Bank of Nova Scotia (BNS) Q1 2018 Earnings Conference Call Transcript

Bank of Nova Scotia, Inc. (BNS -0.11%)
Q1 2018 Earnings Conference Call
January 27, 2018, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Adam Borgatti -- Vice President, Investor Relations

Good morning, and welcome to Scotiabank's 2018 First Quarter 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 will be glad to take your questions.

Also, in the room with us to take questions are Scotiabank's business line group heads, James O'Sullivan from Canadian Banking and Nacho Deschamps from International Banking and Dieter Jentsch from Global Banking and Markets.

Before we start, and on behalf of those speaking today, I will refer you to Slide 2 of our presentation, which contains Scotiabank's caution regarding forward-looking statements.

With that, I will now turn the call over to Brian Porter.

Brian Porter -- President and Chief Executive Officer

Thank you, Adam. Good morning, everyone. I'll start on Slide 4. We are very pleased with the bank's strong start to 2018. Scotiabank delivered $2.3 billion in earnings and diluted earnings per share of $1.86 for the quarter, up 18% compared to last year. Our return on equity was strong at 16.2%, and within our medium-term objectives. We are increasing our dividend to shareholders by $0.03 to $0.82 per share. This represents an 8% increase over the prior year.

Turning to our business lines, I'd like to make some comments. Canadian banking had another strong quarter, with earnings in excess of $1 billion. The division's performance continues to be supported by growing primary customers, investments in digital banking capabilities to improve the customer experience and reducing structural costs. Taken together, the Canadian bank produced very strong operating leverage.

International banking delivered another quarter of strong earnings, driven by double-digit loan growth in the Pacific Alliance, positive operating leverage, and solid credit quality. Overall, our personal and commercial banking businesses are generating roughly 80% of Scotiabank's earnings, with strong earnings growth and improving return on equity.

Global bank end markets also had a solid performance in Q1 with good results across our global equities, foreign exchange, and fixed income businesses in the quarter. At the enterprise level, our structural cost initiatives are progressing well, one year ahead of schedule. And the bank generated adjusted operating leverage of 2.9% this quarter.

The bank remains very well capitalized with a strong common equity Tier 1 ratio of 11.2%, or 11.75% on a pro forma basis. The bank's strong financial position provides us with optionality to invest in our businesses organically, grow through acquisitions, or return capital to our shareholders.

On January 31st, we reached an agreement to acquire the consumer and small and medium enterprise operations of Citibank in Columbia. The acquisition positions Banco Colpatria as the leading credit card issuer in Columbia and increases our commercial banking presence.

Along with the previously announced BBVA Chile transaction, these acquisitions are fully aligned with our Pacific Alliance strategy and will create value for our shareholders. The quarter's strong performance reflects the ongoing execution of our strategy and building on our momentum to sustainably grow earnings and dividends for our shareholders.

Subsequent to quarter end, we announced our plan to acquire Jarislowsky, Frasier Limited, a leading independent Canadian investment management firm. The firm has approximately $40 billion in assets under management for institutional and ultrahigh net worth individuals. Jarislowsky, Fraser has been widely recognized for it's disciplined research process and high caliber team with a proven track record, and we are excited to join forces.

The transaction significantly enhances our institutional investment capabilities and creates the third largest active asset manager in Canada, with $166 billion in assets under management. Through this acquisition, we are following through on our strategic commitment to diversify our global wealth management business and build our platform across Canada and the Pacific Alliance.

Before I turn the call over to Sean, I want to make a few comments on our All Bank Investor Day, which we held earlier this month. At our Investor Day, we highlighted some of the transformational work we've done over the past several years to build a much stronger and more competitive bank. Our heavy lifting was focused on five key areas that will turn the dial for the bank: achieving alignment across the bank, both strategically and operationally; reshaping our leadership teams and developing a much more performance oriented culture; being a digital leader by setting aspirational goals and getting the fundamentals right; transforming our cost structure, which is critical to realizing our untapped potentially; strengthening our balance sheet, including an improved funding and liquidity profile.

Many of these efforts were frontend loaded, and the benefits are now starting to materialize. Looking forward, we have three key areas of focus: building a superior experience for our customers and increasing our share of primary customers; harnessing our untapped potential, including organic growth, leveraging our partnerships, and making better use of our scale and geographic footprint; strengthening the core of the bank by developing deeper capabilities and enhancing controls. These focus areas are all underpinned by our digital strategy, which is the connective tissue across the bank.

Finally, we raised our medium-term EPS growth objective to 7%-plus, reflecting the quality of the opportunities we see in front of us and our increased confidence in seizing them. I will now turn the call over to Sean to discuss our financial performance and we'll return with some closing remarks.

Sean McGuckin -- Chief Financial Officer

Thanks, Brian. I will begin on Slide 8, which shows our key financial performance metrics for Q1 2018. The bank reported diluted earnings per share of $1.86, up 18% year over year. Included in our results is an employee benefits remeasurement credit, resulting in $150 million of net income, or $0.12 of diluted EPS.

Our core retail and commercial banking businesses reported double-digit earnings growth, and global banking and markets delivered a strong recovery versus last quarter, up 16%. Revenue growth was up 3% from Q1 over last year, or almost 6%, adjusting to the impact of foreign currency translation and the impact of the sale of HollisWealth last year.

Net interest income was up 8% from strong growth in retail and commercial lending in Canada and internationally as well as higher deposits. The core banking margin was up six basis points compared to last year. On an adjusted basis, non-interest revenues grew at a more modest pace as good CN commission and insurance growth was partly offset by lower trading revenues and lower real estate and securities gains.

Expenses were down 5% on a reported basis primarily due to the aforementioned benefits remeasurement credit. Adjusting further for the impact of foreign currency translation, the impact of the sale of HollisWealth last year, expenses were up 3%. High investments in technology, digital banking, employee related costs, and professional fees were partially offset by continued cost reduction initiatives.

The bank delivered strong positive operating leverage this quarter, further improving the bank's productivity ratio. The credit quality of our portfolios remains stable with a provision for credit loss, or PCL ratio, on impaired loans of 43 basis points versus 45 basis points last year. There was a modest net reversal of provisions on performing loans of $20 million of improved credit quality. And, when combined with provisions in impaired loans, resulted in a PCL ratio of 42 basis points.

On Slide 9, we provide the evolution of our common equity Tier 1 capital ratio over the last quarter. The bank continues to maintain a strong capital position with a common equity Tier 1 ratio of 11.25%. Internal capital generation contributed to roughly 30 basis points of capital improvement, partly offset by strong organic business growth.

This was quarter was also negatively impacted by the full transitional impact of IFRS 9, up 14 basis points, and an additional 10 basis points to the Basel I floor. However, a new Basel II floor is effective in the second quarter, increasing our common equity Tier 1 ratio by 50 basis points, or to 11.75% on a per forma basis. Risk weighted assets increased roughly 2% quarter-over-quarter, or $6 billion.

Moving to Slide 10 on IFRS 9. Our current quarter of Fiscal Q1 '18 is based on IFRS 9, while prior periods were not restated and are based on IAS 39. The transition net reduction to equity was $610 million. As I mentioned earlier, the common equity Tier 1 capital impact was negative 14 basis points.

The Q1 total provision for credit losses included a net reversal of $20 million on performing loans, also known as Stage One and Stage Two, due mainly to credit quality improvements in the Canadian banking and global banking markets portfolios, primarily in commercial and corporate provisions.

We saw minimal changes to our gross impaired loans as a result of IFRS 9. As part of our transition to IFRS 9, certain allowances previously attributed to impaired retail loans are not attributed to performing retail loans.

Turning to the baseline results beginning on Slide 11. Canadian banking produced a strong quarter with net income of $1.1 billion, up 12% year-over-year. The results reflect strong asset growth, marking expansion, improved credit performance, and positive operating leverage. Total revenues were up 4% from last year, driven by net interest income growth of 7%, partly offset by the impact of the HollisWealth sale last year.

Loans and acceptances increased 7% from last year. Residential mortgage growth was up 6% and business loans were up a strong 14%. Provision for credit losses on impaired loans improved three basis points year-over-year and was stable quarter-over-quarter.

Expenses were well controlled and decreased 2% year-over-year. Higher investments in technology, digital, and regulatory initiatives were more than offset by continued progress on our cost reduction initiatives and the impact of the HollisWealth sale last year. Canadian banking delivered strong positive operating leverage, driving an improvement in the productivity ratio to 48.6%.

Turning to the next slide on international banking, earnings of $667 million in Q1 were up 16% year-over-year, or 18% adjusting for the impact of foreign currency translation. My comments to follow on international banking are on a constant currency basis. Q1 results reflected strong asset and deposit growth, positive operating leverage, and lower taxes. Revenues grew 7% with net interest income up 8%, including a 12% increase in Latin America.

Loans grew by 11% compared to a year ago, led by the Latin America region, grown by 16%. A net interest margin 4.66% was down seven basis points year-over-year, mainly driven by changes in business mix. The margin was stable with the previous quarter. The loan loss ratio on impaired loans was up four basis points year-over-year. Excluding acquisition related benefits last year, the underlying loan loss ratio on impaired loans improved versus both last year and the pervious quarter.

Expenses were up 3% as higher business volume growth, inflation costs, and increased technology and digital investments were partly offset by cost reduction initiatives. Operating leverage was strong at positive 4%, leading to an improvement in the productivity ratio.

Moving to Slide 13, global banking and markets. Net income of $454 million was down 3% compared to last year, primarily due to the impact of foreign currency translation. Higher contributions from corporate banking, global equities, and investment banking were offset by lower global fixed income. On a quarter-over-quarter basis, net income increased 16% as markets were more constructive. All bank trading revenues on a taxable equivalent basis nearly Q1 '17 levels, but were down 17% year-over-year.

Revenues were down 2% year-over-year, reflecting lower global fixed income and precious metals trading revenues. However, net interest income was up 13%, mainly from higher loan fees as well as higher deposit volumes and lending markets. The PCL ratio on impaired loans reflected a net reversal of one basis point, improvement of five basis points quarter-over-quarter and year-over-year.

Advance growth was up 2% year-over-year, driven by higher regulatory and technology costs, partly offset by lower performance related and share based compensation and the positive impact of foreign currency translation.

I'll now turn to the Other segment on Slide 14, which incorporates the results of group treasury, smaller operating units, and certain corporate adjustments. Results include the net impact of asset and liability management activities. The Other segment reported a net income of $56 million this quarter. Earnings in this segment included the employee benefits remeasurement credit I referred to early. Partly offsetting, were lower gains on investment securities and higher expenses.

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

Daniel Moore -- Chief Risk Officer

Thank you, Sean. I'll turn now to Slide 16. We continue to remain comfortable with the fundamentals of the bank's risk portfolios. Our PCL ratio on impaired loans, or what is referred to as Stage 3 in IFRS 9 terminology, was 43 basis points, increasing one basis point from last quarter, but improving by two basis points from the same quarter last year.

On an IFRS 9 basis, our all bank PCL ratio is 42 basis points and reflects a $20 million net reversal on performing loans. Overall, we are seeing improvements in the PCL ratios across our personal and commercial banking businesses in Canada and internationally. Specifically, in Canada, delinquency rates improved from prior periods across all of our retail product categories.

Our residential mortgage portfolio is of high quality and lower risk. 48% is insured and the uninsured portfolio has an average loan-to-value ratio of 53%, providing a substantial equity buffer. New originations this quarter continue to reflect an average loan-to-value of 64%, consistent with prior levels. These results are based on strong underwriting and credit margin practices we have in place, and we maintain consistent mortgage adjudication standards across all our origination channels.

Moving on to international banking, we continue to see good credit quality trends. Retail performance was generally stable to improving across Mexico, Peru, and Columbia. In the Caribbean and Central America region and Chile, the results are impacted by the benefits from acquisition adjustments which are no longer recognized.

We continue to monitor the impacts of customer assistance programs in areas impacted by natural events and growth in unsecured lending across our international footprint. However, our portfolio is stable within our risk appetite. In global banking markets, we experienced reversals on both performing and peer loans, largely related to improved credit quality in the energy sector.

Now, looking at our credit metrics, gross impaired loans were generally stable at roughly $5 billion. Turning to Slide 17, you can see the recent trend in loss rates for each of our businesses. Here again, I draw your attention to PCLs on impaired loans, or Stage 3. For purposes of comparability to IAS 39, and as we move to a more robust measure going forward, Canadian banking's credit losses are consistent with prior quarters. International banking's credit losses improved nine basis points over last quarter, from 134 basis points to 125 basis points, excluding prior acquisition benefits under IAS 39.

Overall, we believe our credit portfolios continue to reflect overall diversification. And, notwithstanding the expected impact around the adoption of IFRS 9 standards, our underlying performance remains strong.

Turning to Slide 18, you can see the recent trend in net write-off rates for each of our businesses. As discussed recently in our All Bank Investor Day, we believe it is important to distinguish between accounting and economic performance. And we believe our net write-off experience is indicative of the economic performance. Looking over the last five quarters, our net write-off ratio has been relatively stable, and we would expect that tend to continue.

I'll now turn the call back over to Brian.

Brian Porter -- President and Chief Executive Officer

Thank you, Daniel. I'd like to highlight some of the key takeaways from our presentation and comment on the outlook for Scotiabank. We delivered strong results to start the year, continuing the momentum we built over the last year. In Canada, we continue to target revenue growth through increasing the number of primary customers and investing in digital capabilities while maintaining a sharp focus on improving productivity.

For the international bank, we continue to see great potential across the Pacific Alliance countries as we densify our presence in key markets and leverage our footprint to improve connectivity. More specifically, we are seeing strong global growth that we anticipate will be a tailwind for our international businesses.

A strong US economy always benefits US trading partners, and an increase in US output typically leads to significant increases in GDP growth in Lat Am, as we see in the current forecast for our key markets. NAFTA negotiations continue, and we remain hopeful that parties can reach a modernized agreement. However, as we have said before, we are confident in our footprint and particularly in the resilience of the Mexican market. To give some context, the private sector in Mexico grew approximately 3% last year. And, given the country's extensive network of free trade agreements, Mexico is well positioned to adjust to any NAFTA outcome.

In global banking and markets, we are expanding our investment banking capabilities to continue to improve results. We continue to transform the bank digitally and we are making further investments to redesign and streamline processes to make us more efficient, enhance the customer experience, and support our growth efforts to grow primary customers.

Our capital position remains strong, allowing us to make strategic investments to grow our businesses and support higher returns of capital to shareholders, as evidenced by our increase in the dividend. We have many areas of untapped potential, and we are very optimistic about the bank's future.

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

Sean McGuckin -- Chief Financial Officer

Thanks, Brian.

...

That concludes our prepared remarks. We will now be pleased to take your questions. Please limit yourself to one question and then rejoin the que to allow everyone the opportunity to participate in the call. Operator, can we have the first question on the phone, please?

Questions and Answers:

Operator

Yes. Your first question comes from Robert Sedran of CIBC Capital Markets. Please go ahead.

Robert Sedran -- CIBC Capital Markets -- Analyst

Good morning. I want to ask about the shares you intended to repurchase after Jarislowsky's deal closed. Maybe you're not planning to wait until after that deal actually closes to do that? It feels like after Columbia, Chile, and Jarislowsky, you're likely to land somewhere around 11% CET1. I'm just curious if we're still seeing a little bit of creep higher in terms of the operating level toward that 11% level rather than something lower in the mid-tens.

Sean McGuckin -- Chief Financial Officer

It's Sean. I'll take that one, Rob. After the acquisitions, which will take place in a couple of quarters, you're right. After some capital accretion over the next couple of quarters, we expect to be around 11%. In terms of the buying back of the shares related to the Jarislowsky, Fraser transaction, we will look to start that in due course. We will try to be opportunistic in terms of finding the right price level to buy that back. But, being around 11% -- or toward the higher end of our peer group -- gives us flexibility optionality. You may find us, for acquisition purposes, dipping a bit below 11%. But, I think we're comfortable targeting in and around 11% and being toward the higher end of our peers.

Robert Sedran -- CIBC Capital Markets -- Analyst

Okay. Thank you.

Operator

We will now take our next question from Mario Mendonca of TD Securities. Please go ahead.

Mario Mendonca -- TD Securities -- Analyst

Good morning. Sean and maybe Daniel, the concerns about the Canadian housing market have resurfaced with a bit of a vengeance recently. We're hearing it from a lot of different quarters. One talking point in particular is the potential for more than just a modest amount of mortgage fraud in the country. Could you speak to what the bank does to prevent, monitor, and detect mortgage fraud and what your experience has been so far in terms of -- what have you actually seen? What have your tests and all the work you've done uncovered about mortgage fraud for Scotia.

Sean McGuckin -- Chief Financial Officer

I'll ask James O'Sullivan to answer that question.

James O'Sullivan -- Group Head, Canadian Banking

Mario, a few thoughts. As you well know, we have three distribution channels and the exact same adjudication standards across those three channels with the same independent oversight led by Daniel Moore's risk team. I do think the quality of the portfolio overall is probably best reflected in the delinquency ratio. To be specific, that delinquency ratio reached a record low in Q1 of 57 basis points. It was down quite markedly year-over-year. I'd say, if we think about the progress we've made as a bank and an industry, we've made a lot of enhancement over the past few years to our underwriting policies, whether it's risk thresholds, income verification -- there's been a lot of progress made in just tightening the whole thing up.

In our broker channel and our direct sales force channel, we have specific clawbacks for credit and fraud issues. If we look at fraud, we have not seen an increase in fraud. In fact, it has been quite stable for some time. Daniel may want to add to that.

Daniel Moore -- Chief Risk Officer

I'll just backstop what you said, James. We apply the same process to all of our mortgages coming from all channels, and we continue to adjudicate and have our credit policies in line with our risk appetite. We monitored the delinquency rate very closely as an early warning indicator. Whether that's 30-day or 90-day delinquencies, we've seen it on a positive and improving trend over the last number of quarters. We're very comfortable with our portfolio.

Mario Mendonca -- TD Securities -- Analyst

We all know that you can have very low delinquencies and fraud at the same time. Those two can happen simultaneously. In the work you've done so far in reviewing it, is there anything you can offer in terms of the propensity for fraud in your mortgage book and any differences you've seen between broker distributed mortgages -- I'm referring to the level of fraud in the mortgages originated by Scotia proper and by the brokerage channel separately.

James O'Sullivan -- Group Head, Canadian Banking

Mario, for as long as I've been in this chair, there has been no distinguishable trends across those three channels. We have a significant fraud management unit. As long as I've been in this chair, mortgage fraud has not been a topic. We do have fraud. We have them every quarter. But, mortgages have not surfaced as a product where we have seen any meaningful amount of fraud whatsoever.

Mario Mendonca -- TD Securities -- Analyst

That's clear. Thanks, James.

Operator

We will now take our next question from Ebrahim Poonawala from Bank of America Merrill Lynch. Please go ahead.

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

Good morning. Can you just talk about the outlook for the margin? We've seen the margin in Canadian P&C flatline for the last few quarters. I'd love to get your outlook there relative to what you expect the BOC to do this year. Also, in terms of the international banking margin, do you expect that to continue to trend lower?

James O'Sullivan -- Group Head, Canadian Banking

It's James. I'll start with the Canadian banking margin. Margin this quarter at 241 continues to improve, up two basis points year-over-year. It's challenging to forecast. There are many moving pieces. The direction clearly is up. To be more specific, over the balance of this year, assuming there are no further rate increases, we'd expect to see a further increase in the Canadian banking margin of up to five basis points.

Roughly, each 25-basis point increase in the Bank of Canada rate is worth roughly $60-70 million to Canadian banking pre-tax. After tax and some basis risk, it's less than that. But that's a bit of a sense of the sensitivity of Canadian banking and the outlook as the year progresses.

Ignacio "Nacho" Deschamps -- Group Head, International Banking and Digital Transformation

This is Nacho. In terms of intentional banking, on a quarter-over-quarter basis, our mean was stable. Although there are many components, and more given the international franchise, the main driver that is leading to some variation is the mix of commercial and retail growth. Year-over-year commercial has grown faster than retail. That is the main component. More importantly, we see our underlying risk adjusted margin stable and we expect our risk adjusted margin to remain stable in the medium term.

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

Got it. To follow-up, James, when you think about each rate hike, what are your expectations in terms of the longer-term rates? How impactful are those going to be to the $65-70 million that you mentioned?

Sean McGuckin -- Chief Financial Officer

I'll take that one. There is funds transfer pricing between the center -- as long-term interest rates go higher, they will, over time, get higher value of capital ascribed to that division. So, they will benefit from the near-term rate increases and, over time, the longer-term rate increases.

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

Good. Thank you.

Operator

Our next question comes from Gabriel Dechaine of National Bank Financial. Please go ahead.

Gabriel Dechaine -- National Bank Financial -- Analyst

Good morning. I want to go to Slide 17 and the impact of IFRS 9. Any thoughts for this quarter? In the international business, I see you released on Page 2 in your commercial portfolio and then added to the retail portfolio. Can you talk about what changed in your outlook for these portfolios?

Daniel Moore -- Chief Risk Officer

I can speak to that. It's Daniel Moore. In the international banking side, we had an increase in our retail portfolio of one to two, due to strong asset growth, which was supported by a good risk adjusted margin. On the commercial side, there is at least -- Stage 1 and 2 had to do with improved credit quality, which was consistent with the release we had in Canadian banking and in GBM, which is overall driven by credit quality.

Gabriel Dechaine -- National Bank Financial -- Analyst

So, the retail change in the book growth. Is that a particular portfolio that makes you a bit more -- has higher expected losses on it or what?

Daniel Moore -- Chief Risk Officer

No. Bear in mind there are a number of factors that go into the Stage 1 and 2 calculation and has gotten more complicated than the previous standard. Those three primary factors would be outright stock change of the portfolio -- that would be volume growth -- credit quality changes, and economic indicator changes. Here, we're really seeing volume growth in the retail portfolio.

Gabriel Dechaine -- National Bank Financial -- Analyst

That's helpful. Your Canadian margin is flat for the past year or so, and now we're focusing on risk adjusted margin. I just want to get a sense of -- it looks to be coming mostly from loan spread compression despite double-digit commercial loan growth and your personal balances still growing at a pretty healthy rate. So, why are we seeing that level of spread -- where is this coming from?

Sean McGuckin -- Chief Financial Officer

I'd say quarter-over-quarter, we've seen expansion of deposit margin, as you've mentioned, primarily because of the recent Bank of Canada hikes. We have seen some asset compression. The spreads on mortgages was a bit tighter in Q1 as the longer-term funding rates were moving up faster than the repricing of the assets. Over the next couple of quarters, we'd like to see that reverse somewhat. We would expect our margin in Canadian banking over the coming year to grow upwards of five basis points toward the end of the year.

Gabriel Dechaine -- National Bank Financial -- Analyst

Do you have an interact gain?

Sean McGuckin -- Chief Financial Officer

We did have a gain on that this quarter. Yes.

Gabriel Dechaine -- National Bank Financial -- Analyst

About $30 million?

Sean McGuckin -- Chief Financial Officer

It was around that level. It's important to note that the lower real estate gains recorded in Canadian banking this quarter year-over-year was offset by that interact gain. So, the underlying performance of Canadian banking of 12% is a true underlying performance.

Gabriel Dechaine -- National Bank Financial -- Analyst

Great. Thank you.

Operator

We will take our next question from Mr. Doug Young of Desjardins Capital Markets. Please go ahead.

Doug Young -- Desjardins Capital Markets -- Analyst

Good morning. My question is probably for Nacho. Latin America earnings were up 20% year-over-year. Can you flesh that out a little bit in terms of what you're seeing in some of the divisions, specifically Columbia. I know you are doing the recent acquisition of Citi's business. But, Columbia's been an area that's been a bit more challenged. I just wanted to see if you're seeing a bit of a reversal there as well. Thank you.

Ignacio "Nacho" Deschamps -- Group Head, International Banking and Digital Transformation

Thank you. I'm very pleased with the quarter. It's really across the lines that we've had a very strong performance in international banking, particularly in the Pacific Alliance countries. Double-digit growth, strong deposit growth, revenues growing at 11%, and structural costs also under control and improving with a very strong operating leverage. As you saw, the performance of Mexico is very strong. The performance of Chile is very strong. Peru, too -- you can see they're a softer economy this year.

In the case of Columbia, they are coming out of a difficult economic cycle of commodities and high inflation. But, we are seeing better trends. Most of the financial system in Columbia has been affected by higher PCLs. But, we are encouraged to see that the underlying performance of Columbia is growing around 15%, and we expect Columbia to have better results in 2018 compared to 2017.

Doug Young -- Desjardins Capital Markets -- Analyst

Was there anything unusual, or any benefits, that came through in the quarter in any of those? I think Mexico had a bit of a tax gain. I don't know if you quantified that. Is there anything else unusual that flowed through in the quarter?

Ignacio "Nacho" Deschamps -- Group Head, International Banking and Digital Transformation

We had very positive developments in the quarter across the footprint. But, even if you consider our performance of Pacific Alliance earnings before taxes growing 17%, we had a very strong quarter in capital markets and corporate revenue in Chile. Very strong wealth business, particularly in Mexico, due to our repatriation program. So, it was a solid quarter across the lines.

Doug Young -- Desjardins Capital Markets -- Analyst

Okay. Thank you.

Operator

Your next question comes from Meny Grauman of Cormark Securities. Please go ahead.

Meny Grauman -- Cormark Securities -- Analyst

Good morning. We know that there was a pickup in trading volatility toward the end of the quarter, but looking at Slide 36, it just caught my eye, the spike up in trading revenue toward the end of the quarter and then immediately coming down and trending down. Could you comment on that? Is there anything that's notable going on there specifically? And then, the outlook for trading so far in the second quarter.

Dieter Jentsch -- Group Head, Global Banking and Markets

Good morning. It's Dieter Jentsch. The first two months of the quarter were relatively soft in terms of volatility that we saw in the prior quarter. It picked up in January. We saw the Bank of Canada increase its rate, so we saw lots of trading activity take place. As a matter fact, probably two-thirds of the trading revenue pickup was in the month of January. And then, the equity markets began a little bit of volatility near the end of the quarter and into February. You saw it calm down a little bit.

Now, we're seeing that the overall markets are more constructive and once we see a calmer way of the equity markets, we see the market actually being quite constructive to ongoing trading revenues.

Meny Grauman -- Cormark Securities -- Analyst

Related question just on Mocatta. There was some news late last year about potential sale and some rumors about a buyer. Is there any update on that? Have you changed your view of that business at all?

Dieter Jentsch -- Group Head, Global Banking and Markets

We recently included a review of this business and I'm pleased to confirm that most of our key services, markets, and clients will be continuing. That said, we will be exiting some markets. We will be simplifying our product suite. We'll be much more judicious about our allocation of capital and liquidity.

Meny Grauman -- Cormark Securities -- Analyst

Thank you.

Operator

Your next question comes from Sohrab Movahedi of BMO Capital Markets. Please go ahead.

Sohrab Movahedi -- BMO Capital Markets -- Analyst

Thank you. For Daniel, when you look under IFRS 9, combined Stages 1, 2, and 3, do you have any thoughts on the outlook for the combined PCL? And then, the level of volatility you may expect to see out of the Stage 1 and 2 over the next four to six quarters.

Daniel Moore -- Chief Risk Officer

Sure. I would say that, with respect to Q1, we had particularly Stage 1 and 2 volatility, which was consistent with both the strong economic performance we had in the quarter and the improved credit quality overall in our book. That credit quality has been driven by our continued focus on originating AV customers and increasing selections and analytical capabilities across retail and upgrading the portfolio across our corporate book.

Under IFRS 9, it's certainly going to be the case that PCL movements are going to be more sensitive to economic cycles and more volatile going forward, especially that Stage 1 and 2. We will continue to draw your attention to the Stage 3, the provision on tiered loans, as we think there's a more robust measure going forward. But, as an overall comment, I would say that we feel that we will continue to be, as we've always been, prudent on our reserves and appropriately conservative in our methodologies.

Sohrab Movahedi -- BMO Capital Markets -- Analyst

Sorry, if I could just follow-up on that. I would've thought, with your geographic footprint and business exposure to a multitude of economic cycles and jurisdictions, the volatility -- at least, relative to the peer basis -- should be more moderate. Is that a fair supposition on my part?

Daniel Moore -- Chief Risk Officer

Again, it will be driven by a number of facts. We do think, from an overall perspective -- this is a comment away from IFRS 9 -- that the diversity of our platform is a real strength to our overall business model. It's something we're very passionate about in this quarter with our strategy. Going forward, Stage 1 and 2 volatility will be driven by a variety of factors. Those include economic factors and growth and performance of the portfolio. But, it would be our assertion that, in the long run, diversity would be a strength, both vis-à-vis IFRS 9 as well as generally.

Sohrab Movahedi -- BMO Capital Markets -- Analyst

So, you're not going to manage the way you run the business any differently if you see undue volatility in that. Is that what you're saying?

Daniel Moore -- Chief Risk Officer

That is correct. We will continue our focus on robust measures and on the sets of credit measures and risk calc that we've always had.

Sohrab Movahedi -- BMO Capital Markets -- Analyst

Thank you.

Operator

Your next question comes from Nick Stogdill of Credit Suisse. Please go ahead.

Nick Stogdill -- Credit Suisse -- Analyst

Good morning. A quick follow-up on the $20 million benefit on the Stage 1 and 2 loans under IFRS 9. Is improvement in Columbia driving any of that benefit? Can Columbia get better from here, meaning we could see more improvement in Stage 1 and 2 in 2018 on the Columbian market?

Daniel Moore -- Chief Risk Officer

Overall, we're very pleased with the performance of our Columbia portfolio. As you know, we tend a lot of tension and energy to upgrading our technology, our people, and our strategies through the course of the year. That's paid dividends. As Nacho mentioned, we had a turnaround in delinquencies, 13 basis points improvement quarter-over quarter. And in vintages, 71 basis points quarter-over-quarter. That's been declining over the past several quarters.

On a going forward perspective, I would agree with Nacho that we would have a cautious outlook given that we have presidential elections and seasonality effects coming up. But, we would expect that would have a cautiously stable outlook vis-à-vis firmly going forward.

Sean McGuckin -- Chief Financial Officer

If you're looking at the Columbia performance on Slide 34, the improvement is primarily Stage 3, not so much Stage 1 and 2. We are seeing improvement in the credit quality.

Nick Stogdill -- Credit Suisse -- Analyst

So, if the Columbia economic environment improves this year, we could say better performance in Stage 1 and 2 in that market?

Daniel Moore -- Chief Risk Officer

All else being equal, that would be correct.

Nick Stogdill -- Credit Suisse -- Analyst

My second question, for James, on business banking in Canada. Your loan growth continues to accelerate, which is a specific focus for the business. Can you give us a sense on what regions and industries are driving the acceleration in business growth?

James O'Sullivan -- Group Head, Canadian Banking

Sure. On commercial, it was a strong quarter, and a very strong start to the year. We have momentum in this business. If you think about it geographically, we've had a big push out west, in BC in particular. If you think about if factorially, agriculture is a sector that we've wanted to be a more significant participant in, and we're doing that.

But, more broadly, what's driving all of this growth would be growth in customers working capital needs. There are investments in plants and equipment. There is commercial real estate development in the portfolio. Business succession is a part of the business as well. I think it's fairly well diversified, but if I had to pick a region, it would be BC. And, if I had to pick a sector, ag is something we're focused on. 13% growth year-over-year in assets, 12% growth year-over-year in deposits -- that business is doing very well.

Nick Stogdill -- Credit Suisse -- Analyst

Thank you.

Operator

Your next question is from Scott Chan of Canaccord Genuity. Please go ahead.

Scott Chan -- Canaccord Genuity -- Analyst

Good morning. If I look at the Jarislowsky transaction, $40 billion of assets -- 77% institutional, 23% ultra-high net worth -- what client segment attracted you more to the transaction of JF? Or, is it both?

Sean McGuckin -- Chief Financial Officer

Well, it's both for sure, Scott. This extends our reach into two customer segments where we believe we're underpenetrated -- institutional and ultra-high net worth. As Brian has said, we think that we can build a platform here -- or use this as a platform -- and over time, we'll build a multi asset class investment firm. It'll have disciplined investment process. Our goal would be to carry that right across our footprint.

Scott Chan -- Canaccord Genuity -- Analyst

Is there the potential over time to put JF products on the retail side in Canada or internationally?

Sean McGuckin -- Chief Financial Officer

There is, but we're going to be thoughtful about it. It's an iconic brand. We want to think about how best to leverage that brand. We're going to want to work with our new partners in making those decisions thoughtfully and carefully.

Scott Chan -- Canaccord Genuity -- Analyst

Okay. Thank you.

Operator

Your next question comes from Mike Rizvanovic of Macquarie Capital Markets. Please go ahead.

Mike Rizvanovic -- Macquarie Capital Markets -- Analyst

Good morning. A quick one for Nacho. I want to go back to your international business, specifically the Pacific Alliance. Looking at your Slide 28, your results have been very strong in light of decelerating GDP growth. I think the commentary in the past has been around anything in the 2-3% GDP growth range would be conducive to strong growth in your banking businesses in that region. Very high level, but what would have to happen to GDP growth before that resilience would get tested? How low would it have to go before you start to have some concerns that growth would not be as robust as it's been lately?

Ignacio "Nacho" Deschamps -- Group Head, International Banking and Digital Transformation

Well, I think the factor that effects positively our outlook for international banking is the low level of credit and banking penetration across the Pacific Alliance countries. So, we see always a factor -- in general, the past decade, there's been a factor of two or three times growth of banking and lending the Pacific Alliance countries. That has been very consistent in average. So, the good news is that we are seeing right now an improvement for the outlook in GDP growth for the four Pacific Alliance countries in 2018. I would say it's quite resilient because of this bonus of low credit and banking penetration.

Mike Rizvanovic -- Macquarie Capital Markets -- Analyst

To the upside, if you do get much better GDP growth, is it fair to say that the correlation is not necessarily that high? You just mentioned the three times GDP growth. If you do see Chile get back to that 3-4% range, is it fair to say that maybe the upside is not quite as significant?

Ignacio "Nacho" Deschamps -- Group Head, International Banking and Digital Transformation

It's still a factor, so the more GDP growth of connectivity across the economy. I would say that, in the case of Chile, we're seeing a strengthening of business confidence. We would expect our corporate and commercial business to be quite dynamic in the coming years in Chile. But, I would say it is a factor that affects positively our performance.

Mike Rizvanovic -- Macquarie Capital Markets -- Analyst

Great. Thanks very much.

Operator

Your next question comes from Steve Theriault of Eight Capital. Please go ahead.

Steve Theriault -- Eight Capital -- Analyst

Thanks very much. Sean, the gains on investment securities are the lowest we've seen in a number of years, going back at least the last three or four. Can we get some color on that? In particular, I'm wondering if 2017 featured any pull forward of gains that we've seen at least one of your peers that could account for a lower run rate this year. Anything IFRS 9 related? How should we think about that? And then, going forward, if there are any implications?

Sean McGuckin -- Chief Financial Officer

I think we've signaled in the past, Steve, that we expect security gains to have a lower run rate level than they have in the past. One of the main reasons is IFRS 9. Under IFRS 9, if you have an equities investment portfolio, if you want the realized gains to go through P&L, you also have to take the unrealized gains through P&L. So, we're being very cautious on the volatility too our earnings. We would expect lower equity gains going forward, but we will still have periodic debt security gains as we manage our treasury portfolios. Overall, we would expect to be running closer to these levels than what we've seen in the past.

Steve Theriault -- Eight Capital -- Analyst

Okay. That's helpful. Thanks.

Operator

Your next question comes from Sohrab Movahedi of BMO Capital Markets.

Sohrab Movahedi -- BMO Capital Markets -- Analyst

Sean, just wanted to reconfirm the expense savings expected to come through from the restructuring initiatives that were started a couple of years ago. Do you still expect to outperform the $550-or-so million in 2018 that you had originally talked about?

Sean McGuckin -- Chief Financial Officer

Most definitely. We had signaled $200 million additional savings in 2018. We expect to track ahead of that. We've expanded our program beyond the original charge we took in 2016, so we're having a much broader base. We're still only about 60-70% to our expense base. We still think this program will continue on for the next couple of years and then some. Definitely, we would expect our savings this year to be higher than the $200 million that we've signaled as our plan for 2018.

Sohrab Movahedi -- BMO Capital Markets -- Analyst

Thank you.

Sean McGuckin -- Chief Financial Officer

Alright. I believe that's the last call. Again, thank you for joining us on the call. We look forward to talking to you again in May with our Q2 results.

...

Duration: 53 minutes

Call participants:

Adam Borgatti -- Vice President, Investor Relations

Brian Porter -- President and Chief Executive Officer

Sean McGuckin -- Chief Financial Officer

Daniel Moore -- Chief Risk Officer

Ignacio "Nacho" Deschamps -- Group Head, International Banking and Digital Transformation

Dieter Jentsch -- Group Head, Global Banking and Markets

James O'Sullivan -- Group Head, Canadian Banking

Gabriel Dechaine -- National Bank Financial -- Analyst

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

Steve Theriault -- Eight Capital -- Analyst

Robert Sedran -- CIBC Capital Markets -- Analyst

Meny Grauman -- Cormark Securities -- Analyst

Scott Chan -- Canaccord Genuity -- Analyst

Doug Young -- Desjardins Capital Markets -- Analyst

Nick Stogdill -- Credit Suisse -- Analyst

Mario Mendonca -- TD Securities -- Analyst

Sohrab Movahedi -- BMO Capital Markets -- Analyst

Mike Rizvanovic -- Macquarie Capital Markets -- Analyst

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