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The Bank of Nova Scotia (NYSE:BNS)
Q4 2017 Earnings Conference Call
Nov. 28, 2017 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Adam Borgatti -- Vice President, Investor Relations

Good morning, everyone, and welcome to Scotiabank's 2017 Q4 results presentation. My name is Adam Borgatti, Vice President of Investor Relations. Presenting to you this morning is Brian Porter, Scotiabank's President and Chief Executive Officer, Sean McGuckin, our Chief Financial Officer and Daniel Moore, our Chief Risk Officer.

Following our comments, we'll be glad to take your questions. Also in the room with us to take questions are [inaudible] business line group heads, James O'Sullivan from Canadian Banking, Ignacio Deschamps from International Banking and Dieter Jentsch from Global Banking and Markets. Before we start, on behalf of those speaking today, I would refer you to Slide 2 of our presentation which contains Scotiabank's caution regarding forward-looking statements. With that, I will now turn the call over to Brian Porter.

Brian Porter -- Chief Executive Officer and Vice President

Thank you, Adam, and good morning everyone. We're very pleased with the bank's results in 2017. Our team of 89,000 Scotiabankers has performed well to deliver these results, notwithstanding several catastrophic events that took place across our footprint. We're thankful that all our effective colleagues are safe and we are continuing to support our customers.

Consistent with our strategic agenda, or 24 million customers remain our core focus. Throughout the year, we implemented a number of initiatives that put our customers at the center of everything we do including a digital customer experience management system that provides us with rich feedback from our customers. We continue to make progress on our digital transformation. A good example is our digital factory network which became fully operational in Canada, in the Pacific Alliance in 2017.

The network is integrated and we leverage our international scale and diversity of talent across our footprint. It is also a driver of internal innovation in our digital targets. Our increased attention to the business mix has yielded good results on both sides of the balance sheet. Our focus on deposits in retail, commercial and corporate segment has reduced our wholesale funding ratio by approximately 20%.

This has improved our funding profile and further strengthened our financial [inaudible].

In Q2 of last year, we announced our structural cost transformation program to significantly transform the bank's cost structure. For fiscal 2017, the first full year of this SCT program, I am pleased to report the bank generated savings of $500 million, well ahead of our target of $350 million for the year. Our SCT program helps to make the bank more productive and create capacity for new investments. Over the last few years, we have invested significantly in our leadership team.

We have strengthened the bank's leadership capabilities with an infusion of new leaders from other businesses, industries, and geographies. These new Scotiabankers have brought depth and a diversity of experience that meaningfully improves our bank's strength and effectiveness. Today, our teams are more performance oriented than ever before.

I will now shift and comment on our financial performance for the year. In 2017, the bank delivered strong results which were in line with our medium-term objectives. Earnings per share of $6.49, up 8% from 2016. And the return on equity was 14.6%, notwithstanding a 50-basis-point increase in our common equity tier one ratio.

We had very good positive operating leverage in our personal and commercial banking businesses offset by performance in our global banking and markets and other segments. As a result, operating leverage at the all bank level was flat for the year. In 2017, we raised our quarterly dividend twice, reflecting a 6% increase and well within our targeted 40% to 50% dividend payout ratio. Our net income of $8.2 billion for the year was supported by strong range across all 3 of our business line which Sean will discuss further.

In terms of risk management, we have maintained good credit quality throughout the year and our credit performance continues to improve. The bank remains well capitalized with a strong common equity tier one ratio of 11.5%. This provides us optionality for acquisitions, dividends, and share buybacks. And earlier this morning we announced a binding offered to acquire BBVA at 68% interest in BBVA Chile and its interest in certain subsidiaries for approximately US $2.2 billion.

The [inaudible] family which owns approximately 32% of BBVH Chile has a right of first refusal. BBVA is willing to accept our offer if the right of first refusal is not exercised. The offer values BBVA Chile at approximately 2.1 times price to book value and 18 times price to trailing 12 months [inaudible]. If the offer is accepted, the transaction would utilize approximately 100 basis points of our common equity tier one ratio.

Combining our operations would create Chile's fourth largest bank worth or third largest privately owned bank and would double our market share to 14%. This is consistent with our core strategy to invest in faster-growing Latin American markets with solid macroeconomic fundamentals, favorable demographics, and stable banking environments. We will provide further financial and business benefits on the proposed transaction when a final agreement is in place and we will respond during the Q&A portion of this call to any questions related to the offer or the process.

To recap, we are proud of this year's accomplishments. We have the right strategy and we have strong momentum to sustainably grow our businesses and earnings for our shareholders. I will now pass the call over to Sean to review the full year and the Q4 performance but will return to provide some additional comments on our outlook for 2018.

Sean McGuckin -- Chief Financial Officer

Thanks, Brian. I'll begin on Slide 6 which shows our key financial performance metrics for fiscal 2017. The bank entered this year with diluted earnings per share of $6.49, up 8% in 2017. All three of our business lines delivered a strong performance for the year.

Canadian banking was up 9% in 2017, reflecting a strong performance in retail and small business banking, commercial banking and automotive finance. The net benefit of higher real estate gains and lower net gains on the sale of businesses contributed 200 basis points of the growth this year. International banking delivered strong results, up 15% results. Results were driven mainly by the Pacific Alliance countries with higher net interest income and fees from good loan growth and lower commercial provisions.

Ongoing benefits from cost reduction initiatives also supported results.

Global banking markets rose 16% from last year, driven by results in the equities business related primarily to higher client trading activity. As well lower energy-related provisions drove improvement in credit costs. As Brian mentioned, all operating leverage was flat at the all bank level in 2017. We saw good performances in Canadian banking, the adjusted positive operating leverage of 2.1% and international banking at 3.3%.

Lower revenues and global banking markets and the other segments offset the previously mentioned strong results. The bank generated net additional savings of approximately properly 500 million in 2017 from a structural cost reduction program related to the restructuring charge taken in 2016. These savings are well ahead of the 2017 guidance of 350 million, resulting in expenses growing only 3%, notwithstanding a 14% increase in technology-related costs. Generating positive operating leverage remains a priority for the bank and we are targeting positive operating leverage in 2018.

Turning to the Q4 results, the bank reported diluted earnings per share of $1.64, up 4% year over year. Our core retail personal and commercial banking businesses reported double-digit earnings growth but global banking markets were down 15% year over year. Revenue growth was up 1% from Q4 last year. While net interest income was up 5% or 7% adjusting for foreign currency translation, from good asset growth and personal and commercial banking businesses, noninterest revenues were 4% lower.

This was primarily from [inaudible], lower trading revenues from a high-level last year and a reduction in real estate gain probably offset by higher securities gains. Expense growth was 1%, reflecting further investments in technology, digital banking, and higher employee-related costs. Partly offsetting were additional savings from cost reduction initiatives and lower expenses from the Philip Haswell and the impact of foreign currency translation.

The Q4 productivity ratio was 53.8%, an improvement of 30 basis points year over year. The credit quality of our portfolios remained very good and resulted in a 3-basis-point improvement in our provision for credit loss ratio. While the collective allowance against performing loans remained unchanged in Q4, an amount related to the recent hurricanes in the Caribbean was added, offset by reductions in other exposures, primarily energy.

On slide 8 we provide an evolution of our common equity tier one capital ratio over the last quarter. As mentioned, the bank continues to maintain a strong capital position with a common equity tier one ratio of 11.5%, up from 11.3% in the prior quarter and compared to 11% in Q4 of last year. Common equity tier one risk-weighted asset increased roughly 3% quarter over quarter and year over year. Internal capital generation contributed to roughly 30 basis points of capital improvement, partly offset by business growth.

At 11.5%, our capital position is strong, as Brian spoke to you earlier, provides the bank optionality for capital deployment.

Moving to slide 9. We provide some expectations around the adoption of IFRS 9 in fiscal 2018. As a reminder, the first set of IFRS 9 financial statements will not be released until fiscal Q1 2018 and there will be no restatement of prior period comparative statements. We expect the impact to shareholders equity and capital ratios from IFRS 9 to be as follows.

Transition adjustment to the opening balance sheet that will see a reduction in total shareholder's equity estimated at $600 million, primarily reflecting additional allowances for lifetime expected losses on performing loans including our share of the impact from the investments in associated corporations. This level of additional allowances is within the range we anticipated. This transition amount will result in a reduction in the common equity tier one ratio of approximately 15 basis points. Overall, our estimates are based on prevailing market and economic factors as well as forward-looking information.

We do expect slightly higher provisions in 2018 as a result of the adoption of IFRS 9 primarily related to portfolio volume growth, partly offset by benefits from our investment to enhance our collections capabilities. Overall, our underlying credit performance remains strong.

Turning now to the business line results beginning on slide 10. Canadian banking produced a strong quarter with net income of nearly 1.1 billion, up 12% year over year. As mentioned earlier, results include the gain on the sale of [inaudible] which contributed 7% of the net income growth. Loans and acceptances increased 6% from last year.

Residential mortgage growth was up 5% or 6% excluding the tangerine mortgage runoff book. Business loans are up a strong 13%. Deposit momentum continued with retail savings and checking deposit balances up 7% and 10% respectively. Small business and commercial operations also grew 9%.

Strong asset and solid deposit growth were coupled with a 2-basis-point increase in the net interest margin. Total revenues were up 5% from last year with net interest income increasing 7%. The increase was negatively impacted by 2% as lower fees and commission revenues due to the sale of [inaudible] business was only partly offset by the gain on sale. Provision for credit losses was relatively flat year over year and the loan [inaudible] ratio improved one basis point.

The improvement was broad-based across both retail and commercial portfolios. Expenses were well controlled and increased only 1% year over year. Higher technology and digital investments were partially offset by benefits realized from cost reduction initiatives. Canadian banking delivered strong positive operating leverage of 2.9% for the year or 2.1% adjusting for the net gains from the real estate and the sale of businesses, [inaudible] this quarter and the non-core lease financing business in Q2 of last year.

Turning to the next slide on international banking. Earnings of 605 million in Q4 2017 were up 11% year over year or 8% adjusting for the impact of foreign currency translation. Our Pacific Alliance business had a strong quarter, growing 13% quarter over quarter and 11% year over year, adjusting for the impact of foreign currency translation. Our Caribbean business was impacted somewhat by hurricanes.

However, hurricanes did not impact our larger operations in the Caribbean. As well, the earthquake in Mexico did not materially impact business. Our results included the hurricane-related impact of roughly $20 million of earnings primarily and lower revenues which were offset by a gain on sale of a portfolio of own assets in the Caribbean, primarily reported as a reduction in expenses.

Q4 results also included the impact of lower tax benefits and lower contributions from affiliates. Our underlying results continue to reflect strong operating performance including loan and deposit growth in the Pacific Alliance and very good expense performance. International banking grew loans by 7% in Q4 or 10%, adjusting for the impact of foreign currency compared to a year ago. On a constant currency basis.

the Pacific Alliance grew loans by 15% in Q4 compared to last year led by robust retail and commercial growth of 14% and 16% respectively. The good asset growth in international banking was supported by strong deposit growth, up 11% when adjusting for the impact of foreign currency. The net interest margin decreased 4.67%, down 10 basis points year over year. The decline was mainly driven by changes in business mix as commercial loan growth outpaced retail loan growth, the impact of lower inflation and lower funding benefits in certain markets.

We expect margins to be generally stable at these levels going forward, impacted by business mix and to a lesser extent inflation impacts. Loan losses were up 5% but overall credit performance remained well controlled and the loan loss ratio improved one basis point compared to Q4 last year. Expenses declined 1% but were up 2% adjusting for foreign currency translation. Higher volume and inflation costs and increased technology and digital investments were mostly offset by the positive benefits of expense management program.

For 2017, operating leverage was strong at positive 3.3%.

Moving to slide 12, global banking and markets. Net income of 391 million was down 15% compared to last year. Higher contributions from equities and Canadian core banking were more than offset by lower results in fixed income and precious metals. All bank trading revenues on an [inaudible] basis were down 30% year over year.

Total corporate loan volumes were down 2% versus Q4 last year. However, this was mostly offset by a higher interest. Revenues were down 7% year over year, reflecting lower loan origination fees and lower fixed income and precious metals trading revenue. Provisions for credit losses of 8 million was down from 39 million in Q4 last year and the loan loss ratio was 4 basis points.

Quarter over quarter, the loan loss ratio improved 17 basis points. [Inaudible] growth was up 7% year over year, driven by higher regulatory and compliance cost as well as technology [inaudible].

I'll now turn to the other segment on slide 13 which incorporates the results of group treasury and smaller operating units and certain corporate adjustments. Results include the net impact or [inaudible] management activity. The other segment reported a net loss of 48 million this quarter. Earnings in the segment were down from a net loss of 23 million in Q4 last year.

Results reflect lower net gains on investment securities and lower real estate gains, probably offset by a reduction in expenses.

This completes my review of our financial results. I'll now turn it over to Daniel to discuss risk management.

Daniel Moore -- Chief Risk Officer

Thank you, Sean. I'll begin on slide 15. We continue to remain comfortable with the fundamentals of the bank's risk portfolios. Results this quarter are within expectations and we saw the loan loss ratio improve to 42 basis points, down 3 basis points both quarter over quarter and year over year.

Looking back at our guidance of a cumulative energy loan loss ratio over the period of 2015 to 2017 of less than 3%, we have outperformed with a loss ratio of 2.1%. The energy portfolio had stable performance throughout the year. Overall, we are seeing improvements in the [inaudible] ratios across our personal and commercial banking businesses in Canada and internationally. Specifically, in Canada, delinquency rates improved from [inaudible] across all of our retail product categories including auto lending.

On product, our loss rate in residential mortgages remains minimal at one basis point. All lines of credit, personal loans and credit cards, all improved quarter over quarter. Our residential mortgage portfolio remains high quality and lower risk, 49% is insured and the uninsured portfolio has a loan to value of 51% on average, providing substantial equity buffer. As well, new originations this quarter reflect average LTD of 64%.

Moving on to international banking. We continue to see good credit quality trends. The retail performance was generally stable across the Caribbean and the Pacific Alliance countries. Last quarter the exception was Colombia but we saw the portfolio improve PCL ratio over 110 basis points quarter over quarter.

The national catastrophe did not have a significant impact on specific provisions recorded in international banking. As Sean mentioned earlier, the bank did allocate a portion of its existing collective allowance against performing loans to the impacted portfolios while reducing other exposures, mostly energy, in the collective allowance.

Now, looking at our credit metrics. Growth impaired loans were down 1% quarter over quarter, reflecting improvement in Canadian banking and global banking and markets as well as commercial exposures in international banking. Similarly, our net interest loans in terms of percentage of our portfolio improved one basis point quarter over quarter and 6 basis points year over year.

Turning to slide 16. You can see the recent trend in loss rates for each of our businesses. We are reporting broad-based improvement with loan loss ratios improving year over year across all of our portfolios including retail, commercial and wholesale exposures. Overall, we believe our credit portfolios continue to reflect broad diversification and notwithstanding the expected impact of early adoption of IFRS 9 standards [inaudible] our underlying performance remains strong.

I'll turn the call back over to Brian.

Brian Porter -- Chief Executive Officer and Vice President

Thank you, Daniel. I'd like to provide some thoughts on our outlook for next year. As I mentioned earlier, we are very pleased with our performance in 2017 and the bank's accomplishments. We're in a strong position as we head into 2018 and we expect to see good growth in each of our three business lines as economic conditions continue to improve.

We have made good progress against our digital strategy and the targets we set at the beginning of the year. Global growth is strengthening and for the first time since the global financial crisis, balanced global growth between industrialized and emerging market economies is expected. We expect the Canadian and US economic backdrop to remain positive. In the Pacific Alliance, we expect to see improved GDP growth in the range of 2.5% to 4%, led by Peru and Chile.

With this context as a backdrop, I will now turn to the outlook for businesses for next year.

Canadian banking is executing a strategy of delivering an excellent customer experience and growing primary banking relationships. More specifically, James and team are reducing the structural cost to create investment capacity that will drive shareholder value, leveraging digital to improve our operations and enhance the client experience and drive digital sales. And continuing to optimize business mix by growing higher-margin assets, building core deposits and earning higher-fee income. We expect to see good volume growth in both lending and deposit products for our retail and business customers and margins also have the potential to improve during 2018.

Operational improvements will continue to be a sharp focus that will drive positive operating leverage leading to productivity gains. Overall, in 2018 we expect another strong financial performance from Canadian banking building on the momentum that we established in 2016 and 2017 and in line with our guidance of 6% to 9% earnings growth. International banking will continue to execute on its strategy focused on growing in the Pacific Alliance countries and optimizing operations in the Caribbean and Central America. The key priorities for Ignacio and his team in 2018 include using our customer experience system to drive further improvements and systematically gathering feedback from our employees on how to better serve our customers.

Progressing further on our structural cost programs while focusing on developing new capabilities across the bank. And thirdly, scaling up our digital banking units across the network to drive digital sales on priority products and accelerate digital adoption in transaction migration.

International banking's earnings growth in 2018 will be driven by the Pacific Alliance countries as impacts from natural disasters unwind. We also expect private and public investment to pick up as the region benefits from strengthening in the global economy. While elections in Chile, Colombia and Mexico and the ongoing NAFTA discussions creates some uncertainty, we have a track record of managing through periods of changing geopolitical conditions. With a positive outlook for the Pacific Alliance, we continue to expect double-digit loan growth with generally stable margins and credit performance.

Expense management is a key priority and we expect to deliver positive operating leverage in 2018. We remain confident in the medium-term growth outlook for the international bank which calls for constant currency earnings growth of 8% to 10% and in the Pacific Alliance growth of 9% to 11%.

Turning to global banking and markets, the business recorded a better year with net income of 1.8 billion as the business continues to execute on a more focused strategy under [inaudible] leadership. We're investing in the business and adding resources to investment banking including growing our Latin American investment banking and capital markets capabilities. [Inaudible] and his team are sharply focused on executing on their, strategy reducing structural costs and investing prudently in technology to enhance the customer experience and improve the efficiency.

In summary, the bank remains confident in our medium-term financial objectives of earnings-per-share growth of 5% to 10%, return on equity greater than 14%, positive operating leverage, and strong capital levels. With respect to operating leverage, our structural cost transformation program delivered on more than 500 million of savings in 2017, exceeding our previous guidance. We will actively manage your SCT program over the next 2 years along with prudent investments in our business and revenue growth to meet our productivity target of 52% by the end of 2019. Over the next two years, we expect to generate approximately 200 basis points on average, a positive operating leverage.

We're pleased that we've built our common equity tier one capital ratio to a strong level of 11.5%. As I said earlier, this provides us with good optionality for capital deployment including investments in organic growth, acquisitions, buybacks as well as an ongoing dividend increase.

I would also like to comment on the outlook for our technology and digital-related investments, a key consideration to improving the bank's productivity and delivering a better customer experience. Technology expenditures in 2017 amounted to more than $3 billion representing approximately 11% of our revenues. This is in line with our global peers and is up 14% from last year. We expect growth in technology and digital expansions to mark moderate somewhat in 2018.

As we continue our strategy, we are delivering improved financial results and our business momentum is growing, all of which positions us well moving forward. We're also very pleased with the progress we made on our journey to become a digital leader. We've hired some great new people, have strong leadership in place and are doing many exciting things across the bank and we look forward to hosting our All-Bank Investor Day on February 1 here in Toronto where we will provide a comprehensive review of our strategies and priorities.

I will now turn the call back to Sean for Q&A.

Sean McGuckin -- Chief Financial Officer

Thanks, Brian. That concludes our prepared remarks. We'll now be pleased to take your questions. As usual, please limit yourself to one question and then rejoin the queue to allow everyone the opportunity to [inaudible] space in the call.

Operator, can I have the first question on the phone.

Questions and Answers:

Operator

Your first question comes from Gabriel Dechaine, National Bank Financials.

Gabriel Dechaine -- National Bank Financials -- Analyst

Good morning. Can you hear me?

Daniel Moore -- Chief Risk Officer

Yes.

Gabriel Dechaine -- National Bank Financials -- Analyst

Okay. I just have a couple of quick ones of BBVA. Firstly, you've given some guidance on the quarter tier one adjustment [inaudible] buying 70% or 100% of this thing. I just want to confirm what's underlying those assumptions.

You're not intending to issue any new equity to finance. This would be an excess capital finance transaction.

Daniel Moore -- Chief Risk Officer

Yes, that is our intent to fund with existing capital.

Gabriel Dechaine -- National Bank Financials -- Analyst

Okay, great. And then broadly, I guess, how do these businesses compare. We see the loans and all that and then the branch number. Just wondering how they fit strategically into one another and then from a synergy standpoint, I see over the past few years your Chilean operations have had quite a substantial improvement in mix ratio.

And BBVA happens to have quite a few more employees and quite a few more branches. Are those business differences are something you can't really change or if this is an adjustment that would lead to pretty material synergies on a combination.

Brian Porter -- Chief Executive Officer and Vice President

Gabriel, it's Brian. We're going to have to wait and we'll have another call in due course assuming we get this done and we can talk about the quality of the assets, accretion of synergies, all those things but we want to talk about what I think you want to hear about but I would reiterate that this is a high-quality asset bank, it's very well run, risk appetite would be very similar to Scotia and we think it's a good set of assets, will be a good set of people and technology. We've done extensive work on this, we know the asset very well and will have more for you to discuss in the future.

Gabriel Dechaine -- National Bank Financials -- Analyst

Well, if not the accretion numbers, where's the overlap in the businesses, are they strong in the market which you're not specifically?

Sean McGuckin -- Chief Financial Officer

Yes. Well, both banks have a 7% market share. The most important impact of that would be of course very valuable [inaudible] greater scale. It would be a 14% bank and we have a portfolio due to the [inaudible] acquisition which has a larger unsecured lending but I would say, as Brian said, it's quite complementary and there is a very strong [inaudible] to our strategy.

Gabriel Dechaine -- National Bank Financials -- Analyst

Okay, thank you. Have a good day.

Brian Porter -- Chief Executive Officer and Vice President

Next question on the line, please.

Operator

Our next question comes from Ebrahim Poonawala from BOA/ML. Please go ahead.

Ebrahim Poonawala -- Bank of America/Merrill Lynch -- Analyst

Good morning. Hello, can you hear me?

Brian Porter -- Chief Executive Officer and Vice President

Yes, please go ahead.

Ebrahim Poonawala -- Bank of America/Merrill Lynch -- Analyst

Yeah. I just wanted to follow up, Brian and [Inaudible], if you can put some numbers around you mentioned the target to maintain strong capital levels. If we adjust for the BBVA transaction and the IFRS 9 impact, it gets to about 10.35 CT1. If you could, what's the timeline, how soon can that transaction close if the [Inaudible] family doesn't refuse the transaction? And secondly, given that there is a likelihood that the global banking regulators may reach some sort of an agreement [inaudible] maybe as early as next week, can you help us sort of put some number around what a B4 impact would be to your CET1?

Brian Porter -- Chief Executive Officer and Vice President

Sure. I'll start and then I'll turn it over to Sean who will walk you through the capital numbers. If everything goes according to plan here, we would expect to close a transaction sometime in the summer of 2018. And in terms of capital, Sean, do you want to walk through that?

Sean McGuckin -- Chief Financial Officer

Yeah. So, that would be further three quarters of cap appreciation and [inaudible] 30 and say 45 basis points on top of where we're at today. As you had mentioned, [inaudible] is only 15 basis points. So, that would [inaudible] put us around 10.5 plus level.

We started a dialog with [inaudible] in terms of looking at revisions possibly on about [inaudible]. [Inaudible] has agreed to look into that. So, there may be some changes with respect to the capital calculated in the near term which could be a potential benefit but we're not there yet. So, overall we're comfortable that will still be up at 10.5 or higher.

With respect to [inaudible], you're right, there could be an announcement coming up next week. Our understanding is that would be effective for 2020 within a 5-year [inaudible] timeline to phase in a new [inaudible] expectations. So, there are still many years in front of us and, again, we have reached a pretty good level. So, we do not see on the [inaudible] being a headwind in the near term for us in terms of our capital management.

Ebrahim Poonawala -- Bank of America/Merrill Lynch -- Analyst

Understood. And just to clarify the 30 to 45 basis point, is that the capital you expect [inaudible] over the next three quarters?

Brian Porter -- Chief Executive Officer and Vice President

Yes.

Ebrahim Poonawala -- Bank of America/Merrill Lynch -- Analyst

And I get that there will be enough of [inaudible] to get into [inaudible]. Clearly, there's no immediate shock but I'm just wondering and I'm sure you've gone through the mark, I'm just trying to get a sense of is at a 20-basis-point impact, is it a 50-basis-point impact? Then you apply for over 72.5 output floor. Any [inaudible] there would be very helpful.

Brian Porter -- Chief Executive Officer and Vice President

Yeah, we're still working through that but, again, we believe it's going to be very manageable for Scotiabank to accrete up to those newer levels under [inaudible].

Ebrahim Poonawala -- Bank of America/Merrill Lynch -- Analyst

Understood. Thanks for taking my question.

Brian Porter -- Chief Executive Officer and Vice President

Next question on the line, please?

Operator

Next question is from John Aiken from Barclays.

John Aiken -- Barclays -- Analyst

Good morning. Sean, thank you very much for the disclosure in terms of the hurricane and other impacts in Mexico. I was wondering though is there any ongoing lingering impact that you can talk to or in terms of the operations and then specifically what's been going on in Puerto Rico.

Sean McGuckin -- Chief Financial Officer

I'll pass it over to [Inaudible] to answer.

Nacho Deschamps -- Head, International Banking and Digital Transformation

Yes. Good morning. Well, as Sean mentioned, really the impact, the direct impact was in Puerto Rico and some smaller countries. So, it's relatively small.

It only represents 3% of international banking. Going forward, of course, we expect that tourism and economic activity will gradually recover. And in terms of Puerto Rico, it's a very small portion. It represents only around 1% of our assets today.

We have been [inaudible] our operations in Puerto Rico in the past year and it only represents around 30% of what it was 5 years ago.

John Aiken -- Barclays -- Analyst

That's great. Thank you very much.

Brian Porter -- Chief Executive Officer and Vice President

All right, next question, please.

Operator

Next question is from Steve Theriault of Eight Capital.

Steve Theriault -- Eight Capital -- Analyst

Thanks so much. I had a question for [Inaudible] but first just, Sean, on the BBVA deal, how long does the [inaudible] family have to make the elections regarding their optionality and right of first refusal?

Sean McGuckin -- Chief Financial Officer

We think this will get settled sometime within our Q1. So, it won't go beyond Q1.

Steve Theriault -- Eight Capital -- Analyst

Okay. And then so for [Inaudible], I think we all expected trading to be weak this quarter but 60 million [inaudible] credit rating, I think that's the weakest we've seen since 2014 and I think there was a liquidity event in the quarter and we hit that. So, can we get a lot more detail, a little more granular detail around how challenging the quarter was? I mean, you guys had pretty good fixed income underwriting and volatility was down but not that much quarter on quarter. So, just if you can get into that a little bit and if you can speak at all to the outlook and how the numbers' been versus Q4, that would be helpful.

Sean McGuckin -- Chief Financial Officer

Yeah, thank you, Steve. You're absolutely right. The challenging area was on the rate side of the fixed income business and as we saw continued low volatility in the major government bond markets in the UK and the US and Canada. So, low volatility with lack of movement in issuance, notwithstanding a very benign environment resulted in trading revenues falling off considerably and that was off a very robust Q4 and Q1 last year.

You'd recall Brexit and election situation in the US, it was a very constructive trading environment. So, that came off this quarter as you saw. We anticipate a much more proactive trading environment in the next quarter, next two quarters as a new Fed Chairman takes over and some rate increases take place in the US. And so, we also see a little more hawkish tone in the UK.

If you combine that together, we anticipate a much more, as I said, constructive environment. And the other good news is that our underlying platforms are operating efficiently and we're ready to take advantage of those flows and also add to that our debt origination, you saw the underwriting fee was also quite robust this quarter.

Steve Theriault -- Eight Capital -- Analyst

Thanks for that color. Are you seeing much of that in November or is that more Fed hikes in December, you expect to see [inaudible] because November is feeling like Q4?

Sean McGuckin -- Chief Financial Officer

November is feeling mildly more positive than the end of October. We saw some volatility creep back in the markets and stayed back. So, it isn't at the same levels as we saw at the end of Q4 but much more constructive to begin the quarter.

Steve Theriault -- Eight Capital -- Analyst

Thanks for the color. Appreciate it.

Brian Porter -- Chief Executive Officer and Vice President

Next question, please?

Operator

Next question comes from Robert Sedran from CIBC Capital Markets.

Robert Sedran -- CIBC Capital Markets -- Analyst

Hi, good morning. Just first off a quick clarification. Sean, you mentioned on the back of IFRS 9 modestly higher provisions into next year. I presume that's off the roughly 45 basis points for the full year and not the 42 for the quarter?

Sean McGuckin -- Chief Financial Officer

Yeah, [inaudible] your number.

Robert Sedran -- CIBC Capital Markets -- Analyst

Okay, thank you.

Sean McGuckin -- Chief Financial Officer

As I mentioned, that's really off the volume growth. Now with IFRS 9 to originate loans you have to offer provisions update once. So, it's a bit more upfront provisioning that's got to be done.

Robert Sedran -- CIBC Capital Markets -- Analyst

Got it. Thank you. And just a follow-up on the question about the international margin. You mentioned that it was mix and also some inflation-related noise, I guess.

I'm curious when you start talking about a flatter margin outlook, what are the next you see changing? Are you expecting the commercial loan growth to slow a little bit or are you seeing a better pipeline on the retail side to balance off some of that growth or perhaps it's the funding side that I'm missing?

Sean McGuckin -- Chief Financial Officer

We're saying that the margins should be in and around this level but it will be impacted going forward based on business mix. So, as you'd expect, if retail grows faster than commercial, you will see a higher margin but we think at the current level, if everything grew at the same pace, at the same rate, then the margin should be in and around what you're seeing today.

Robert Sedran -- CIBC Capital Markets -- Analyst

Oh, I see. So, you weren't signaling a change in the direction of [inaudible].

Sean McGuckin -- Chief Financial Officer

I was not [inaudible].

Robert Sedran -- CIBC Capital Markets -- Analyst

I understand. Okay, thank you.

Sean McGuckin -- Chief Financial Officer

Next question on the line, please.

Operator

The next question comes from Meny Grauman from Cormark Securities.

Meny Grauman -- Cormark -- Analyst

Hi, good morning. Just a follow-up question on what drove trading this quarter? Specifically wondering about the precious metals business and the reported challenges there. I noticed that precious metals holdings are down quite significantly quarter over quarter and year over year. So, I'm wondering if you have any color on that, to what extent that specific business is impacting the results in capital markets?

Brian Porter -- Chief Executive Officer and Vice President

The main trading numbers, as I mentioned, refocused on the rate side of the business income. In the cash equities, we're softer as well. We saw the market come up considerably in terms of new equity issuance. So, between cash equities and the rate side that was the predominant side of the trading numbers in terms of the reduction, you're absolutely right, with gold being range bound for a good part of the quarter, we saw the trading numbers come off in gold as well as the lending side of gold business.

So, the metals business was off this year and this quarter as well.

Meny Grauman -- Cormark -- Analyst

And if you can answer it in terms of your commitment to that precious metals trading business, is there anything you can add more publicly to those reports about potentials there?

Brian Porter -- Chief Executive Officer and Vice President

We're always looking at making our businesses better and we continue to want to serve our customers the best way we can.

Meny Grauman -- Cormark -- Analyst

Thank you.

Sean McGuckin -- Chief Financial Officer

Okay, next question on the line, please?

Operator

Your next question comes from Scott Chan from Canaccord Genuity

Scott Chan -- Canaccord Genuity -- Analyst

Good morning. Just a clarification question. When you talked about the international guidance, was that based on Q4 or the 2017 run rate in terms of the way you were talking about earlier.

Nacho Deschamps -- Head, International Banking and Digital Transformation

This is Nacho. Well, it can be we're talking basically about some volatility around these levels of Q4. As Sean mentioned, I would put in this ways. Our margins in our core businesses – corporate, commercial and retail – are stable and we expect them to continue going forward to be stable.

It's really asset mix, the impact that [inaudible] quarter and quarter and inflation also has, as you see, sometimes an impact [inaudible] we see relative stability at these levels.

Scott Chan -- Canaccord Genuity -- Analyst

And is the retail margin higher than commercial [inaudible]?

Nacho Deschamps -- Head, International Banking and Digital Transformation

Yes.

Scott Chan -- Canaccord Genuity -- Analyst

Okay, thank you.

Brian Porter -- Chief Executive Officer and Vice President

Next question on the line, please?

Operator

Your next question comes from Doug Young from Desjardin Capital Markets.

Doug Young -- Desjardin -- Analyst

Good morning. Sean, just on expenses, 500 million of savings achieved in fiscal 17. Can you talk a bit about bottom line impact from that and then just off the same kind of vein, the mix ratio in GBM 52.3%, a lot higher versus last year. I don't think it's been this high since 2011.

Just wanted to see what was flowing through there. It didn't seem to be a revenue item from that ratio. It looked like obviously [inaudible] absolutely [inaudible]. Just want to get a little more detail there.

Thanks.

Sean McGuckin -- Chief Financial Officer

So, on the cost savings, definitely, we're seeing good benefit from that. As I mentioned, the whole year expense growth was up 3% which is quite lower than what we were seeing up to Q3 year to date from the banking industry here in Canada. So, we are seeing savings from that. As I mentioned, what we're still heavily investing in digital and technology to drive ongoing sustainable efficiency gains but also a better customer experience.

So, again, we're very comfortable on the expense management side coming in at a very low 3% compared to what we're seeing in the rest of the marketplace. In terms of GBM, again, slightly lower revenues than last year. There are two sides of the equation when it comes to productivity and mix. So, slightly lower revenues than last year on [inaudible] basis but, again, as we mentioned, that business continues to invest and earn through higher regulatory compliance costs and also their own technology digital investments.

Doug Young -- Desjardin -- Analyst

Sean, is this a new for GBM? Is this a new level that we should expect going forward? And then just on the total expense side, I mean it sounds like most of the savings are being pumped back into the business and aren't going to the bottom line. Is that a fair assessment?

Sean McGuckin -- Chief Financial Officer

Is that with the all-bank last quarter?

Doug Young -- Desjardin -- Analyst

Yes.

Sean McGuckin -- Chief Financial Officer

Yeah when you say not getting to the bottom line when you've got expense growth of only 3% on a whole year basis when our peers are running at 5.5%, it sounds to me like the expense savings are making their way to the bottom line to reduce expenses. This year, as I was saying that, the revenues came in a bit lighter. Again, on the trading side on an [inaudible] basis, lower security gains for the year. The revenue side was a bit lighter but the expense performance, I think, was quite strong.

In terms of GBM, again, a bit of a softer quarter. The next is a bit elevated and we expect to see that come off and back down into kind of the high 40s forties range that it was running before this quarter.

Doug Young -- Desjardin -- Analyst

Okay, thank you.

Sean McGuckin -- Chief Financial Officer

Next question on the line, please.

Operator

Nick Stogdill from Credit Suisse.

Nick Stogdill -- Credit Suisse -- Analyst

Hi. Good morning. Just on the IFRS 9, the 600 million opening transitional adjustments, can you give us some context on the geographic mix, what's driving that business line by product, just some [inaudible] thoughts on what's driving those numbers?

Adam Borgatti -- Vice President, Investor Relations

Yeah, I'll kick off and, Daniel and [inaudible] can add afterward. So, we're seeing higher provisions on the retail side with the commercial and non-retail actually a bit slower. It's generally split on the retail kind of equally between Canada and international banking. That's the general split between retail and non-retail and between the business lines.

Is there anything else?

Nick Stogdill -- Credit Suisse -- Analyst

Just to clarify. So the 600 million is split equally between Canada and international and it's mostly on the retail side, the 600, or it's slightly more [inaudible]?

Adam Borgatti -- Vice President, Investor Relations

The 600 million is the [inaudible] retainer interest and after-tax number. So, just think of retail provisions were a bit higher than that number and commercial provisions a bit lower than that number and for the higher retail provisions, half of that is in Canadian banking and half of that in international banking.

Nick Stogdill -- Credit Suisse -- Analyst

Okay, thank you. [Inaudible] ask one more on BBVA Chile. Just as we look at the loan-to-deposit ratio for Scotia, there's a bit of a gap. Same with BBVA Chile.

The scale matter on the deposit side in that market. I guess, having more scale improve your deposit gathering capabilities?

Nacho Deschamps -- Head, International Banking and Digital Transformation

Absolutely they matter and this, of course, will have a positive impact on the cost of funds. If you see the largest banks in Chile, they have a larger mix of core deposits.

Nick Stogdill -- Credit Suisse -- Analyst

Thank you.

Sean McGuckin -- Chief Financial Officer

Next question on the line, please.

Operator

Next question is from Mario Mendonca from TD Securities.

Mario Mendonca -- TD Securities -- Analyst

Good morning. If we could just revisit the expenses again. So $500 million is for structural cost transformation. Now, presumably, that wasn't all generated in the year.

That's more of a run rate look at it. Is that fair, Sean?

Sean McGuckin -- Chief Financial Officer

That would be the incremental in European [inaudible] savings, yes.

Mario Mendonca -- TD Securities -- Analyst

Oh, that all fell into the European. The reason that number just seemed large to me, considering the incremental investment spending, you said there was $3 billion in digital or IT spending with an increase of about 14%. That would imply then that your increase in the year was something like $350 million. So, without putting too fine a point, is it fair to say that as much as $150 million of cost savings fell into the year?

Sean McGuckin -- Chief Financial Officer

There's more categories than just technology. We've got people costs and some other costs that we're also looking from the procurement. We've had savings on that which shows up in different lines as well. So, I think it best, Mario, just to look at the overall expense growth of 3% in this environment when you're spending significant amounts in technology.

Mario Mendonca -- TD Securities -- Analyst

And that's kind of where I'm going with this. So, if next year, as you suggested, you could keep the growth in the investment spending to less than 14%, is it fair to the bottom line contribution or the contribution, let's call it, to lower expense growth could be greater next year than what we've seen in 2017?

Sean McGuckin -- Chief Financial Officer

Yes, I think that's correct. We've signaled we expect ongoing expense benefits all the way up to 2019 and beyond and we signaled we have a further 200 million next year and if we do as well as we did this year, we will exceed that 200 million and, as Brian mentioned, if our technology digital comes off somewhat, then you will see even more reduction to our expenses to even a lower expense growth possibly next year.

Mario Mendonca -- TD Securities -- Analyst

And then to wrap it all up, you made reference or I think it was Brian who made reference to 200-basis-point positive operating leverage on average over the next two years. Is there any reason why that might be backend loaded like as it's in the second year, 2019 rather than 2018?

Brian Porter -- Chief Executive Officer and Vice President

I'll answer this. We see a very good operating leverage performance next year. So, to get 52% which is a 2% improvement on productivity ratio, that means on average we need 2% a year operating leverage in 2018 and 2019 and we think we will do even better than that in 2018. So, we'll have less reliance on 2019 to get to that 52% target.

Mario Mendonca -- TD Securities -- Analyst

And if I could just squeeze in a little more here, you went through the segments when you talked about your medium-term growth outlook 6 to 9, 8 to 10, there were a few numbers in there. Given the momentum we're seeing in the bank from 2017 and your positive outlook on the macro environment, you sound constructive there, is there any reason why the medium-term growth outlooks, is there any reason why they would not be appropriate for 2018?

Brian Porter -- Chief Executive Officer and Vice President

Mario, it's Brian. We think the bank's in a very good spot and I think that if you look at our international business, in particular, I think the performance was ... we're proud of everything that's been done this year and particularly in the P&C businesses but if you look at the international bank, in particular, you look at the positive operating leverage of 330 basis points in an environment where revenue growth was hard to come by, and I noted that in my opening comments Peru had devastating floods, you know what happened in the Caribbean and Mexico obviously with the earthquake, so we had to earn through that. We did it within our risk appetite. Obviously, the economic outlook is going to be more positive throughout the Pacific Alliance footprint next year.

So, we think international's going to have a very good year. You've asked Sean the appropriate questions on the expense side and how we're going to get to our numbers and we think we're going to have a very good year in the Canadian bank and we will certainly update you further on some initiatives in organic growth opportunities that present themselves in all our businesses on Investor Day and on February 1 but we look forward to a very constructive year next year.

Mario Mendonca -- TD Securities -- Analyst

Thank you.

Brian Porter -- Chief Executive Officer and Vice President

Next call on the line, please.

Operator

Next question comes from Darko Mihelic from RBC Capital Markets.

Darko Mihelic -- RBC Capital Markets -- Analyst

Hi. Thank you. Two really quick questions actually. First question is with respect to B20 guidelines.

I think [inaudible] suggested that you're expected to comply with the principles as of the date of that letter. So, the question is have you started to basically underwrite according to B20 and if so, have you seen any impact? And then I have a second follow-up question for Sean on IFRS 9.

Brian Porter -- Chief Executive Officer and Vice President

On B20, I believe we'll be live January 1. Let me make a broader comment if I may, Darko, on B20 and on mortgage growth generally. On B20, we think there will be some impact and it will represent a bit of a headwind but I would point out that some customers are going to find more equity. Others will extend amortization and some to be sure what purchase [inaudible] less home but I think offsetting that higher retention is certainly possible.

So, as we look at it, we kind of think about a 5% headwind to originations maybe a reasonable guess but I want to be clear on our overall assessment. Our overall assessment would be this. We have very strong leadership in this business in the person of John Webster and as an executive team, we've discussed our outlook for 2018 more than once and based on that, we would be aiming for growth in the mortgage book in 2018 of GDP plus and I want to point out there is room here for mortgage growth to decelerate from current levels and yet still deliver at those levels of nominal GDP plus. Mortgage growth was 6% in Q4.

So, one final thought or assessment of risk and return as dynamics. So, with our assessment changes our appetite will change but overall we're in a pretty good position here in Canadian banking. If we go back to Q1, the balance sheet was expanding at less than 3% annualized. You go to Q4, the balance sheet is expanding at just north of 6% annualized.

So, we've got very good momentum in the balance sheet which should feed into net interest income and into revenue as we head into 2018.

Darko Mihelic -- RBC Capital Markets -- Analyst

Okay, thank you for that. That answer's very good. Just a quick follow up for Sean on the IFRS 9 impact. You mentioned that it sounded like the pre-tax number, I guess we'll figure that out, it sounded like retail was more than commercial and you mentioned retail was equally split between Canada and international.

What the commercial spread? Is that also equal between Canada and international?

Sean McGuckin -- Chief Financial Officer

The commercial reduction we're seeing primarily in international and some in GBM and just a bit in [inaudible] banking and we will be providing a lot more detail in our Q1 reporting. On the transition [inaudible] also the impact on provisions in Q1 itself.

Darko Mihelic -- RBC Capital Markets -- Analyst

Fair enough. Thank you.

Sean McGuckin -- Chief Financial Officer

We have time for one last question on the line, please.

Operator

Your last question comes from Sohrab Movahedi from BMO Capital Markets.

Sohrab Movahedi -- BMO Capital Markets -- Analyst

Thanks. Just a quickie for James. James, the commercial loan growth in Canada was very strong as well. Can you just provide some color as to by industry segment or otherwise where that's coming from?

James O'Sullivan -- Head, Canadian Banking

Yeah, I think in commercial we had a strong quarter and a strong year. I think we see very clear evidence now of good momentum in that business. To your question, we're seeing good growth in certain focus areas. So, geographically BC had a particularly strong year and sectorally agriculture had a very strong year.

So, 13% growth in assets, 18% growth in deposits. Spreads have been under a bit of pressure but we're very, very pleased with this business and it continues to be a priority as we go into 2018.

Sohrab Movahedi -- BMO Capital Markets -- Analyst

So, do you think double-digit growth is doable in an environment where as your mortgages are growing, let's say, a GDP plus?

James O'Sullivan -- Head, Canadian Banking

For commercial?

Sohrab Movahedi -- BMO Capital Markets -- Analyst

Yeah. If you took that same operating environment that you have in mind for mortgages and applied it to commercial in Canada, would you think that you could continue with this kind of growth rate?

James O'Sullivan -- Head, Canadian Banking

Yeah very much so. So, our expectation would be for solid double-digit growth in commercial and solid double-digit growth in small business.

Sohrab Movahedi -- BMO Capital Markets -- Analyst

And across the same sort of industry sectors?

James O'Sullivan -- Head, Canadian Banking

I think so. I don't see any particular shifts. I think there's still lots of room for us to acquire a share in certain segments whether it's geographically or sectorally. So, I think 2018 will look a lot like 2017.

Sohrab Movahedi -- BMO Capital Markets -- Analyst

Thank you.

Adam Borgatti -- Vice President, Investor Relations

Very good. Well, thank you, everyone, for participating and we look forward to speaking with you again in the new year. Have a great day.

Duration: 61 minutes

Call Participants:

Adam Borgatti -- Vice President, Investor Relations

Brian Porter -- Chief Executive Officer and Vice President

Sean McGuckin -- Chief Financial Officer

Daniel Moore -- Chief Risk Officer

Gabriel Dechaine -- National Bank Financials -- Analyst

Ebrahim Poonawala -- Bank of America/Merrill Lynch -- Analyst

John Aiken -- Barclays -- Analyst

Nacho Deschamps -- Head, International Banking and Digital Transformation

Steve Theriault -- Eight Capital -- Analyst

Robert Sedran -- CIBC Capital Markets -- Analyst

Meny Grauman -- Cormark -- Analyst

Scott Chan -- Canaccord Genuity -- Analyst

Doug Young -- Desjardin -- Analyst

Nick Stogdill -- Credit Suisse -- Analyst

Mario Mendonca -- TD Securities -- Analyst

Darko Mihelic -- RBC Capital Markets -- Analyst

Sohrab Movahedi -- BMO Capital Markets -- Analyst

James O'Sullivan -- Head, Canadian Banking

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