 2018 Financial Performance 16 • Canadian Banking 17 • International Banking 23 • Global Banking and Markets 26 • Credit Performance by Business Lines 28 Treasury and Funding 29 • Funding Strategy 30 • Wholesale Funding Composition 31 • Deposit Overview 32 • Wholesale Funding Utilization 33 • Liquidity Metrics 34 Appendix 1: Bail-in and TLAC 35 Appendix 2: Canadian Housing Market 42 Appendix 3: Key Market Profiles 50 Appendix 4: Covered Bonds 62 Appendix 5: Energy Exposure 66 Additional Information 68 Contact Information 69
Scotiabank Overview
Canada’s International Bank
Top 10 Bank in the Americas1,2 Change
Scotiabank3 FY2018 Y/Y
Americas Revenue $28.8B +6%
7th largest bank by market capitalization1
Net Income $9.1B +10%
8th largest bank by assets1
Return on Equity 14.9% +20bps
Europe Operating Leverage 3.7% +390bps
Productivity Ratio 51.7% -190bps
Total Assets $998B +9%
Ranking by Market Share4
Canada 3
USMCA U.S.A. Top 10 Foreign Bank
Full-Service Asia Mexico 6
Canada • Mexico Peru 3
PAC
Peru • Chile Chile 3
Colombia • Caribbean
Uruguay Colombia 5
Wholesale Operations
USA • UK • Hong Kong Earnings by Other
Singapore • Australia Geography3,5,6Other
Ireland • China • Brazil
Americas 10%
South Korea • Malaysia
7%
India • Japan
2018 Bank of the Year PAC 21% 55% Canada
Latin America and the
Caribbean by LatinFinance
7%
U.S.A
1 Source:Bloomberg 10/31/18; 2 By assets and market capitalization; 3 Figures adjusted for Acquisition-related costs, including Day 1 PCL impact
on acquired performing loans, integration and amortization costs related to current acquisitions and amortization of intangibles related to current
and past acquisitions; 4 Market share in loans as of September 2018 for PACs, as of July 2018 in Canada; 5 For the twelve months ended Americas (90%)
October 31, 2018; 6 Excluding Corporate adjustments
5
LEADING BANK IN THE AMERICASWell-Diversified and Profitable Business
Diversified by business and by country, creating stability and lowering risk
Earnings by Business1,2,3 Earnings by Country1,2,3
Canadian
Canadian Banking
Banking Wealth 49% Other International
Other 10%
9% Colombia Americas
Canadian 1% 7%
Global Banking
Banking and Chile
P&C
Markets 5%
40% EARNINGS MIX
20% Peru
8% $8.9B Canada
55%
Mexico
7%
International U.S.
Banking 7%
31%
23.0%
15.8% 16.0% 14.9%
Canadian Banking International Banking Global Banking and All Bank
Markets
1For the twelve months ended October 31, 2018; 2 Figures adjusted for Acquisition-related costs, including Day 1 PCL impact on acquired performing loans, integration and amortization costs related to
current acquisitions and amortization of intangibles related to current and past acquisitions; 3 Excluding Corporate adjustments
6
GREATER SCALE, GREATER FOCUSMedium-Term Financial Objectives1
2018 results met or exceeded medium-term objectives
FY2018 RESULTS2
METRICS OBJECTIVES
(Y/Y Change)
ALL BANK
EPS Growth 7%+ +9%
ROE 14%+ 14.9%
Operating Leverage Positive 3.7%
Capital Strong Levels 11.1%
OTHER FINANCIAL OBJECTIVES
Dividend Payout Ratio 40%-50% 47.7%
CANADIAN BANKING
Net Income Growth 7%+ +8%
Productivity RatioWhy Invest in Scotiabank?
Canada’s international bank • Unique footprint that provides sustainable and growing earnings
and dividends
and a top 10 bank in the
• Strong balance sheet, capital and liquidity ratios
Americas
• Attractive dividend yield and long-term shareholder returns
• Leading bank in the Pacific Alliance growth markets of Mexico,
Peru, Chile and Colombia – a region of 230 million people with
Diversified exposure to high an under-banked market and a median age of 29
quality growth markets • Earnings momentum in personal & commercial, wealth, and
wholesale businesses
• Gaining market share in key markets of Canada and the Pacific
Alliance countries
Increasing scale and market • Top 3 bank in Canada, Chile and Peru
share in key markets • Increasing scale in Wealth and Pacific Alliance with $7B of
strategic acquisitions in 2018
• Approximately 80% of earnings from core personal and commercial
banking businesses
Improving quality of earnings • Exited over 20 non-core countries and businesses since 2014
while reducing risk profile • Strong Canadian risk management culture – building stronger
capabilities for AML, cyber and reputational risk
• Leading levels of technology investment supports digital banking
Enhancing competitive strategy. Increasing digital sales adoption with clear targets
advantage in technology • Well positioned in the Pacific Alliance to leverage technology, risk
and talent management and funding versus local and global competitors
• Named to Top 25 ”World’s Best Workplaces” (2018)
8Increasing Scale, Improving Focus1
Gaining scale in key markets to drive earnings growth, improve earnings quality and reduce risk
2013
Gaining Market Share (Total Loans) Increasing Scale with Strategic Acquisitions (2017-2019)
2018
0 2 4 6 8 10 12 14 16 18 20 Increases wealth management assets to $230B.
Canada
Adds 110,000 potential primary customers.
Canada
Chile Doubles market share. Creates 3rd largest bank.
Mexico
Peru Creates #2 bank in credit cards.
Chile
Colombia Creates market leader in credit cards.
Peru
Dominican
Colombia Doubles customer base. Creates 4th largest bank.
Republic
Improving Earnings Quality Reducing Risk Profile
Between 2013 and 2018, exited
57 19 countries with either low
countries 38 returns, small scale or higher
countries
operational risk:
Turkey • Russia • Haiti • Egypt
Taiwan • UAE • plus 13 others
Increased wealth AUM by Reduced
37% to $282B in 2018. 2013 2018 Exited 3 non-core businesses
contribution of
Targeting earnings trading to All-Bank
contribution to All-Bank revenue from • Reduced wholesale funding (% of assets) from 29.6% to 23.4 %
earnings from 7.5% 4.9%
to • Reduced asset exposure in Asia by 21%
12% to 15%
1 5-year period 2013-2018
9
INCREASING SCALE, IMPROVING FOCUSStrong Track Record of Earnings and Dividend Growth
Stable and predictable earnings with steady increases in dividends
Earnings per share (C$)1,2 Total shareholder return3
Scotiabank Big 5 peers (ex. Scotiabank)
+9%
CAGR $7.11 13.2%
11.1% 11.8%12.0%
10.4%
$3.05 6.6%
08 09 10 11 12 13 14 15 16 17 18
5 Year 10 Years 20 Years
Dividend per share (C$)
$3.28
+6%
CAGR
$1.92
08 09 10 11 12 13 14 15 16 17 18
1Reflects adoption of IFRS in Fiscal 2011 2 Excludes notable items for years prior to 2016. For 2016 onwards, results adjusted for acquisition-related costs including Day 1 PCL impact on acquired performing loans, integration and
amortization costs related to current acquisitions and amortization of intangibles related to current and past acquisitions. 3 As of October 31, 2018
10
INCREASING SCALE, IMPROVING FOCUSStrong Capital Generation and Position
Capital levels are well above minimum regulatory requirements. Expect CET1 >11%.
CET1 Ratio
11.4% +33 bps +14 bps -65 bps 11.2%
11.1%
-10 bps +1 bp +10 bps
Q3/18 Internal Capital RWA Impact Impact of Share issuance Other Q4/18 Impact of Q4/18 Pro-
Generation (ex. FX) Acquisitions / (buybacks) Including FX Announced Forma
(net) Dispositions
Strong Capital Levels
15.3%
14.9% 14.6% 14.5% 14.3%
1.8% 1.8%
1.9% 1.7% 1.8%
1.6% 1.5%
1.5% 1.4% 1.4%
11.5% 11.2% 12.0% 11.4% 11.1%
Q4/17 Q1/18 Q2/18 Q3/18 Q4/18
CET1 Tier 1 Tier 2
11Progress in Digital Banking
Progressing well against 2018 Investor Day digital targets
Digital Retail Sales Digital Adoption In-Branch Financial Transactions
+11% +7% -6%
33
29 26
26 23
22 20
15
11
F2016 F2017 F2018 F2016 F2017 F2018 F2016 F2017 F2018
Goal Goal Goal
>50% >70%Corporate Social Responsibility
MEMBERSHIPS &
ASSOCIATIONS
13Business Line and Financial Overview
2018 Financial Performance
Strong adjusted earnings growth with positive operating leverage and productivity gains
$MM, except EPS 2018 Y/Y
Reported YEAR-OVER-YEAR HIGHLIGHTS
Net Income $8,724 +6%
Diluted EPS $6.82 +5% • Adjusted Net Income up 10%3
Revenue $28,775 +6%
Expenses $15,058 +3% • Revenue up 6%
Productivity Ratio 52.3% (160bps) o Net interest income up 8%
Core Banking Margin 2.46% -
o Non-interest income up 4%
PCL Ratio1, 2 48bps +3bps
PCL Ratio on Impaired Loans1, 2 43bps (2bps) • Expense growth of 2%3
Adjusted3
Net Income $9,144 +10% • Productivity ratio improved 190 bps3
Diluted EPS $7.11 +9%
Expenses $14,871 +2% • Full year operating leverage of +3.7%3
Productivity Ratio 51.7% (190bps)
PCL Ratio1, 2 41bps (4bps) • Improved PCL ratio on impaired loans1, 2
ADJUSTED NET INCOME3 BY BUSINESS SEGMENT ($MM)
+8%
Y/Y +16%
Y/Y -3%
Y/Y
4,090 4,416
2,424 2,819
1,818 1,758
Canadian Banking International Banking Global Banking and 1 2018 amounts are based on IFRS 9. Prior period amounts were based on IAS 39
2 Provision for credit losses on certain assets – loans, acceptances and off-balance sheet exposures
Markets 3 Adjusted for Acquisition-related costs, including integration and amortization costs related to current
2017 2018 acquisitions, amortization of intangibles related to current and past acquisitions and the Day 1 PCL
impact on acquired performing loans in Q3/18
15Q4 2018 Financial Performance
Strong revenue growth and higher NIM
$MM, except EPS Q4/18 Y/Y Q/Q
Reported YEAR-OVER-YEAR HIGHLIGHTS
Net Income $2,271 +10% +17%
Diluted EPS $1.71 +4% +10% • Adjusted Net Income up 13%3
Revenue $7,448 +9% +4%
Expenses $4,064 +11% +8% • Revenue up 9%
Productivity Ratio 54.6% +80bps +210bps o Net interest income up 10%
Core Banking Margin 2.47% +3bps +1bp
o Non-interest income up 8%
PCL Ratio1, 2 39bps (3bps) (30bps)
PCL Ratio on Impaired Loans1, 2 42bps - +1bp • Expenses up 9%3
Adjusted3
• Productivity ratio improved 40 bps3
Net Income $2,345 +13% +4%
Diluted EPS $1.77 +7% +1% • Flat PCL ratio1, 2 on impaired loans
Expenses $3,962 +9% +6%
Productivity Ratio 53.2% (40bps) +140bps
PCL Ratio1, 2 39bps (3bps) (1bp)
DIVIDENDS PER COMMON SHARE
0.03 0.03
0.79 0.79 0.82 0.82 0.85
1 2018 amounts are based on IFRS 9. Prior period amounts were based on IAS 39
Q4/17 Q1/18 Q2/18 Q3/18 Q4/18 2 Provision for credit losses on certain assets – loans, acceptances and off-balance sheet exposures
Announced Dividend Increase 3 Adjusted for Acquisition-related costs, including integration and amortization costs related to current
acquisitions, amortization of intangibles related to current and past acquisitions and the Day 1 PCL
impact on acquired performing loans in Q3/18
16Canadian Banking
Top 3 bank in personal & commercial banking, wealth and insurance in Canada
• Canadian Banking provides a full suite of financial advice and banking solutions, supported by an excellent
customer experience, to Retail, Small Business, Commercial Banking, and Wealth Management customers
Retail Residential
57% Mortgages 60% MEDIUM-TERM FINANCIAL OBJECTIVES
Target 2018 Actual2,3
AVERAGE Net Income Growth4 7%+ 8%
REVENUE MIX1
LOAN MIX1
$3.4B $340B
Productivity Ratio5Q4 2018 Canadian Banking Financial Performance
Solid asset and deposit growth, margin expansion and positive operating leverage 4
1
FINANCIAL PERFORMANCE AND METRICS ($MM)
Q4/18 Y/Y Q/Q
Reported YEAR-OVER-YEAR HIGHLIGHTS
Revenue $3,443 +5% +2%
Expenses $1,747 +7% +5% • Adjusted Net Income up 7%4
PCLs $198 (9%) +9% o Asset and deposit growth, margin expansion
Net Income $1,115 +4% (1%)
Productivity Ratio 50.7% +80bps +150bps
• Revenue up 5%
o Net interest income up 6%
Net Interest Margin 2.45% +4bps (1bp)
PCL Ratio2, 3 0.23% (4bps) +2bps • Loan growth of 5%
PCL Ratio on Impaired Loans2, 3 0.22% (5bps) +1bp o Business loans up 13%
Adjusted4 o Residential mortgages up 3%; credit cards up 7%
Expenses $1,705 +5% +4%
• Deposit growth of 6%
Net Income $1,146 +7% -
o Personal up 5%; Non-Personal up 7%
Productivity Ratio 49.5% (20bps) +70bps
• NIM up 4 bps
ADJUSTED NET INCOME ($MM) AND NIM (%)
1,4 o Rising rate environment and improved business mix
2.41% 2.41% 2.43%
2.46% 2.45% • Expenses up 5%4
o Investments in technology and regulatory initiatives
o Full-year productivity ratio improvement of 90bps4
1,073 1,107 1,022 1,141 1,146 • Full-year operating leverage of +1.9%4
• PCL ratio improved by 4 bps due to lower
2, 3
Q4/17 Q1/18 Q2/18 Q3/18 Q4/18 retail PCLs
1 Attributableto equity holders of the Bank
2 2018 amounts are based on IFRS 9. Prior period amounts were based on IAS 39
3 Provision for credit losses on certain assets – loans, acceptances and off-balance sheet exposures
4 Adjusted for Acquisition-related costs, including integration and amortization costs related to current acquisitions, and amortization of intangibles related to current and past acquisitions
18Canadian Banking: Retail Exposures
High quality retail loan portfolio: ~92% secured
• Residential mortgage portfolio is high quality
79%
o 43% insured, and the remaining 57% uninsured has a LTV of 54%1 Real Estate
• Market leader in auto loans Secured Lending
o $37 billion auto loan portfolio with 7 OEM relationships (3 exclusive)
o Prime Auto and Leases (~91%)
o Lending terms have been declining with contractual terms averaging 77
months with effective terms averaging 54 months DOMESTIC
RETAIL LOAN
• Growth opportunity in credit cards BOOK
o $7.3 billion credit card portfolio represents ~3% of domestic retail loan $286.2B
book and 1.3% of the Bank’s total loan book
o Organic growth strategy focused on payments and deepening customer
relationships
o Upside potential from existing customers: ~80% of growth is from existing
customers (penetration rate mid-30s versus peers in the low-40s)
o Strong risk management culture with specialized credit card teams,
customer analytics and collections focus 5% 13%
Unsecured
Automotive
3%
Credit Cards
1 LTV calculated based on the total outstanding balance secured by the property. Property values indexed using Teranet HPI data.
19Canadian Banking: Residential Mortgages
High quality, diversified portfolio
o Residential mortgage portfolio of $213 billion: 43% insured; LTV 54% on the uninsured book1
• Mortgage business model is “originate to hold”
• New originations2 had average LTV of 63% in Q4/18
• Majority is freehold properties; condominiums represent approximately 13% of the portfolio
o Three distinct distribution channels: All adjudicated under the same standards
• 1. Broker (~55%); 2. Branch (~25%); and 3. Mobile Salesforce (~20%)
CANADIAN MORTGAGE PORTFOLIO: $213B (SPOT BALANCES AS AT Q4/18, $B)
$107.0 Freehold - $185B Condos - $28B
43%
Insured
$12.2
Total
Portfolio:
$213 billion
$94.8
$38.6
$30.7
$9.2
$3.6
$15.9
$29.4 $27.1 $1.8 $11.4 $9.5
$14.1 $11.2
$0.2
$8.8 $0.7 57%
Uninsured
Ontario BC & Territories Alberta Quebec Atlantic Provinces Manitoba &
Saskatchewan
% of
50% 18% 14% 8% 5% 5%
portfolio
1 LTV calculated based on the total outstanding balance secured by the property. Property values indexed using Teranet HPI data
2 New originations defined as newly originated uninsured residential mortgages and have equity lines of credit, which include mortgages for purchases
refinances with a request for additional funds and transfer from other financial institutions
20Canadian Banking: Residential Mortgages (continued)
High quality portfolio, lower originations in Vancouver and Toronto
NEW ORIGINATIONS: UNINSURED LTV* DISTRIBUTION
Growth/Change
Q4/17 Q3/18 Q4/18 Y/Y
Canada
Total Originations ($B) 12.9 11.9 10.5 -19%
GVA
59% Uninsured LTV 64% 63% 63% -1%
GTA
62% GTA
BC &
Territories Total Originations ($B) 3.9 3.6 3.2 -18%
61% Uninsured LTV 63% 62% 62% -1%
Atlantic
Prairies 67% Provinces
ON QC GVA
63% 65% 69%
Total Originations ($B) 1.8 1.4 1.1 -39%
Uninsured LTV 61% 60% 59% -2%
*Average LTV ratios for our uninsured residential mortgages originated during the quarter
FICO® DISTRIBUTION – CANADIAN UNINSURED PORTFOLIO
Average FICO® Score
Canada 787
57%
GTA
GVA
790
790
• 788
FICO is a registered trademark of Fair Isaac Corporation
21Tangerine
Canada’s #1 Digital Bank
STRATEGIC FOCUS:
Simplicity
• Industry-leading customer service (NPS) • Simple, market-leading products that appeal to value-
• 97% digital transactions conscious and tech-savvy Canadians
• Seamless digital client experience
• 96% digital on-boarding
• Highly competitive rates, simple products
• 91% digital sales
• Velocity
• Enhanced self-service options, adding speed & agility
• Nimble, modern platform supporting rapid development cycles
~50% multiple-p roduct clients • Low cost, scalable business model
Primary clients +23% Y/Y Partnerships
• Accelerating momentum through the Toronto Raptors
50% New Clients via Referrals • Deepening client relationships by introducing SCENE Loyalty
• Strong partnership with Scotiabank
Modern Platform Speed & Agility Client-Driven Innovation Unique ‘Orange’ Culture Award Winning Approach
Scalable: Rapid Deployments: Incubator: Team Tangerine: Third-Party Recognition:
Nimble, low cost systems Agile best practices enable Identify, explore, and pilot new Our unique culture and J.D. Power Customer Satisfaction
provide a holistic client view. quick & efficient new product & technologies and solutions to lean team are an essential seven years in a row, Finovate “Best
feature delivery. meet evolving Client needs. part of how we deliver. in Class” for digital experiences.
22International Banking
Leading diversified personal and commercial franchise in high quality growth markets
• International Banking operates primarily in Latin America, the Caribbean and Central America with a full range
of personal and commercial financial services, as well as wealth products and solutions
Business
Asia
6%
51% Loans MEDIUM-TERM FINANCIAL OBJECTIVES
REVENUE1 LOAN MIX1 Target 2018 Actual2,3
24% $3.1B 70% 6%
$144B
Credit
Latin Cards Net Income Growth4 9%+ 16%
C&CA America 16%
Personal 27%
23%
26% Peru Loans Productivity Ratio5Q4 2018 International Banking Financial Performance
Strong performance in the Pacific Alliance supported by acquisitions
1, 2 2
FINANCIAL PERFORMANCE AND METRICS ($MM) YEAR-OVER-YEAR HIGHLIGHTS
Q4/18 Y/Y Q/Q
Reported • Adjusted Net Income up 22%6
Revenue $3,134 +22% +11%
Expenses $1,721 +23% +15% o Strong asset and deposit growth in Pacific Alliance
PCLs $412 +32% (45%) o Includes impact of acquisitions and alignment of
Net Income $712 +18% +36% reporting period
Productivity Ratio
Net Interest Margin
54.9%
4.52%
+50bps +200bps
(15bps) (18bps)
• Revenues up 22%
PCL Ratio 1.05% (9bps) (153bps) o Pacific Alliance up 28%
PCL Ratio on Impaired Loans3, 4 1.20% +6bps (13bps) • Loans up 29%
Adjusted6
Expenses $1,661 +19% +14% o Pacific Alliance loans up 42%
PCLs $412 +32% +14% • NIM down 15 bps
Net Income $746 +22% +6%
Productivity Ratio 53.0% (100bps) +130bps o Mainly driven by the business mix impact of acquisitions
PCL Ratio3, 4, 6 1.05% (9bps) (18bps) • Expenses up 19%6
1,6 o Business volume growth, inflation and higher technology
ADJUSTED NET INCOME ($MM) AND NIM5 (%) costs
4.67% 4.66% 4.74% 4.70%
4.52%
o Full year productivity ratio improvement of 150bps6
• Full-year positive operating leverage of
675 683 715 746
613 3.1%6
Q4/17 Q1/18 Q2/18 Q3/18 Q4/18
• PCL ratio3, 4, 6 down 9 bps
1 5 Net Interest Margin is on a reported basis
Attributable to equity holders of the Bank
2 6 Adjusted for Acquisition-related costs, including integration and amortization costs related to current acquisitions,
Y/Y and Q/Q growth rates (%) are on a constant dollars basis, while metrics and change in bps are on a reported basis
3 2018 amounts are based on IFRS 9. Prior period amounts were based on IAS 39 amortization of intangibles related to current and past acquisitions and the Day 1 PCL impact on acquired performing
loans in Q3/18
4 Provision for credit losses on certain assets – loans, acceptances and off-balance sheet exposures
24Scotiabank in the Pacific Alliance Countries
Well positioned for long-term growth in large, growing market
Key Highlights of Pacific Alliance countries (PACs)
Population1,2 • 230 million. 6.2x Canada’s population. Projected growth outpaces Canada and G7 countries; median age4 of 29
Government
Presidential Elections • No elections scheduled until 2021
Financial Stability • All sovereign credit ratings in IG category with central banks’ policy targeting inflation since 1999
Economy
GDP1 • 9th largest economy in the world
Exports5 • 64% of exports related to manufacturing
Trade Partners5 • US, China and Canada are the PACs’ largest trading partners, representing 72% of exports
Business Environment
HDI Score Rank6 • Rank “High” or “Very High” (United Nations, 2017)
Banking Penetration1 • Under-banked with average banking penetration at ~50% compared to over 90% in Canada and the U.S.
Foreign Direct Investment1 • FDI averaging 3.2% of GDP compared to 1.7% in Canada and the U.S.
PACs
Mexico Peru Chile Colombia (Total11/Average)
Scotiabank Market Share7 7.1% 18.2% 13.8% 6.2% 11.3%
Market Share Ranking7 6th 3rd 3rd 5th 4th
Commercial, Personal Commercial, Credit cards
Strengths Mortgages and Auto Retail and Credit Cards Well positioned
and Credit cards and Mortgages
Average Assets8(C$B) $32.3 $24.0 $32.9 $12.3 $101.5
Revenue8(C$B) $2.2 $2.0 $1.7 $1.3 $7.2
Net Income after NCI8,9(C$B) $0.6 $0.7 $0.4 $0.1 $1.9
ROE8,9 26% 24% 11% 6% 17%
# of Employees8,10 13,204 11,032 9,386 9,658 43,280
1 Source: World Bank 2017
2 Population growth: World Bank DataBank 2017-2022 7
3
Total loans market share as of September 2018
EM countries include: Argentina, Brazil, China, Greece, India, Indonesia, Poland, South Africa, Turkey, and Russia 8 As of October 31, 2018 or for the fiscal year 2018
4 Source: The World Factbook, CIA 2017
5 Source: United Nation Conference on Trade and Development (UNCTAD) 2017; Organization for Economic Co-
9 Earnings adjusted for acquisition –related costs including the Day 1 PCL on acquired performing loans, integration and
amortization costs related to current
operation and Development (OECD) 2016 acquisitions, and amortization of intangibles related to current and past acquisitions
6 Human Development Index. Source: United Nations Development Programme (UNDP) 2017. For more information, 10Employees are reported on a full-time equivalent basis
please refer to: http://hdr.undp.org/sites/default/files/2018_human_development_statistical_update.pdf 11May not add due to rounding
25Global Banking and Markets
Second-largest Canadian wholesale banking and capital markets business serving global clients
• Full-service wholesale bank in Canada, the United States and Latin America. Offers a range of products and
services in select markets in Europe, Asia and Australia.
Business Canada
Canada Banking
Other Latin
America 40%
41% 4%
Latin 7%
America 15%
57%
Global Asia 7%
REVENUE1,2 Equities 18%
REVENUE1 AVG ASSETS1,2
Asia 5% $1.3B $1.3B $338B
9% 16%
Europe Europe
21% 30%
30% US
US FICC
STRATEGIC OUTLOOK
• Up-tiering lending relationships, expanding our Investment Banking capabilities in key markets, increasing our investment in
the Pacific Alliance to become a leader in local and cross-border banking and capital markets
• Continued strong growth in deposits, improved corporate lending and investment banking results to absorb required
regulatory and technology investments
1For the 3 months ended October 31, 2018; 2 Latin America revenue contribution and assets reported in International Banking’s results
26Q4 2018 Global Banking and Markets Financial Performance
Solid loan growth, strong credit quality and lower productivity ratio
1
FINANCIAL PERFORMANCE AND METRICS ($MM) YEAR-OVER-YEAR HIGHLIGHTS
Q4/18 Y/Y Q/Q
Revenue $1,073 (1%) (3%)
• Reported Net Income up 6%
Expenses $553 (3%) +2% • Loans up 7%
o U.S. loans up 13%
PCLs ($20) N/A N/A
Net Income $416 +6% (6%) • NIM down 16 bps
Productivity Ratio 51.5% (80bps) +260bps o Mainly driven by lower deposit and lending margins
Net Interest Margin 1.72% (16bps) (10bps) • Expenses down 3%
PCL Ratio2, 3 (0.09%) (13bps) (4bps) • Productivity ratio improved 80 bps
PCL Ratio on Impaired Loans2, 3 (0.07%) (11bps) (1bp)
• PCL ratio2, 3 improved by 13 bps
1
o Impaired loan provision reversals in Europe
NET INCOME AND ROE
16.9%
16.2% 15.6% 15.3%
14.9%
447 441
454 416
391
Q4/17 Q1/18 Q2/18 Q3/18 Q4/18
1 Attributable to equity holders of the Bank
2 2018 amounts are based on IFRS 9. Prior period amounts were based on IAS 39
3 Provision for credit losses on certain assets – loans, acceptances and off-balance sheet exposures
27Credit Performance by Business Lines
Stable all-bank PCL ratios on impaired loans
IAS 39 IFRS 9
Q4/17 Q1/18 Q2/18 Q3/18 Q4/18
PCLs on PCLs on PCLs on PCLs on Total PCLs on
(As a % of Total Total Total
Impaired Impaired Impaired Impaired PCLs Impaired
Average Net Loans & Acceptances) PCLs PCLs PCLs
Loans Loans Loans Loans (adj.) Loans
Canadian Banking
Retail 0.30 0.29 0.28 0.28 0.28 0.25 0.24 0.25 0.25
Commercial 0.07 0.11 0.08 0.09 0.09 (0.04) 0.06 0.06 0.15
Total 0.27 0.27 0.25 0.25 0.25 0.21 0.21 0.22 0.23
Total – Excluding Credit Mark
0.28 N/A N/A N/A N/A N/A N/A N/A N/A
Benefits
International Banking
Retail 2.00 2.28 2.39 2.26 2.16 2.36 2.254 2.38 2.21
Commercial 0.32 0.28 0.201 0.55 0.341 0.38 0.311, 4 0.07 (0.06)
Total 1.14 1.252 1.261, 2 1.382 1.221, 2 1.33 1.234 1.20 1.05
Total – Excluding Credit Mark
1.34 N/A N/A N/A N/A N/A N/A N/A N/A
Benefits
Global Banking and Markets 0.04 (0.01) (0.04) 0.02 (0.05) (0.06) (0.05) (0.07) (0.09)
All Bank 0.42 0.43 0.42 0.46 0.42 0.41 0.40 0.42 0.39
1Excludes provision for credit losses on debt securities and deposit with banks
2 Not comparable to prior periods, which were net of acquisition benefits
3 On an reported basis; includes impact of Day 1 PCLs from acquisitions
4 On an adjusted basis; adjusted for Day 1 PCLs from acquisitions
28Treasury and Funding
Funding Strategy
Flexible, well-balanced and diversified funding sources
Funding Strategy • SHORT-TERM FUNDING
o USD 25 billion Bank CP program
o USD 3 billion Subsidiary CP program
• Build customer deposits in all of our key markets o CD Programs (Yankee/USD, EUR, GBP, AUD, HKD)
• Continue to manage wholesale funding (WSF) • TERM FUNDING & CAPITAL
and focus on longer term funding
Canadian Dollar
o Endeavouring to fund asset growth through deposits
o CAD 36 billion global registered covered bond program
• Achieve appropriate balance between cost and (uninsured Canadian mortgages)
stability of funding o Canada Mortgage Bonds and Mortgage Back Securities
o CAD 15 billion debt & equity shelf
(senior/sub debt, prefs, common shares)
o Maintain pricing relative to peers
o CAD 15 billion START ABS program (indirect auto loans)
o
• Diversify funding by type, currency, program, CAD 7 billion Halifax ABS shelf (unsecured lines of credit)
o CAD 6 billion Principal at Risk (PAR) Note shelf
tenor and markets
o CAD 5 billion Trillium ABS shelf (credit cards)
• Pre-fund at least one quarter ahead, market Foreign Currency
permitting
o USD 20 billion debt & equity shelf
• Centralized funding strategy and associated risk (senior/sub debt, prefs, common shares)
management o USD 20 billion EMTN shelf
o AUD 8 billion Australian MTN program
o USD 7.5 billion Singapore MTN program
30Wholesale Funding Composition
Wholesale funding diversity by instrument and maturity1,6,7
0%
Bail-inable Notes MATURITY TABLE
36% (CANADIAN DOLLAR EQUIVALENT, $B)
(EX-SUB DEBT)
Senior Notes
2%
Asset-Backed $25
Securities $24
$22
$6
13%
Covered Bonds
$1
$4 $8 $19
Asset-Backed $4 $16
Commercial Paper3 $3
$233B $1 $1 $2
3% $13
10%
Mortgage $18
$5
Securitization4 $15 $14 $15 $14
31% 3% $8
Bearer Deposit Notes,
Commercial Paper &
Short-Term Certificate
2%
Deposits from Banks2
Subordinated Debt5
< 1 Year 2 Years 3 Years 4 Years 5 Years 5 Years
of Deposits >
Senior Debt ABS Covered Bonds
1 Excludes repo transactions and bankers acceptances, which are disclosed in the contractual maturities table in the MD&A of the Interim Consolidated Financial Statements. Amounts are based on remaining term to maturity.
2 Only includes commercial bank deposits raised by Group Treasury.
3 Excludes asset-backed commercial paper (ABCP) issued by certain ABCP conduits that are not consolidated for financial reporting purposes.
4 Represents residential mortgages funded through Canadian Federal Government agency sponsored programs. Funding accessed throu gh such programs does not impact the funding capacity of the Bank in its own name.
5 Although subordinated debentures are a component of regulatory capital, they are included in this table in accordance with EDTF recommended disclosures.
6 As per Wholesale Funding Sources Table in MD&A. As of Q4/18
7 May not add to 100% due to rounding
31Deposit Overview
Stable trend in personal & business and government deposits
PERSONAL DEPOSITS PERSONAL DEPOSITS
(SPOT, CANADIAN DOLLAR EQUIVALENT, $B)
$215 • Important for both relationship purposes
$204
and regulatory value
•
$202 $200 $211
$199 Good momentum with 4.1% CAGR over
$193
$190 $199 $198
$201 the last 3 years
$195 $196
3Y CAGR – 4.1%
BUSINESS & GOVERNMENT DEPOSITS1 BUSINESS & GOVERNMENT
(SPOT, CANADIAN DOLLAR EQUIVALENT, $B)
$197
• Gaining share of deposits through
$169 $174
$168 leveraging of relationships
$155 $179
$139
$156
$149
$161
$172 $170 • 12.3% CAGR over the last 3 years
$156
3Y CAGR – 12.3%
• Focusing on operational, regulatory
friendly deposits
1 Calculated as Bus& Gov’t deposits less Wholesale Funding, adjusted for Sub Debt
32Wholesale Funding Utilization
Managing reliance on wholesale funding and growing deposits
WHOLESALE FUNDING / TOTAL ASSETS REDUCING RELIANCE ON
WHOLESALE FUNDING
28.0% 27.7% • Targeting to be in line with peers
o Reduced reliance on wholesale funding over the last two
25.2% years
o Sustained focus on deposits as an alternate to wholesale
23.8%
23.4% funding
Q4/14 Q4/15 Q4/16 Q4/17 Q4/18
MONEY MARKET WHOLESALE FUNDING / FOCUS ON TERM FUNDING
TOTAL WHOLESALE FUNDING
• Reduced reliance on money market
funding and termed out funding book
39.9%
38.7% 38.3%
37.7% 37.5% 37.4% 36.8%
35.6% 36.0%
Q4/16 Q1/17 Q2/17 Q3/17 Q4/17 Q1/18 Q2/18 Q3/18 Q4/18
33Liquidity Metrics
Well funded Bank with strong liquidity
• Liquidity Coverage Ratio (LCR)
o Stable and sound management of liquidity
o Net Stable Funding Ratio (NSFR) implementation date is January 2020
132%
128%
127% 127%
126%
125% 125% 125%
124%
Q4/16 Q1/17 Q2/17 Q3/17 Q4/17 Q1/18 Q2/18 Q3/18 Q4/18
• High Quality Liquid Assets (HQLA)
o Efficiently managing LCR and optimizing HQLA
$144
$136 $140 $138
$132
$125 $128 $127
$123
Q4/16 Q1/17 Q2/17 Q3/17 Q4/17 Q1/18 Q2/18 Q3/18 Q4/18
34Appendix 1: Bail-in and TLAC
Overview of Canadian Bail-in Regulations
Introduction Bail-In Basics
• In effect since September 23, 2018 • A statutory conversion power that allows for the
permanent conversion of eligible shares and
• Canada’s resolution authority is Canada liabilities of a non-viable bank into common shares,
Deposit Insurance Corp (CDIC) incremental to OSFI’s conversion of NVCC
• Bail-in framework provides CDIC the • Bail-in conversion would occur in the context of an
statutory power to convert certain open bank; the bank remains open and operating
eligible debt into common equity to and continuing to provide critical services to its
recapitalize a non-viable DSIB customers
• Supplements existing NVCC framework • CDIC has flexibility to determine:
o Quantum of conversion – portion of bail-in debt to be converted
and other resolution tools into common shares
o Several tools available including bail-in and o Timing of conversion – if it will take place immediately or over a
restructuring the bank period of time
o Goal to return the bank to viability o Process for converting – if conversion will take place in one or
more steps
• Applies to six Canadian DSIBs, including • CDIC must adhere to certain parameters
Scotiabank o Adequate recapitalization
o Order of conversion
o Equally ranking instruments
o Relative creditor hierarchy
36Overview of Canadian Bail-in Regulations
Scope of Bail-in Debt Bail-in Outcomes
• Scope emphasizes operational feasibility, • Bank stays open and operating
credibility and preserving access to
liquidity in stress
• DSIB is recapitalized with limited or no
taxpayer support and able to re-access
• What’s in scope: markets
o Issued, originated or renegotiated after September 23,
2018
o Long term (original term >400 days) • Recoveries are consistent with relative
o Tradeable and transferrable hierarchy of claims (shared losses)
o Unsecured o Significant dilution of original common shareholders through
conversion of NVCC and Bail-in debt
o New common shares issued to NVCC and Bail-in debt
• What’s not in scope: holders according to their relative rankings
o Deposits
o Most structured notes • No creditor worse off
o Secured liabilities
o Covered bonds
o Derivatives
• Legacy (non-NVCC) instruments are not in
scope but would be subject to other
resolution tools to ensure that senior bail-
in debt holders are better off than holders
of legacy capital instruments
37Bail-in Process
Resolution
Bail-in Conversion
Business Heightened Point of Resolution Stabilization / CDIC
as usual risk non-viability weekend restructuring exits
• Good • Financial difficulties • OSFI declares • CDIC takes • 1-week to 1- • 1 to 5-year
financial the DSIB non- control / year timeframe timeframe
health viable ownership of
• DSIB may the DSIB
implement recovery • Common • Voting rights are
plan actions under • Minister of shares resulting resumed
OSFI oversight Finance has • OSFI triggers from NVCC and
Federal Cabinet NVCC BID conversion
issue orders conversion are issued • “No creditor
• CDIC may monitor authorizing (voting rights worse off”
and undertake CDIC to assume suspended) determination
necessary temporary • Management and payment of
preparatory control or and Board of compensation
activities ownership of the DSIB • Execution of
DSIB and to replaced if restructuring
necessary plan
• DSIB may execute a Bail-in
experience declining conversion
market confidence, • Liquidity
credit rating support if
downgrades and necessary
funding / capital
raising challenges
38Overview of Canadian Bail-in Regulations
Compensation Regime Resolution Tools
• No creditor worse off: Creditors and • CDIC has a number of tools to assist or
shareholders are compensated where they resolve a failing DSIB
have been made worse off than they would
have been in a liquidation 1. Liquidation of the bank and reimbursement of insured
deposits
• Persons who hold the following claims at the 2. Bank is placed under temporary CDIC control to
complete its sale to a willing buyer (forced sale) via one
time of entry into resolution are entitled to of two approaches:
compensation:
o All shares are transferred to CDIC and it becomes
o Shares of the institution
the sole shareholder to facilitate the sale; or
o Subordinated debt vested in CDIC at the time of entry into
resolution o CDIC is appointed receiver to sell all or some of the
o NVCC subordinated debt subsequently converted into assets and liabilities to the buyer
common shares pursuant to contractual terms
o Under both approaches, critical banking operations
o Liabilities subsequently converted into common shares
are maintained
pursuant to Bail-in power
o Any liability of the institution if the institution was wound-up 3. Bank is placed under temporary CDIC control and CDIC
at the end of the resolution process transfers certain functions to a bridge bank which is
o Any liability of the institution that was assumed by a CDIC- temporarily owned by CDIC
owned work-out company or bridge bank which was
subsequently liquidated or wound-up o Meant to bridge the gap from when an institution
fails and when a buyer or private-sector solution can
be found
• Compensation = liquidation value – o Critical banking operations are maintained
resolution value
4. Bail-in regime
• Right to compensation is not transferrable
39TLAC Requirements and Eligibility
Two concurrent minimum TLAC
compliance requirements by Q1/22
21.5% minimum risk-based TLAC ratio
&
6.75% minimum TLAC leverage ratio
TLAC eligibility
Tier 1 and 2 regulatory capital
as per CAR guideline
+
Bail-in debt
Eligibility criteria for bail-in debt to qualify as TLAC
• Subject to permanent conversion into common shares in whole or in part pursuant to CDIC Act
• Directly issued by Canadian parent operating company
• Not secured or covered by a guarantee of the issuer or related party
• Perpetual or have remaining term >365 days
• No acceleration rights outside of bankruptcy, insolvency, wind-up, liquidation or failure to make
principal or interest payments for 30 business days or more
• Callable without OSFI prior approval if, following the transaction, the minimum TLAC requirement
is satisfied
By Q1/22, Scotiabank will exceed the minimum TLAC requirement (plus Domestic Stability Buffer
requirement) based on maintaining current capital levels and refinancing upcoming senior maturities
40Overview of Canadian Bail-in Regulations
NVCC vs. Bail-in Enhanced Disclosures
• NVCC are regulatory capital instruments • Bail-in debt will be subject to robust
other than common shares that are disclosure requirements to promote
converted to CET1 at non-viability transparency, legal certainty and market
discipline
• Authorities would trigger NVCC only
where there was a high level of • Contractual terms must include a clause
confidence that the conversion plus whereby investors expressly submit to the
additional measures would restore the Canadian Bail-in regime notwithstanding any
viability of the bank foreign law to the contrary
• NVCC improves regulatory capital quality, • Disclosures regarding Bail-in power are
not quantity required in offering documents
o Conversion of NVCC increases CET1 but not total
capital – a gap that Bail-in addresses
• DSIBs are not permitted to advertise or
otherwise promote Bail-in debt, including in
• NVCC is a prerequisite to Bail-in its name, to a purchaser in Canada as a
deposit
• Failure to meet these requirements would not
exempt an issuance from being eligible for
Bail-in
41Appendix 2: Canadian Housing Market
Canadian Household Credit Growth Moderating
Public policy changes are moderating growth in household credit
• Total household credit growing 4.4% in nominal terms in 2018, vs 2008 peak of 12% y/y
• Consumer loans excluding mortgages (cards, HELOCs, unsecured lines, auto loans, etc.)
are growing 4.4% in 2018 vs >6% in late-2017
• Mortgage credit growing 4.4% year-to-date vs 2008 peak of 13%
HOUSEHOLD CREDIT GROWTH CONSUMER LOAN GROWTH RESIDENTIAL MORTGAGE GROWTH
20 20 20
%, 3-month moving average %, 3-month moving average %, 3-month moving average
18 18
16 15 y/y % 16
y/y % change
14 change 14 y/y %
m/m %
change
12 change, 10 12
SA
10 10
8 5 8
6 6
4 0 4 m/m %
m/m % change,
2 change, SA 2 SA
0 -5 0
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Sources: Scotiabank Economics, Bank of Canada. Sources: Scotiabank Economics, Bank of Canada. Sources: Scotiabank Economics, Bank of Canada.
43Household Debt: Canada vs. U.S.
Canadian households’ balance sheets compare favourably to US
• Canadian debt-to-income ratio is now 5.5% below the U.S. peak in 2008
o In the last 7 years, increases in Canadian debt-to-income ratio have slowed vs. 2002–10
o Calculated on the same terms, Canada’s debt-to-income is currently 164% vs. 134% in the U.S.
• Canadian debt-to-assets ratio remains below U.S.
o U.S. households have incentive to pursue higher asset leverage in light of mortgage interest deductibility
o Debt is a stock concept, to be financed over one’s lifetime. Income is a flow concept measuring
one single year’s earnings. Debt should be compared to lifetime or permanent income, or assets
• Ratio of total household debt-to-GDP remains lower in Canada than U.S.
o Calculated on a comparable basis, the ratio of household credit market debt is 98.2% in Canada vs.101.3% in the U.S.
Household Credit Market Total Household Liabilities Household Credit Market
Debt to Disposable Income As % of Total Assets Debt to GDP
180 30 130
household credit liabilities 169.1 household debt
% of GDP
as % of disposable income as % of assets
120
160 US with
163.6
110 unincorporated
25 US business debt 102.7
140 Original Canada
100 101.3
133.8 98.2
120 90
20 Canada*
18.0
80
100 75.1
Original
Adjusted Canadian*
Canada 70
US
15 16.7
80 Official Canadian
60
Official US
60 50
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
10
* Adjusted for US concepts and definitions. 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 * Adjusted for US concepts and definitions.
Sources: Scotiabank Economics, BEA, Federal Sources: Scotiabank Economics, Federal Sources: Scotiabank Economics, BEA, Federal
Reserve Board, Statistics Canada. Reserve Board, Statistics Canada. Reserve Board, Statistics Canada.
44Canadian Mortgage Market
Less than half of households have a mortgage or a HELOC More than 50% of Households Do Not
Have a Mortgage or HELOC
• Mortgage holders
45 % of households, 2017
40
o Less than 50% of Canadian households have exposure to a mortgage 35 10.6 with HELOC
and/or a HELOC
30
o Negligible number of negative equity mortgages in Canada
25 3.4
o 91% of all homeowners have equity ratios of 25% or higher. Significant price
20
decreases required to reach a negative equity position
15 30.7 32.0
o High share of equity: average equity ratio is 74% (excluding HELOCs)
22.8
10
o Approximately half of first-time home buyers in Canada are able to source
their down payments from their personal savings 5
0
Owned dwelling Owned dwelling Rented
• 2014–17 data show 79% of buyers from that period have w/ mortgage w/o mortgage
Sources: Scotiabank Economics,
25% or more equity Mortgage Professionals Canada.
o Reflects speed of rising house prices, increased down payment High Percentage of Equity
requirements and tightened mortgage rules
(real estate equity as % of real estate assets)
80
• 2014–17 data indicate only 42% of first-time home buyers % Official (excludes HELOCs)
75
had less than 20% down 70 Cda estimate
including HELOCs
65
US estimate
with NFPs
60
excluding
• Efforts to cool the housing market are working, which 55
HELOCs
implies moderating price appreciation 50
45
Official FRB with NFPs
(includes HELOCs)
40
35
90 92 94 96 98 00 02 04 06 08 10 12 14 16
Sources: Scotiabank Economics, OSFI, FCAC,
Statistics Canada, Federal Reserve Board.
45Canadian Housing Fundamentals Remain Sound
Solid indicators on several dimensions
INTERNATIONAL IMMIGRATION TOTAL DEBT-SERVICE RATIO
2018 16
% OF DISPOSABLE INCOME
NUMBER OF IMMIGRANTS
Target = 310K
290 15
TO CANADA, 000S
14 1990–2017
240 average
13
12
190
11
140 10
90 95 00 05 10 15 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Sources: Scotiabank Economics, Statistics Canada. Sources: Scotiabank Economics, Statistics Canada. Data through 2018Q2.
RESIDENTIAL UNIT SALES TO NEW LISTINGS RATIO RESIDENTIAL MORTGAGES ARREARS
% OF MORTGAGES IN ARREARS
1.0 6
5
3 MONTHS OR MORE
0.8
Sellers’ Market
4
0.6
RATIO
Balanced Market 3 U.S.
0.4
2
Buyers’ Market
0.2 1 Canada
0.0 0
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Sources: Scotiabank Economics, CREA MLS. Data through September 2018. Sources: Scotiabank Economics, CBA, MBA. Data through 2018Q3 (US) and June 2018
(Canada).
46Households Can Sustain Higher Rates
Real interest rates are still negative and will turn only mildly positive in 2019
• Scotiabank Economics expects the Bank of Canada to raise its target overnight rate
an additional 125 bps by Q1/2020
• Average mortgage borrowers have only just begun renewing their loans at higher
interest rates
Further Rate Hikes
Ahead from BoC & Fed
9
%
8
7 Fed Funds
Target Rate
6
(Upper Limit)
5
4 forecast
3
BoC
2 Overnight
Target Rate
1
0
93 98 03 08 13 18
Sources: Scotiabank Economics, Haver Analytics.
47Housing Market Differences vs. U.S.
Canada’s housing market features distinct practices and policies
Canada U.S.
• Mortgage interest not tax deductible • Tax-deductible mortgage
• Full recourse against borrowers in most provinces interest creates incentive to
• Foreclosure on non-performing mortgages - no stay periods borrow and delay repayment
Insurance
• Lenders have limited recourse
in most states
• Mandatory default insurance mortgages with LTV >80% • 90-day to 1-year stay
o CMHC backed by Government of Canada (AAA). Private insurers period to foreclose on
are 90% government backed non-performing mortgages
o Insurance available for homes up to $1 million • No regulatory LTV limit
Regulation and o Premium is payable upfront • Private insurers are not
Taxation o Covers full amount for life of mortgage government backed
• Homebuyers must qualify for mortgage insurance at an interest rate
that is the greater of their contract mortgage
rate or the Bank of Canada's conventional five-year fixed posted rate
• Re-financing cap of 80% LTV on non-insured mortgages
Amortization
• Maximum 25-year amortization on mortgages with LTV > 80%
• Maximum 30-year amortization on conventional mortgages
• Down payment of > 20% required for non-owner
occupied properties
• Conservative product offerings, fixed or variable rate options • Can include exotic products
• Much less reliance upon securitization and wholesale funding (adjustable rate mortgages,
Product • Asset-backed securities not subjected to US-style off-balance sheet interest only)
leverage via special purpose vehicles
• Terms usually 3 or 5 years, renewable at maturity • 30-year term most common
Underwriting • Extensive documentation and strong standards • Wide range of documentation
and underwriting requirements
48Housing Policy Developments in Canada
Consistent policy initiatives to maintain a balanced and sustainable market
2018 2017 2016
• Ontario: Elimination of rent control on • Ontario: 16 measures aimed to slow • Canada: Qualifying stress rate for all
new rental units first occupied on or rate of house price appreciation new mortgage insurance must be the
before November 1, 2018 greater of the contract mortgage rate
Key aspects include: or the Bank of Canada's conventional
• British Columbia: Extension of the
o 15% non-resident speculation tax five-year fixed posted rate
Property Transfer Tax on non-resident
buyers. Investment of more than $1.6 o Expanded rent control to all private • Low-ratio mortgage insurance
billion through FY2021 toward the goal rental units in Ontario eligibility requirements updated for
of building 114,000 affordable housing lenders wishing to use portfolio
o Vacant home tax insurance:
units in the next 10 years
o $125 million five-year program to o Maximum amortization 25 years
• Canada: OSFI imposes more stringent encourage construction of new
rental apartment buildings o $1 million maximum purchase price
stress tests for uninsured mortgages,
including a minimum qualifying rate at o Minimum credit score of 600
the greater of the five-year fixed o Property must be owner occupied
posted rate or the contractual rate plus • Elimination of primary residence tax
200 bps, effective January 1, 2018 exemption for foreign buyers
• Minimum down payment on insured
mortgages on homes valued $0.5–$1
million increased from 5% to 10%
• British Columbia: 15% land transfer
tax on non-resident purchases in
Metro Vancouver introduced
49Appendix 3: Key Market Profiles
Canadian Economy and Financial System
Stable economy with sound financial system
CANADIAN ECONOMY STRONG FINANCIAL SYSTEM
• The 10th largest economy in the world, • Effective regulatory framework
with an outward orientation o Principles-based regime
• Economy diversified, with particular o Single regulator for major banks
strength in services, primary industries, o Conservative capital requirements
manufacturing, construction, o Proactive policies and programs
and utility sectors • Risk-management practices
• Proactive government and central o Prudent lending standards
bank that have begun unwinding o Few sub-prime mortgages
exceptionally accommodative o Relatively little securitization
monetary policy o Primarily originate-to-hold model
• Manageable government deficits • Canadian banks well-capitalized
and debt burdens and profitable
• Strong growth outlook, with firm
commodity prices, resilient consumer
activity, and solid U.S. demand for
Canadian goods and services
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