Incoming Scotiabank CEO sees room to refine international operations

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Incoming Bank of Nova Scotia chief executive Scott Thomson says returns from the bank’s international strategy have not matched the risks and that he sees an opportunity to refine the business line going forward.

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“We deployed a lot of capital into the international markets over the last 10 years, and the returns on that capital have not been commensurate with the risks that we’ve taken,” Thomson said during a fireside chat at the RBC Capital Markets 2023 Canadian Bank CEO Conference on Jan. 9. “There’s a lot of reasons for that … a lot of geopolitical reasons, a lot of macro reasons, a lot of execution reasons, but that’s something that we need to be really thoughtful about going forward.”

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Thomson, who assumed the role of president of Scotiabank in December and will become the chief executive in February, commended the work outgoing CEO Brian Porter and Scotiabank’s international banking head Ignacio “Nacho” Deschamps had done on the international business line, including “strengthening that portfolio, narrowing that portfolio and building up the earnings quality.”

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Thomson said there had been challenges in the unsecured international retail banking operations throughout the COVID-19 pandemic, but that performance had since improved. Unsecured lending is a bank speaking for loans that don’t require collateral. Credit card lending is a prime example of unsecured lending since the client can borrow without an asset as security to pay back the debt.

Thomson emphasized that the unsecured part of its international portfolio made up a relatively small portion of the bank’s operations.

“So, what I’m really talking about here — and it’s really important that people focus on this because our international business gets so much attention for sometimes the wrong reason — 2.5 per cent of the bank’s (net income after taxes) is in unsecured retail in Peru,” he said.

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Thomson added that given its lagging performance during the COVID pandemic, Scotiabank is selling one of its businesses there to reduce the unsecured mix further.

“We really need to align on how we’re going to run that unsecured retail business, and I do think there’s an opportunity to make that important in the context of it only being 2.5 per cent, but you can get higher rounds in that business if it’s done right,” Thomson said.

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He pointed to success in the Mexican market as a model to be emulated.

“I take Mexico as a shining example of where we should try to get to, you’ve got a great franchise there,” he said, adding there was an eight-per-cent market share and a return on equity greater than 20 per cent. “So, there’s an example of a great platform that we should aspire to have, and then great connectivity back to the Americas when you think about Canada and the US So, that’s an example of what we’re trying to do.”

Questions about whether Thomson would alter Scotiabank’s international strategy, which has frequently been blamed for the bank’s lagging share price, have swirled since he was first announced as its next leader.

“We have to assume that change will be coming,” Canadian Imperial Bank of Commerce analyst Paul Holden wrote at the time, noting that Thomson had been characterized as an “agent for change” during his time at Finning International Inc.

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The heads of Canada’s other big banks also shared their economic forecasts at Monday’s conference.

Dave McKay, chief executive of the Royal Bank of Canada, said the bank is sticking with its call for a modest recession in 2023 and expects the unemployment rate to creep up closer to six per cent.

“So, what we’re forecasting and our base case is a fairly significant increase in unemployment given the timing, maybe a mismatch between losing a job and finding a job as we see a kind of reallocation of human capital within our economy,” McKay told investors.

He added that the RBC loan default rate remained low, but that a significant uptick in unemployment could prompt the banks to set more funding aside for bad loans in anticipation that households could feel an economic squeeze.

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Toronto-Dominion Bank chief executive Bharat Masrani also downplayed the potential of a severe recession.

“I’m not suggesting that there’s a 100 per cent chance (of) no recession,” Masrani told the event moderator. “When rates go up so much, is there a slowdown to be expected? Yeah. But on the other hand, the job market has been remarkably strong and continues to be strong.”

Masrani added that while it’s not a benign economic environment by any means, everyone has their eyes on employment data.

Despite the Bank of Canada’s aggressive hiking cycle rate over the course of last year, December’s jobs report blew past expectations, with the economy adding 104,000 new positions in a sign of resilience.

“Are we seeing a depression here with some of the questions you’re asking me saying, ‘Oh, my God, the world is coming to an end?’” Masrani said. “We don’t see that.”

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