BNS - Bank of Nova Scotia (BNS) RBC Capital Markets Global Financial Institutions Conference Call Transcript

2023-03-07 18:06:01 ET

Bank of Nova Scotia (BNS)

RBC Capital Markets Global Financial Institutions Conference

March 07, 2023, 15:20 ET

Company Participants

Rajagopal Viswanathan - Group Head & CFO

Conference Call Participants

Darko Mihelic - RBC Capital Markets

Presentation

Darko Mihelic

Okay. Great. Thank you. Good afternoon, everybody. My name is Darko Mihelic. For those you who haven't met me, I'm the research analyst in Toronto covering the Canadian banks, and I'm -- it's a pleasure to have the CFO, Raj Viswanathan here from Scotiabank to speak with me this afternoon.

Raj, we recently went through earnings season. So this is going to sound a little bit like a bit of a repeat from what we talked about recently during earnings. But bear with us, while we go through this, and hopefully, we're try and sneak in a few longer-term questions in there as well. But again, thanks for joining us today.

Rajagopal Viswanathan

No. It's my pleasure, Darko. It's always a pleasure talking to you. So we can do it monthly, absolutely.

Question-and-Answer Session

Q - Darko Mihelic

Okay. That sounds good. I'll take you up on that. So when we saw earnings last week, one of the things that always stood out to me to many people is the corporate segment had a tough quarter. A lot of the rate marks are in there. So I thought maybe we can revisit and it's very topical today. We heard all day-to-day lot talk about NIMs compressing and expanding deposit betas and so on.

So I thought maybe we could start off the discussion with net interest margin. Talk about how that runs through your corporate segment? And what the expectations are for the next little while on that, maybe fine-tune some of the discussion we had in the earnings call?

Rajagopal Viswanathan

No, thank you. Happy to do that, and good afternoon, everybody. I think the corporate segment, like you mentioned, had in what I would call an outsized number, which is about $334 million of loss this most recent quarter, which is Q1 of 2023. And the way transfer pricing works in our bank is the cost of funds remains in the corporate center and it gets transfer price to the business.

And there are a few reasons we have done this for a long time. Some of it is to maintain the stability of the margin and stability of the pricing that we need to do in the business lines. But more importantly, this quarter was impacted simply because of the level of term funding cost that has grown in line with rate curves that we've all seen in the forward rates and so on, exponential growth. And simply put, I think our liabilities reprice faster than our assets reprice. When the assets reprice in the business segments, the other segment gets paid, the losses will come down. It's not going to happen next quarter, to be very clear about the near term that you asked me.

I think the next quarter will have challenges, which were impacting Q1, like we called those 3 elements externally. Our term funding cost, which tracks the forward rates because we do borrow from the wholesale funding market. The second thing which we have is we do have an active hedging program, like many people know. And part of the hedging program benefits, which were higher last year, are lower this year because these swaps fall off as the benefits from previous year has come off. So that's a headwind when you think about it year-over-year.

And finally, there's a tailwind because we do invest in the investment securities as part of our liquidity portfolio, which are returning higher because it also tracks the rate curve and the changes that have happened in the rate curve. So we're getting paid more than what we got paid last year. But it's not entirely offsetting it.

The $334 million also reflects in previous years, go back to 2019, for example, when we also had rate increases, not at the same velocity that we have seen more frequently, we had a bigger loss in the other segment, except it was muted, because we had investment gains to offset it. If you look at just the net interest income line in the other segment, the whole year was a loss of almost $1 billion. It was $984 million for the whole year. So call it, $250 million a quarter. Now it's higher because of the velocity and volume of rate increases that have come through, the losses that are seen -- And frankly, we don't have the investment gains to offset it in this quarter.

So that's kind of how the various parts have played out. It's not secret to a lot of people, who follow the bank that we are positioned to benefit from declining rates rather from increasing rates. And some of it is our balance sheet structure, the way we fund the business mix that we have on the asset side, which tends to be more secured loans, a lot of mortgages, a lot of auto loans as well, which we call secured in Canada for sure. And we have very little unsecured loans.

So the repricing of the loans definitely lags because these tend to be 5-year loans and so on, and the repricing happens over a period of time. And we did disclose a lot of it in our analyst deck when we talked about the repricing schedule, particularly of our mortgage book, to help readers understand that this is how it's going to reprice, like 9% will reprice in '23, another 9% in '24, and then there's a huge 50% repricing happening in '25. So it's about a bit of timing lag for us and the time lag shows up in the other segment.

The net interest margin of the bank to address that, it did compress 7 basis points quarter-over-quarter, primarily driven by these factors. The business line margins have generally remained stable, both in the Canadian Bank and the International Banking margin compression really related to how inflation impacts net interest margin, which is very unique to places like Chile, which you don't see in Canada or the United States.

So a bit of a summary there, whatever shows up relates to the all bank and most of it relates to the term funding costs.

Darko Mihelic

And so when I think of that, and I followed Scotia for some question time and you mentioned the interest rate, the lack or the less benefit. That's something that you don't hear a lot of from other Canadian banks. And also as well, I think you guys may be reassessing sort of your deposit franchise. So as I think of it, can you talk about some of the things that are going to change going forward and some of the thought processes around how you manage your interest rate risk and your margin at Scotiabank?

Rajagopal Viswanathan

Sure. I think like I mentioned, the fact that we will not benefit when you have inverted yield curves, which we haven't seen in 40 years and the velocity of rate increases, what is showing up. But that will be the tailwind in 2024. And the tailwind will come perhaps even in the latter part of '23, depending on how the rate curve evolves. If rate increases stop, we're going to start benefiting, because the asset repricing will continue while the liability side of the funding side has stopped. So we should start seeing tailwinds.

But learning from this, we talked a little bit on the call, we talked a little bit in your RBC conference when Scott sat down with you, is we want to use this as an opportunity to see how can we build our deposit franchise. And a lot of it comes down to focusing on the customer more importantly. We do know that all deposits are not the same and are not created the same when you look at it from a liquidity perspective. But deposits, I believe, are good at all times, -- and the economy is doing well, it's not doing well or if it's in volatile environments like we live now. It makes it much easier to manage the asset side of the balance sheet and therefore, margin compression and so on.

Now easier said than done, I'll acknowledge that straight away, right? Because if it is easy to be done, we could have done it. But our intention is to make progress and hopefully, we can talk more about it at the Investor Day, which we expect to have later this year to lay out a little bit more about not about the what, which people know, about the how. But it will be a longer-term journey that we expect to see progress going forward.

Darko Mihelic

Okay. Okay. That's very useful. Does it require a big investment? And if you don't want to outline the size, but should we think about that as a big strategic investment of time, people and money to really go down the path of altering the deposit actions?

Rajagopal Viswanathan

We haven't sized it as yet, which is why I said we have to talk about the how maybe in about 6 months' time or so when we put out the Investor Day. But what I will tell you is since that will be a number one priority, we will direct our investments to that. So we'll put in the necessary investments to make that happen. Investments to us is always about prioritization. If this becomes the number one priority, which I believe it is at this time and something would be 2 and 3, something will fall down the line, which probably was higher up today.

And we got to repurpose the money that we reinvested in those and move it up to this initiative. But this initiative is also branded more as a customer-centric initiative rather than just a deposit acquisition initiative. So it's more about thinking of the customer profitability as a whole and how do we put deposits in the center of that. So that way, we get the holistic relationship with the customer and therefore, improve the customer profitability. That's how we are approaching this.

Darko Mihelic

Okay. All right. That's interesting and thank you for that. Now one of the things that came out last week as well was making sort of expense growth and expense control, a bit of a focus for 2023. And I think you provided a bit of a range for investors. So when you provide a range, we always think, well, actually gets you and you decided that range. So maybe let's talk a little bit about the inflationary environment and other things that may pop up or crop up this year, that could potentially cause push and shove that range around? Or do you feel absolutely confident you could stick within that range you guys provided?

Rajagopal Viswanathan

Yes. I think this is one of those years where it's going to be more challenging than normal years. Inflation is one thing you mentioned, prioritization, we just talked about the initiatives that we want to invest in. We have a new CEO. We have to support his strategic vision as we go forward starting this year. So lots of things are different this year. But one thing I'll tell you for Scotiabank, one of the cornerstones of the bank is we know how to manage expenses in line with revenue growth and we know how to manage expenses prioritizing where we want to spend it. I think we've done it for decades. We'll continue to do that.

It's never easy. So I'm not going to leave you with the impression that it's an easy game that we know how to play. We know it's difficult, and it will only get more difficult in an inflationary environment. For us, there are many initiatives we work on apart from prioritization and growing revenue and so on. People cost is the largest opportunity, like apart from technology. And people cost is an opportunity that is available to us very frequently. Natural attrition is an opportunity, right? We have natural turnover that happens across all our businesses. We use that as an opportunity when we have to find some savings.

When we think about this year, I talked on the call about, this quarter was about 3.5% expense growth year-over-year, excluding FX, which is a factor for us, because there's a number of countries we operate in, that I think is a damn good outcome considering the inflation, both in Canada as well as in some of these economies you operate in Latin America where you very easily have high single-digit inflation even in normal times. Productivity ratio of International Banking, for example, has been declining, because we're always focused on how to become more productive and therefore, have a better efficiency ratio.

Digital is a big component. Digitalizing the adoption rate, bigger country like Chile has been very high. So that has helped us bring the expense base down quickly in Chile. And if Diego Masola was here, who's the Head of our Chilean operation, we're very proud of the progress he has made. Likewise, we have progress in multiple parts within the international banking space. Take the Pacific Alliance, which is the 4 countries we talk about. Productivity ratio there is in the mid-40s range, but we've done it mostly through digital adoption over there.

So there are many levers that we work on to ensure that we're continuously focus on expenses, whether we have good times, challenging times, like what we're going through now. Revenue challenged environment, excess revenue environment doesn't matter. I think if you're constantly focus on expense, which is the DNA of Scotiabank, we tend to get it more right than otherwise. I think this will be one of those years as well.

Darko Mihelic

Yes, it's always just surprising, working in high-inflation environments that you can control. It's just always -- it's as long as I've known the bank that's been [indiscernible]. So -- and so speaking of the IB, International Banking, IB will be determined -- strong quarter compared to last year, I was surprised actually. There was some quarter-over-quarter NIM compression. How dependent is it on short-term rates in the region? And what should we think about with that with respect to IB?

Rajagopal Viswanathan

Yes. International Banking rate situation is likely normalized, okay? Higher, but normalized in some respects. We're seeing some rate increases coming through both in Mexico and in Colombia, and they positioned differently. Mexico rate is actually good for our balance sheet. Colombia is not so good, okay? So it's a bunch of countries, not everything is the same, and it reacts in different ways like I just described.

International Banking NIM, the most recent compression was all relating to the impact of inflation in Chile. The way it works in Chile, we have inflation-based pricing, inflation goes up, will expand, inflation starts contracting year-over-year, you'll see compression. That's what you saw this quarter. I think that's mostly done because Chile is the biggest contributor to inflation and therefore, into net interest margin impact. So I think the 400 basis points that we reported this quarter is likely the trough. I don't know how quickly it will grow.

International NIM is complicated in the best of times, as you know. There are so many factors. There are rate caps. There are multiple factors that impact NIM. So what we try to do is say how stable can we keep it and progressively improve it. Business mix makes a difference. We used to be about 65%, 66% secured going into the pandemic. Out of the pandemic today, we're about 73% secured. So that reduces NIM as well, but so does the PCL ratio of International Banking.

It was 96 basis points this quarter. We like it. We had indicated it will be mid-90s. Is 100 basis points out of range? No, from our perspective, because we used to be at 130 to 140 basis point PCL ratio. So we feel good about how the quarter shaped up. I think it's the beginning of a series of good results we should expect from the International Bank. It's become a universal banking operation in all these countries.

We talk a lot about retail, because very topical, high margin tends to be the area of focus for a lot of our investors. But GBM, LatAm contribution was $301 million of the $661 million this quarter. That's part of the investment we've made over many, many years in the LatAm franchise for the wholesale bank. And of course, retail has done very well quarter-over-quarter. And so has treasury because all these banks have their own treasury groups or whatever they expect it to manage liquidity. And from time to time, we find opportunities to either improve the NIM or just find investment gains with the bond portfolio we have.

And this is one of those quarters where all of them contributed very well. And I see that continuing in Q2, 3 less days and all that apart because of February being a month in between for our Q2, I see that trend continuing. And the NIM continuing to expand.

Darko Mihelic

Despite the mix? Despite the shift to the secured lending I mean, have you stopped that shift? Or will that shift sort of keep creeping?

Rajagopal Viswanathan

I think it's been stagnant around 72%, 73%, Darko since COVID. I think it will remain around those levels, because you're also seeing unsecured retail starting to grow because not all of it is driven by risk appetite changes. Some of it is simply driven by consumer preferences, right? Coming out of the pandemic, a lot of demand for mortgages. because people wanted to, I guess, build homes, because working from home is a concept in those countries, too. So we saw that demand. We kind of reacted to that demand, and some of it is our own risk appetite changes in certain sectors within those countries. I believe the mix will remain around the 72%, 73% range secured. So the NIM should be stable and then grow from here.

Darko Mihelic

And when I think of that, I mean, we used to talk about a certain range of earnings power. We started off at 500. Once we get to there, we're kind of satisfied. Maybe you guys have sort of backed away from that kind of discussion? How should we think about the earnings power? Where it should be for IB, all things?

Rajagopal Viswanathan

I think so. Instead of speaking in absolute terms of what we're starting to talk about internally is we want IB to be between 20% to 25% of the earnings of the bank. Because as we sold some of the businesses, as you recall, in 2018, '19, we invested a lot in wealth management. So our wealth management earnings have grown. Like I mentioned, as much as IB is 20%, 25%, half of it will come from what we would call commercial and corporate. So the retail segment will be in the big scheme of things likely around the 10% range, which we think is the right range that we'd like to operate at.

So depending on where the bank is, you could do the 10% rather than thinking about it in absolute terms, because corporate and commercial may grow faster going forward than retail. But is the business mix and the diversity within International Banking that we like.

Darko Mihelic

And so when we think about that, though, I mean, the GBM component, it's growing, you've invested quite a bit in. Could that not add a lot of volatility going forward? Or how should we think about that?

Rajagopal Viswanathan

I think it could, if it was mostly capital markets, right? Because a lot of it is our corporate lending book. Go back to the genesis of how we go to Latin America. We followed our corporate customers down, right? We went to Mexico and then eventually mining Peru, Chile and all these places. So it's in line with the bank's focus on the corporate lending book. That's where we have grown really. The capital markets is a client-focused approach saying, if you're going to be the corporate lender, we'd like to be in the league tables and so on, because we've established a relationship.

Would it be $300 million in Mexico? It won't be, Darko. There's always some opportunities to your point that we have volatility in these kind of countries that we are there to capitalize on it. I think a closer run rate for the rest of this year, we will likely around the $250 million. But it will be more stable than you think, because it's driven off the lending book.

Darko Mihelic

Right. So maybe shifting gears to capital. It disappear, but don't worry, I know what they are.

Rajagopal Viswanathan

[Indiscernible] you can use it.

Darko Mihelic

So shifting gears to capital. Let's talk a little bit about some of the pluses and minuses to capital as we sort of go forward. And one of the things that's been coming up is I'm getting a lot of inbounds on -- and this is not so much for your bank necessarily, because you have more standardized. But a lot of inbounds on risk -- credit risk migration and RWA pressures. Maybe this is more for Canada than it is for IB clearly, but maybe you can talk a little bit about that potential pressure and any of the levers that you can pull because we know we saw the DRIP come in for Scotiabank.

So we're going to be building capital now at a faster pace. Was RWA migration part of that thought process? Or maybe you can talk a little bit about some of the threats to the capital ratio going forward? And if credit risk migration is, in fact, a threat?

Rajagopal Viswanathan

No. It is a good question. Capital has got too many moving parts, right? I think in good times, it has and now with all the new rule changes coming in, which we adopted in Canada as of February 1 makes it more complicated for readers to follow. When Scott committed to 12% in the meeting that you had, he did not contemplate a DRIP discount, to be clear, because we knew we had a path to 12% the way we think our internal capital generation will flow for the rest of the year and likewise, how much will consume for what we call organic RWA growth.

This quarter, you saw we generated about 5 basis points for the quarter, so x4, 20 basis points. And we picked up through the implementation between 20 and 30 basis points that we talked about, which will show up in the Q2 ratio. So you put those together, it gets you to 12% from the 11.5%. RWA migration has actually been a positive in the last 3 years. All the disclosures what we call book quality, which is disclosing the right sub pack, shows you it's a credit. RWA migration will become even more complicated looking forward because of the new Basel rules where you have the standardized floor, you calculate standardized capital, apply the floor and so on.

So hypothetically speaking, you may not see any RWA migration relating to real credit migration that's happening, because standardized as we know is non-risk sensitive over there. I'm speaking 2, 3 years down the line. What we always contemplate is some level of migration in our forecast to see how it evolves. The biggest advantage we have, you talked about International Banking and retail being standardized. So it's kind of there. It doesn't matter about the migration from a capital perspective.

When you think about Canada, think about the GBM book that we have, which is our corporate lending book. Two factors which play in our favor, very high-quality GBM book. We tend to have low PDs, 91% plus is in the less than 50 basis points range. And likewise, in the Canadian retail book, we tend to be more secured than our peers. We tend to have a very small unsecured book. And the quality, again, looking at it from a PD's perspective, we have the same percentage in the top 3 PD bands than our peers.

So being in the same credit quality across the book, while having a more secured book, it feels like in the event you have a recession or you have some level of credit migration, it should have a smaller impact to us relative to our peers as well as in absolute terms for the bank. It's not the past history has actually proven that most of the credit losses we saw came in from International Banking, retail and one of the consumer lending books, which was in Peru mostly. And that obviously we're getting out of the business. We definitely dialed it down. We still haven't closed the transaction to sell it. So that should also help as we look forward at the level of impact in the event of a recession on the credit book should be minimal for us.

Darko Mihelic

Okay. All right. Great. And wanted to shift gears now and I'll talk a little bit more about Canada. So topical news in Canada is house prices are falling and interest rates are significantly higher. And of course, there's negative amortization out there on some mortgages and some mortgage books. Your bank is different. Yes, we know you've got -- so maybe because you're different, I always think, well, I'd like to see how you guys are -- how is that portfolio performing? How are the discussions going with customers?

Maybe you can provide us some insight on some of the delinquency trends we're seeing? And again, maybe you can reiterate, how you view that portfolio is different? And in your view, you've mentioned many times that you think it's better than the existing variable rate mortgages that are out there. So maybe you can touch on this and wrap it all up for us? And you got 2 minutes.

Rajagopal Viswanathan

I'll do it as quickly as I can because it's a good news story, I'd like to talk about it for 5, if I can. I think our variable rate mortgage, like you mentioned, is a truly variable rate mortgage. So payments change with rate increases going up. So we have a lot of early insight into -- in the event that is stressed in the portfolio. What we are seeing and a couple of metrics I'll throw out as we talk about peers and how we compare ourselves. In the 90-plus delinquency bucket, we have it significantly lower than our peers, although we have a big variable rate book.

Our variable rate book is about 37% of the book, 63% happens to be fixed. That's been fairly consistent. What we also know about our variable rate borrower, they tend to be a better inform borrower and a higher-quality borrower. And how do we come to that conclusion? We actually can see where they have a banking account with us and not all of them do. You can see it through how they manage their finances, where they get the revenue and so on. So we are able to stress it.

So part of the examples we look at towards stress testing is, so what if the rates went up 25 basis points from now, let's say, from ? What's the impact? 47% of our borrowers have a $100 impact to their variable payment monthly, okay? So I'm assuming mostly it's manageable because the average earnings of these people happen to be around $7,000 a month.

So $100 in relation to that is not a big number. And that's been fairly consistent. So then you stress it another 25 basis points, another 25 basis points and so on. By the time we get to an inflation situation, which might be, let's say, 7.5% as part of the inputs we have and we have rate increases going up to, say, in Canada, we believe that they're still very well positioned, but they have enough cash flow to service your mortgage.

So that's the quality of the book that we have, okay, on average. But we know the risk is always in the tail, right? It's not in the average. So when you looked at the tail, we said, okay, how big is our tail? And without giving out absolute numbers, our tail is actually, let's call it, 2.5% of the entire mortgage borrowing book. That's not just variable, all booked together. And 2.5% of the tail. And in that, we look at saying, those are the people who we call the watch list. So it's about 17,000 borrowers. 17,000 borrowers is you've got to look at it in relation to what it used to be pre-COVID.

We used to have 30,000 borrowers in that list of watch list. So it's still only about 60% today, right, with the exceptional high rate increases on the level of cash that they have. And out of that, we look at it and saying, okay, who could be at high risk or default, the people who have high LTV and likely have significant exposure to rates, how they move. And that's about 30 basis points. So 0.3% of the entire portfolio happens to be in that or let's call it, 2,000 customers.

So when you boil it down for a book which has got $300 billion, what could be at risk or very high risk who we need to pay attention to? These people are all performing. They're still paying. They're not even close to being at default, but who we pay greater attention to is a very small percentage. The advantage for us because you have a truly variable product, you get to see how they actually are behaving in real-time situation. Unlike many of our peers, who might get to know when they come up for renewal, and they have to know service a higher mortgage or a higher payment, it feels very good with the quality of the book that we have and the likelihood of delinquency is quite low.

Darko Mihelic

An astonishing set of numbers with given all the rhetoric that's out there in housing park. What about the fixed rate portfolio? What about that as they come up for renewal in a couple of years, the ticker shock that might happen, should rates stay higher?

Rajagopal Viswanathan

I think we're seeing it already now, right? Because about 9% of our book is repricing, like I said. What we're seeing is 2 things, Darko. People are picking up the higher rates, because that's what's available. It doesn't matter where you go to. And what we're realizing is they're picking it up for a shorter term, 1 year and 2 years, and they're picking up fixed. Even people who are on variable, I'm saying, because I think the consumer sentiment is, don't know where rate situation is going, I'd rather take the fixed rate because I can manage my cash flow. And they're doing it for a shorter term because they do believe that rates will start coming down, and I don't want to hold on to a fixed rate for a longer term. Small percentage, but it's showing a certain consistent behavior from what we are seeing so far.

Now by the time it gets to 2025 and 50% of the book is going to reprice, if you're going to have exceptionally high rates, that's hard for me to speculate at time.

Darko Mihelic

Okay. All right. Fair. And let me just know we're already at time period here where I have to hurry. So I want to take a look at my -- apologies, my eyesight is not what it used to be, so I wanted to -- yes. I just -- I guess, with the limited time we have left, I think I'll just bounce off of the business just go maybe talk a little bit about PCLs in January.

So moving away from mortgages and thinking about provisions for credit losses all in, one of the things we saw with a little bit of a build in the quarter, a little bit of change to the outlook. As we move forward, we just had a pretty bad print in Canada on GDP. It wasn't, but it was weak. So presumably, there's a possibility that you wanted even to change your forward-looking indicators, but you've provided a pretty good range on PCLs.

And I want to think about the outer boundaries of that range. And maybe talk a little bit about, if you could, what gets you to the upper end? What are you concerned about? And could this happen pretty quickly? Or -- and quickly because of the Stage 2 and 1 or quickly because of the actual underlying impair? So what is it that you're monitoring right now with the Chief Risk Officer?

Rajagopal Viswanathan

Sure, absolutely. I think we gave guidance of mid-30s, which we actually did in November 2021. And we did it for 2 reasons. One is we wanted people to know how our risk appetite and our portfolio has changed because, traditionally, we had been between 45 and 50 basis points of PCL ratio. So we want people to understand, particularly International Banking retail, how we think it's going to play out going forward. And that stayed true in November 22, we confirmed that, the mid-30s, and this quarter was 33 basis points, which to us is exactly in line with where we thought we'll be when we gave the outlook in November.

We do think for the rest of this year, it will be around this range, maybe 33 will become 34, maybe it will become 35, right? We're not seeing big numbers which are changing. The one of the key factors, Darko, as you quite well know, is unemployment rates. Unemployment rates, both in the United States and in Canada for that matter, has been extremely low. So people have income coming in. People have been very judicious, particularly in the Canadian retail space that what we get to see where all they're doing is changing their spending patterns.

It used to be more travel and entertainment once COVID was done. Now it's moving back to groceries and day-to-day living. You're seeing that play out quite in spades actually with the data analytics that we have and been able to mine and stuff like that. So you're starting to see that, yes, there is stress because of high inflation, but no, we're not seeing it in the portfolio. Payments are still not delinquent, but are live and so on.

The performing loans we built or the allowances we built was primarily based on forward-looking indicators of macro. It's a prudent thing to do, particularly when you're getting into a situation, which it might be a little more uncertain than what we've seen in the past. Are we looking at it through the credit quality lens on saying, "I need more?" No. What we built was relating to volume growth, which we're continuing to see and of course, macro indicators.

Take the flip side, stress test that we run, as you would expect. We do a lot of stress test. I talked about the 25 basis points, 50 basis points on the mortgage book and so on. There's so many stress tests we run. The range that you get to see is generally not exceeding 40 basis points at the all bank level. And to us, it's not bad. If you think in a stress situation, it could be 5 basis points higher.

The challenge we have is, yes, you can stress anything to whatever number you want to get to. You want to get to a possible scenario. And maybe a lot of the benefit that we have with the credit quality and the secure nature of the book and the high-quality portfolio they have both in FICO scores and all that in Canada is probably playing out. The one X factor will always be unemployment. If unemployment, most of these stresses, we run between 7% and 8% to see how the portfolio will behave. Now if it gets to double digits, obviously, it will be significantly different than that. I'll leave it at that.

Darko Mihelic

Yes. No, fair enough. I mean it's just astonishing 40 basis points in a stress scenario. It's just -- that seems like a more normal level. But as you say, normal level far past. Well, we've run out of time. So I didn't get to all my questions. I apologize, but we had a great discussion. Thank you so much, Raj, for joining me and have a great rest of your time here in New York. I know you're here for the day. So...

Rajagopal Viswanathan

Thank you.

Darko Mihelic

All right. Cheers. Thank you.

Rajagopal Viswanathan

Thanks for your time. My pleasure.

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Bank of Nova Scotia (BNS) RBC Capital Markets Global Financial Institutions Conference Call Transcript