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The Bank of Nova Scotia (NYSE:BNS)
Q2 2021 Earnings Call
Jun 01, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Philip Smith

Good morning, and welcome to Scotiabank's 2021 second-quarter results presentation. My name is Philip Smith and I'm head of investor relations here at Scotiabank. Presenting to you this morning are Brian Porter, Scotiabank's president and chief executive officer; Raj Viswanathan, our chief financial officer; and Daniel Moore, our chief risk officer. Following our comments, we will be glad to take your questions.

Also present to take questions today are the following Scotiabank executives: Dan Rees from Canadian banking, Glen Gowland from global wealth management, Nacho Deschamps from international banking, and Jake Lawrence and James Neate from global banking markets. Before we begin 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, Phil, and good morning everyone. I wanted to make a few comments on the quarter before turning the call over to Raj who will discuss the results in detail. The bank's second-quarter results announced earlier this morning reflect the steady improvement in our financial performance, along with stronger economic conditions and a more positive outlook across our footprint. Our diversified business platform produced good earnings growth, positive year-to-date operating leverage of 3.4%, and higher ROE on both a quarter-over-quarter and a year-over-year basis.

Canadian banking showed solid mortgage and commercial loan growth. Global wealth management produced double-digit growth in earnings in AUM. GBM reported another strong quarterly earnings contribution and international banking continued steady progress toward its run-rate earnings target. We continue to see good operating momentum across the bank, and I am encouraged by the steady month-to-month improvement in both business conditions and our results.

Many of our businesses have yet to return to pre-pandemic global earnings but we see a clear path to achieving this over the near term. In addition to the stronger financial performance, the bank strengthened customer service and our commitment to ESG also stood out in the second quarter. Our commitment to excellent customer service across all channels was recognized in the J.D. Power 2021 Canada Retail Banking Satisfaction Study where the bank rose to No.

2 among large banks while Tangerine was recognized as No. 1 for the tenth consecutive year among mid-sized retail banks. Our focus on responsible environmental and social policy has also been recognized with a rating of AAA in the MSCI ESG Ratings assessment, a rating held by only 2% of banks globally. We remain committed to the global efforts to reach net-zero by 2050, and we are establishing bankwide quantitative time-bound targets for reducing greenhouse gas emissions.

I will now turn the call over to Raj to discuss the quarter in more detail.

Raj Viswanathan -- Chief Financial Officer

Thank you, Brian, and good morning, everyone. Before I begin, I'd like to note that all my comments are on an adjusted basis for the bank and our business lines. As I did last quarter, I will refer to quarter-over-quarter performance in many areas, given the economic impact of the pandemic in 2020 while reflecting that Q2 was a shorter quarter of assessing performance. I will begin with the review of all bank performance for the quarter on Slide 5.

The bank reported strong performance across key metrics of EPS growth, return on equity, operating leverage, and capital. Total earnings were $2.5 billion and diluted EPS was in $1.90 for the quarter, an increase in EPS of 83% year over year and growing quarter over quarter despite the shorter quarter. All operating segments delivered strong results this quarter. Return on equity continues to improve, rising to 14.9% from 14.4% last quarter, above the bank's medium-term objective.

Pretax pre-provision earnings improved 2% year over year driven by strong funds management. Revenue declined 3% year over year or in line with last year excluding the negative impact of foreign currency translation as the Canadian dollar strengthened against most currencies. Net interest income was down 3% excluding the impact of FX as the core buying -- banking margins declined nine basis points year over year. The year-over-year decline in margin was due to Central Bank rate cuts and changes to the business mix to more secured retail and higher commercial property loan growth.

Quarter over quarter, the margin was down only one basis point in line with our expectations. However, non-interest income increased 1% with strong 11% growth in fee and commission income offset by lower trading revenues and lower investment gains. The PCL ratio continued to decrease, falling to 33 basis points for the quarter. This represents a meaningful decline of 16 basis points quarter over quarter and 86 basis points year over year.

Daniel will discuss credit metrics in more detail in our next discussion later on the call. We continue to manage expenses prudently. On a year-over-year basis, expenses declined 7% or 1% excluding the metals business charges taken in 2020 and divestitures. This decrease was due to lower personal costs; foreign exchange translation; and lowered advertising, business development, and professional fees with some offsets from higher performance-based compensation costs.

Year to date, expenses are down 4%. The productivity ratio continued to decline and falling to 51.9%, compared to 54% a year ago. And the bank generated a strong positive year-to-date offering leverage of 3.4%. On Slide 6, we provide an evolution of our common equity Tier 1 capital ratio over the quarter.

The bank reported a strong common CET1 ratio of 12.3%, improving 10 basis points from Q1, and 140 basis points from a year ago. This was due primarily to strong internal capital generation, offset by good growth and risk-weighted assets. Excluding the impact of FX, risk-weighted assets grew $6 billion mainly from growth in business banking and retail mortgages in both Canadian and international banking. We also had additional benefits from pension remeasurement in the quarter driven by higher discount rates.

In the next quarter, our capital ratio would be impacted by approximately 25 basis points due to the increase in the CVA multiplier and the closing of the transaction to acquire 7% minority interest in Chile. However, we expect the CET1 ratio to remain on the 12.2% level for the rest of the year driven by strong internal capital generation. Turning now to the business line results beginning on Slide 7. Canadian banking had a strong quarter as the rebound in earnings continued with net income of $931 million, up 94% quarter over quarter, and 2% quarter over quarter.

The year-over-year increase was driven primarily by lower PCLs and higher revenues. Pretax pre-provision earnings grew strong 7% year over year as solid loan and deposit growth higher fee income and disciplined expense management were partially offset by margin compression. Revenue was up 4% driven by higher non-interest revenue partly offset by lower net interest income. Compared to the prior year, non-interest revenue increases a significant 20% while net interest income declined a modest 1% driven by lower margins.

Higher non-interest revenue was driven by higher banking fees, mutual fund distribution fees, and income from associated corporations. Residential mortgages grew a strong 8% and business lending grew 4% year over year, in line with the strategic priorities of the business. The net interest margin was stable to the prior quarter at 2.26% and in line with our expectations. Year-over-year margin compression was mainly due to changes in business mix and deposit margin compression but was partially offset by higher margins in residential mortgages and commercial lending, as well as higher deposit balances.

Expenses increased a modest 1% primarily driven by higher technology costs to support business development. Good revenue growth and prudent management of expenses resulted in a strong year-to-date positive operating leverage of 1.6%. The PCL ratio decrease to 16 basis points, which is 61 basis points lower year over year and 7 basis points lower than Q1. We expect the Canadian banking business earnings to continue to grow for the rest of the year with stable PCL.

Turning now to global wealth management on Slide 8. Earnings of $378 million were up a strong 21% year over year by strong mutual fund fees and brokerage revenues offset by higher volume-related expenses. Revenue grew a strong 16%, while non-interest expenses grew 14%, contributing to positive operating leverage of 2.5% for the quarter, and 5.4% year to date. Global wealth management has generated positive operating leverage in six consecutive quarters.

Canadian wealth management grew a strong 25% year over year and 4 % quarter over quarter, excluding the performance fee benefit in the prior quarter driven by continued sales momentum. All eight of our Canadian businesses saw a double-digit earnings growth year over year. Assets under management increased 19% to $332 billion, while AUA increased 20% of $571 billion from the prior year driven by positive net sales and market appreciation. Sales activity was strong in the quarter.

We ranked No. 2 for the quarter in retail mutual fund net sales in Canada with record net sales of $4.3 billion. We expect the global wealth management business to continue to perform strongly for the rest of the year with the improving contribution from our international wealth operations. Moving to Slide 9, global banking and markets.

The business generated strong earnings of $517 million, demonstrating consistent earnings from the benefits of a diversified business model. Net income was down slightly year over year as the business benefited from very strong capital markets and lending activities at the onset of the pandemic last year. Revenue growth was impacted by moderating fixed income trading revenues and the negative impact of foreign exchange was partially offset by higher equity trading revenues and underwriting fees. The business is well-positioned to grow as we expect good corporate loan growth in the second half of the year and the advisory business pipeline remains strong.

Expenses increased 3% year over year as we continue to invest in technology and incur higher volume-related expenses. The productivity ratio was 50.3% for the quarter, in line with our Investor Day target. Turning to the next slide on international banking. My comments that follow are on an adjusted and constant dollar basis.

International banking reported a net income of $429 million, up 165% year over year, and 11% quarter over quarter. The improving economic and business conditions, higher loan growth in the second half of the year, and prudent expense management support our continued optimism for the division and our expectation of achieving $500 million of earnings in this business segment like Q4 2021. Pretax pre-provision earnings declined 8% year over year and 4% from the prior quarter but were up 1% excluding the impact of the shorter quarter. Strong performance in Mexico was more than offset by a decline in Peru driven by lower credit cards and personal loans.

Revenue declined 2% quarter over quarter adjusting for the impact of the shorter quarter primarily due to lower credit card and personal loan balances while fee and commission income include 4%. Total loans declined 2% year over year and a strong 6% growth in mortgages was offset by an 11% reduction in credit cards and personal loans and a decline of 2% in commercial loan balances. However, loans grew 1% quarter over quarter. Retail was flat as mortgage growth of 1% was offset by a decline in credit cards and personal loans of approximately 3% while commercial loans grew 1%.

We expect continued growth in mortgages in commercial lending in the second half of the year. Net interest margin of 3.95% declined 8 basis points compared to Q1 driven by the lower interest rate environment, changes in the business mix with the continued increase in credit cards and personal loans, and growth in lower margin commercial loans. Non-interest income declined 5% quarter over quarter and year over year reflecting lower insurance income from associated corporations and card fees, though offset partially by higher banking. The provision for credit loss ratio declines quarter over quarter by 31 basis points to 118 basis points.

Expenses continued to decline 4% year over year and 5% compared to Q1 driven by lower personal cost, digital progress, and other efficiency initiatives. Now turning to the other segment, we reported earnings of $130 million. The increase year over year from a net loss of 166 million in 2020 released primarily to charges related to the metals business in 2020. Strong contribution from asset-liability management activities driven by prudent management of wholesale funding and interest rate risk resulted in higher net interest income in the segment.

I will now turn the call over to Daniel to discuss this.

Daniel Moore -- Chief Risk Officer

Thank you, Raj. Good morning, everyone. I'll begin my remarks on Slide 12. Turning first to credit quality.

Our credit quality continues to be high, and the trends are positive as economic growth accelerates across our footprint. Our GIL ratio of 81 basis points was down three basis points from last quarter and has remained stable for the past four quarters. Retail growth and impaired loans net of FX declined a modest $91 million as new formations were offset by write-offs, primarily international retail. GIL and business banking net of FX increased $109 million as we saw new formations in two accounts for which we have reserved appropriately.

On the bottom of Slide 13, you can see the all-bank net write-off ratio increased to 76 basis points. The increase was primarily driven by international banking, specifically retail. Last quarter, we spoke to the higher levels of late-stage delinquencies in Peru and Colombia, which have resulted in higher levels of -- which have higher levels of unsecured exposures. As expected, these rolled forward and resulted in elevated write-offs this quarter for which we were comfortably provided.

Given the strong performance of our remaining portfolio, we expect the write-offs in international retail to decline next quarter, turning toward our pre-pandemic levels by the end of the year. Meanwhile, write-offs in Canadian banking are below pre-pandemic levels and GBM remains stable. Turning to Slide 14. The bank ended the quarter with total allowances of $6.9 billion.

That's a reduction of over $900 million in the prior quarter driven by elevated write-offs. Consequently, the ACL ratio declined to 109 basis points from 125 basis points last quarter. Performing loan allowances declined about $700 million to $4.8 billion excluding the impact of that FX. Approximately 200 million of this was released due to improving credit quality and better macroeconomic outlook.

The remaining decline in performing loan allowances was primarily related to allowances for impaired loans to support elevated write-offs. Impaired loans ACL remain in line last quarter. The transfer of allowances on performing loans offset the higher level of write-offs, as we spoke of. It's worth noting that as these expected write-offs occur, the overall credit quality of the remaining portfolio improves.

And we expect the ACL ratio to trend below 100 basis points by the end of the year. Let me now turn to the income statement and provisions for credit loss on Slide 15. Our total PCL declined to $496 million. The total PCL ratio was 33 basis points, down 16 basis points in the prior quarter.

Beginning with our impaired PCLs, we reported $1.19 billion in Q2, up $430 million from last quarter. This represents an impaired PCL ratio of 80 basis points, an increase of 31 basis points quarter over quarter. The increase was primarily driven by international retail as the expiry of deferrals resulted in higher delinquencies mainly in Peru and Colombia. In contrast, impaired PCL for GBM and Canadian banking more stable.

Turning to performing PCLs, we had a net reversal of $696 million in Q2, down from positive to $2 million in Q1. Approximate $200 million of the reversal represents a release of allowances built in prior periods that's no longer required. This reflects better credit quality and an improved macroeconomic outlook. We expect similar levels of releases in future quarters.

So let me conclude with a few comments. First, our asset quality remains high and the credit trends are favorable. Secondly, our PCL outlook is positive for the remainder of 2021 with net write-offs and impaired provisions having peaked this quarter. Third, we expect to see additional releases from our performing allowances for the balance of the year.

And finally, we expect the all-bank PCL ratio to be in the mid-30-basis-point range for the remainder of financial year '21 with the PCL ratio in national banking continue to improve sequentially for the rest of the year. These trends are in line with the repositioning and de-risking of the bank, which have taken place in recent years. With improving economic growth across our footprint, we expect strong credit performance in the future. I will now turn the call over to Brian for closing remarks.

Brian Porter -- President and Chief Executive Officer

Thank you, Daniel. I'd like to close our presentation today with a few comments and observations before turning it over to Q&A. Firstly, as I reflect on our results, I am encouraged by the steadily improving operating environment and the more optimistic economic outlook as vaccine deployment accelerates across our footprint. We are seeing continual improvement in customer activity as the economic recovery takes hold.

At the same time, the forecast for GDP growth this year in our six core markets has improved to 6.5% on average, up from 5.8% just last quarter. That, combined with a booming market for commodities, makes us increasingly optimistic in our outlook. Secondly, we are seeing similar business trends across all our core markets, be they developed markets such as Canada or growth markets in the Pacific Alliance. These trends include strong growth in secured lending such as mortgages, a recovery in automotive lending where we are the market leader in subdued growth in cards.

As the economic recovery gains speed, we expect a recovery to more normal growth rates into pre-pandemic levels of revenue in businesses that have been most affected. For example, annual revenue in autos, cards, and insurance in Canadian banking are approximately $400 million below pre-pandemic levels. In international banking, fee and commission revenue is about $200 million lower. We expect a gradual recovery of these revenue lines in the coming quarters.

Thirdly, we continue to see strong progress in digital banking with double-digit growth of active mobile users in both Canada and the Pacific Alliance. Over the past 12 months, we have added close to 1 million mobile banking customers who are attracted by the convenience and high quality of our mobile banking offering. This reflects the growing digital dividend, which we will help -- which will help to drive our productivity ratio lower over time. Turning to international banking with elections this year, there is considerable focus on political events in Peru and Mexico.

While there is much focus on the risks associated with potential changes in governments, our experience over many decades in the region has taught us that these risks are often overstated. Invariably, it is economic growth, the strength of a country's institutions, and demographic trends that matter most. Simply stated, the economic backdrop trumps politics. When we consider the situation in the Pacific Alliance countries today, we are encouraged by a number of positive factors.

Firstly, economic growth is accelerating as internal consumption and international trade increases. The strengthened commodity prices, which have increased roughly 50% in the past 12 months have created a significant export windfall and surging current account surpluses, which provide economic tailwinds. Secondly, policymakers have considerable latitude to manage the economic recovery, given strong balance sheets and a low dependency on foreign capital. In closing, we are optimistic in our outlook for the remainder of the year driven by continued strong growth in our Canadian banking, global wealth management, and global banking and markets businesses, and our confidence in the recovery in international banking.

With that, I'll turn it over to Phil for the Q&A.

Philip Smith

Thank you, Brian. We will now be pleased to take your questions. Please let me yourself to one question and then rejoin the queue to allow everyone the opportunity to participate in the call. Operator, can we have the first question on the phone, please?

Questions & Answers:


Operator

Thank you. Our first question is from Ebrahim Poonawala with Bank of America Securities. Please go ahead.

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

Good morning. Thanks, Brian, for that overview on Latin America and just the update there. I guess just sticking with international banking. One, the $400 million in Canada, $200 million in international banking revenue numbers that you cited, do you see, based on how you see the world today, the revenue recovery in international banking lagging? And remind us in terms of just how you see the revenue contribution from IB in the back half of the year and the loan growth, I think you mentioned 6% growth last quarter.

How you see that playing out? Thank you.

Brian Porter -- President and Chief Executive Officer

Thank you. I think Raj is going to start with it, and then I think Nacho has a supplementary. 

Raj Viswanathan -- Chief Financial Officer

Yeah. Ebrahim, let's start with your revenue question. The recovery of $200 million, I can split it fairly simply that the insurance revenue that they're missing and that credit card revenue exactly missing in that business line, a particular set of $60 million a quarter. So we have used the approximate number of 200 million, not to suggest all of that has already come back in Q3, for example, but we see the gradual recovery as retail spending starts coming back and retailers asset growth happened and that the insurance revenue that actually tied to the retail lending, particularly in the international banking space.

On your question about the revenue recovery that we expect to see in international banking, we think you'll see a sequential recovery, but it will be tied to the retail asset growth. So in IB, expect to have mid-single-digit asset growth for the rest of the year compared to our balances in Q2. And that's going to be skewed, obviously, toward secured mortgage lending that you've seen even in the first half of the year that we continue to see. You're seeing good commotion growth starting this quarter and we expect that to continue for the rest of the year.

On secure lending or personal credit card lending, we expect to be slower coming but certainly, it's going to start in Q3 but actually rates perhaps in Q4. Maybe, Nacho, you want to add some more to that?

Nacho Deschamps

No, I think that's a good summary. Maybe I would also highlight that the retail bookings in the quarter weren't the best since COVID started, improving more than 20% quarter over quarter in retail. So basically, I mean, it really means one engine to go stronger, which is credit card personal loans, similar to what's happening in U.S. banks, and that will happen in the second half of the year.

Also, I have -- I think it's important to see the recovery in fees and commissions, which increased 4% quarter over quarter for 20 million. As Brian mentioned, we still have 60 million quarterly gap compared to pre-COVID that we would gradually recover. So overall, I think it's loan growth and fee recovery that would allow us to have a stronger growth revenue in the second half of the year. 

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

And just on that, Nacho, quick follow-up, is the retail lending or loan growth in Latin America also impacted by the excess liquidity we're seeing in U.S. or Canada, or is it more to do with vaccinations and political uncertainty?

Nacho Deschamps

No, I would say it is similar to what we're seeing in other countries. Our credit card billings are still 20% below pre-COVID levels so a lot of consumers having liquidity. There have been 35 billion disbursements of early pensions in Peru. And particularly, that is the case when we look at Chile, Ebrahim, we see also lower consumer lending demand because of high liquidity.

But we expect one positive aspect in the region, particularly for Mexico, for the Caribbean, and Central America as tourism coming back so restaurants, travel, entertainment, all of these activities are going to allow consumers to increase spending.

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

Got it. Thank you.

Philip Smith

Operator, can we have the next question, please?

Operator

Thank you. Our next question is from Scott Chan with Canaccord Genuity. Please go ahead.

Scott Chan -- Canaccord Genuity -- Analyst

Good morning. So just following up on international briefly. If I kind of look at the vaccine rollout and a lot of the reviews in the Pacific Alliance, it seems like it's very modest relative to North America. Maybe you can kind of comment on vaccine rollout going forward, and how that's going to affect the recovery, I guess, in terms of your portfolio book.

Raj Viswanathan -- Chief Financial Officer

Thank you for your question. Well, you know, infection rates of COVID, there's some volatility like everywhere in the world, but we're seeing infection rates going in the right direction. These countries are managing COVID basically to ensure hospital capacity is available. In terms of vaccination, Chile is a success story worldwide.

More than 50% of the population already got at least one shot. So Chile is doing very well. Because of vaccination and because of the commodity cycle, we expect a very strong recovery of economy in Chile. And the rest of the countries are accelerating vaccination.

Rates of vaccination are between 8% and 15%, but we expect that they would reach around 50% of vaccination by the end of the summer. COVID, however, is not impacting the economic recovery of the Pacific Alliance countries. All of -- all of them reported higher GDP growth in the first quarter of 2021 than estimations. And overall, the economies of the Pacific Alliance countries should grow around 6.5% during 2021.

Scott Chan -- Canaccord Genuity -- Analyst

Thanks. That's helpful. And just lastly, just on global wealth management. Solid results with all the Canadian wealth being exceptionally strong, and we can kind of see the guide in Canada, but perhaps can you give us an update on international wealth management? That is tracking a bit lower, but just anything that you're seeing there would be helpful.

Glen Gowland -- Group Head of Global Wealth Management

Sure. Thanks. It's Glen here. So as you mentioned, you know, I think the strength of our Canadian business is really its breadth.

So we're seeing, you know, strong growth, revenue growth, market share gains across all the businesses, but that's also starting to happen in international as well. So I think one of the benefits of a strong Canadian franchise is our ability to invest in our international growth. And so we've been working very closely with Nacho and his team. We've made very good inroads in terms of our institutional ultra-high net worth business there as well with Jarislowsky Fraser, and we expect that to continue.

So we saw actually quarter-over-quarter growth within our wealth management business in international, and we're seeing that uptick, and we would expect that momentum to continue.

Scott Chan -- Canaccord Genuity -- Analyst

Well, great. Thank you very much.

Philip Smith

Operator, can we have the next question, please?

Operator

Thank you. [Operator instructions] Our next question is from Paul Holden with CIBC. Please go ahead.

Paul Holden -- CIBC

Thank you. Good morning. So one of the key topics I think has been discussed over the last week is around interest rate sensitivity with increasing probability that central banks have to move sooner than later. So wondering if you could just provide us with a quick update on what a 25 basis point rate increase might mean for overall earnings.

And if you can, what that might mean for international banking, in particular, given that rates might increase in that part of the world sooner than U.S. and Canada?

Raj Viswanathan -- Chief Financial Officer

Thank you, Paul, it's Raj. Thanks for your question. So I'll address the international banking one first, and I'll get to the old bank and how we think about interest rate risk and how we manage it. International banking, simply put, a 25-basis-point change in the rates, and they're absolutely right.

It -- we expect it to be earlier compared to, say, Canada and the United States for that matter, will be roughly about $30 million per annum for the interest income line. So it's almost like, you know, a little over 1 basis point, you know, for more than $1 million, easy way to think about it. The Pacific Alliance will be about $25 million, and the Caribbean will be beating 25 basis point annualized would be roughly $30 million. So if you do the math, it's little over $30 million for the business line as a whole.

Let me back to the impact of the bank as a whole. So we all disclosed 100 basis point impact in the tables, in our case, it's about $300 million or 100 basis points increase. And that's just simple math. As you probably know, it's a modeled outcome based on a number of assumptions.

It reflects 100 basis points, you know, have a rate shock effect and based on a common balance sheet, and makes no assumptions for management actions. As you know from our previous conversations, we take a lot of management actually to manage the interest rate risk on the balance sheet of the bank. And that generally does not get reflected. Case in point, you know, last year in Q1 2020, we were the only Canadian bank which is positioned to benefit from rate declining.

That's what happened in Q2 2020, we monetized a lot of the swaps. It continues to benefit us and will continue to benefit us right through to 2024 because of the way hedge accounting works and so on. For example, that benefit is not included in the sensitivity tables. So right now, we have positioned the bank again for rising rates across the footprint, frankly, through our balance sheet.

So those numbers, which you see, and if you equate the 25 basis point to all the bank, you will come to a math of about $75 million for the bank, but that will be significantly higher than the $75 million as rates increase, how our hedges play out, and at what time we take off those hedges and monetize it. So a bit of a long-awaited answer. You start with the table, but the table is kind of a bond instrument. But there's lots of actions we take in the bank, which can help enhance the rate impact on our interest income for the bank as a whole.

Paul Holden -- CIBC

So if I can have a follow-up on that, if I may. Just if I'm using the $75 million and recognizing it could be something higher than that. I mean, what are kind of the -- I don't know, the bands that might be around that? Could it be, you know, as high as 50% higher? Are we talking more 25% higher? Just any kind of help there would be great.

Raj Viswanathan -- Chief Financial Officer

I'll try it, Paul. I think I'll give you a case in point. If you went back to the Q1 2020 disclosure, a rate decline for us would have been $197 million in that disclosure. I can tell you the benefit that we had because of the way our swaps played out, it's about four times that.

So it's a little hard to predict how it will be because it depends on future interest rate increases, what the markets do, and so on based on the positions we have taken to enhance the return. But I think it's safe to assume that it will be a minimum 50% higher, likely will be significantly higher.

Paul Holden -- CIBC

Got it. That's helpful. Thank you.

Raj Viswanathan -- Chief Financial Officer

You're welcome.

Philip Smith

Operator, can we have the next question, please?

Operator

Thank you. Our next question is from Gabriel Dechaine with National Bank Financial. Please go ahead.

Gabriel Dechaine -- National Bank Financial -- Analyst

Hi, good morning. I'd like to talk about the write-offs in international, and I appreciate the, you know, the comment that we could have picked here. But the way I look at it is we've -- over the past couple of quarters, anyway, nearly $2 billion of the individual loans have been written off. You know, how important is it to replace those loans for the segment to get back to its pre-COVID revenue run rate? And is there any, you know, possible change? I heard something about derisking the bank.

Are you changing the way you approach these originations going forward? Or is there -- or did I misunderstand that?

Raj Viswanathan -- Chief Financial Officer

Let me take that question, Gabe. And -- well, first, I think that we are -- we have been growing in mortgages, in commercial, that's where the recovery has started. But we expect, as I mentioned earlier, that retail is coming back. We'll come back during the second half of the year.

And basically, we are seeing retail. We expect to resume retail loan growth in the third quarter and accelerate, particularly in the fourth quarter of the year. And basically, it's around consumer spending in credit cards. That's where we see the most significant gap compared to pre-COVID levels.

However, I would say that it's important for us to replace these balances as long as we can do it with good credit quality. And this has been a trend in the market. The market -- we've seen a decline in unsecured. We see this gradually flattening.

And it will come back, and it will help us to grow our loan book, I would expect, by the end of the year at similar pace, both in commercial and region.

Gabriel Dechaine -- National Bank Financial -- Analyst

And when you say retail rebound, you're talking about mortgages in the second half, not the cards and other personal loans?

Raj Viswanathan -- Chief Financial Officer

I'm saying, especially, mortgages, we are doing very well in mortgages. We have had very strong growth, but we expect also unsecured to accelerate, especially in the last part -- in the last quarter of the year.

Gabriel Dechaine -- National Bank Financial -- Analyst

OK. And then quickly on the other segment, asset-liability management activities, you know, the NII line, you know, hitting a pretty big number there. What are you doing ALM-wise?

Raj Viswanathan -- Chief Financial Officer

Thanks, Gabe, it's Raj. So I'll try to help you with that. The NII line benefits from few different things. I talked about the swap monetization that we did.

So that's going to help the NII line right through to 2024. The second component I call out is volumes. So our wholesale funding volumes have been lower as our deposits have been very strong across the P&C footprint. And we're also being very diligent in managing the volume of our issuances compared to the asset growth that we expect.

Taking into account the deposit, you know, windfall, we've been having for some time. The third one I would call out is rates. You know, we're able to finance this, you know, expensive wholesale funding coming off our books of maturity. We're able to do it at lower rates.

Final thing I would call out is we manage the interest rate risk very closely on the balance sheet. So you'll see a lot of benefits attached to it. And our -- the intention is that that should continue to support the other segments through future quarters as well.

Gabriel Dechaine -- National Bank Financial -- Analyst

Great, thanks.

Philip Smith

Operator, can we have the next question, please?

Operator

Thank you. Our next question is from Lemar Persaud with Comark Securities. Please go ahead.

Lemar Persaud -- Cormark Securities -- Analyst

Thanks, guys. My first question is for Daniel. Daniel, just a point of clarification. I think I heard you suggest that impaired losses have paced and similar levels of performing releases that we saw this quarter.

But if I add those two up, I would think that total PCL's guidance for the back half of the year would be below the mid-30s range, considering that you're at 33 basis points this quarter. So I'm wondering, like, did I hear that incorrectly? And maybe you could just clarify that.

Daniel Moore -- Chief Risk Officer

No, Lemar, I think you heard that correctly. So we're definitely guiding toward the mid-30s on the impaired PCLs -- on the total PCLs with a trending downwards, but remains slightly above pre-COVID on a stage three or impaired PCLs. And we get our confidence on that looking at, you know, the overall macro picture, the performance of our book, and the credit quality of our book. All of three are performing very, very well, reflecting on the quality side, the shift to secured on the customer front.

And on the performing side, the very good results of our early stage delinquency. So that's -- as we put all the numbers together, Lemar, that's how we look at it, and those are our forecasts for the remainder of the year.

Lemar Persaud -- Cormark Securities -- Analyst

OK. But like you're in 33 this quarter, and if I assume a lower level of impaired and similar releases, I just don't get how you get to the mid-30s.

Daniel Moore -- Chief Risk Officer

Yeah. Nobody -- Of course, there's growth in there as well, Lemar, and that goes into the overall PCL utilization as well.

Lemar Persaud -- Cormark Securities -- Analyst

OK. Then my next question is for Dan Rees. Just on -- if I look at your business and government loan growth, it was actually quite strong this quarter. So I'm wondering if you could talk to what drove this growth and the sustainability going forward.

Dan Rees -- Group Head of Canadian Banking

Sure. Good morning. Thanks, Lemar. I think our investments in the business bank, which started some six or seven quarters ago, continued to pay off last quarter.

And again, this quarter, you're seeing that in the [Technical difficulty].

Lemar Persaud -- Cormark Securities -- Analyst

Hello?

Dan Rees -- Group Head of Canadian Banking

Lemar, are you still there? We're muted here.

Lemar Persaud -- Cormark Securities -- Analyst

I'm still here. You guys still there?

Dan Rees -- Group Head of Canadian Banking

Yeah, yeah.

Operator

Please proceed --

Lemar Persaud -- Cormark Securities -- Analyst

OK.

Dan Rees -- Group Head of Canadian Banking

Apologies can explain that. I'll just keep going, Lemar. Thanks for your patience. I hope it's not just the two of us on the line.

First of all, to repeat in case you missed the opening, you know, our investments in the business bank kind of continue to pay fruit, whether that's in our priority provinces or some of the industries where we have notable expertise that would include real estate and agriculture, in particular. You're also seeing good growth in the marketplace. But this quarter, again, we think on both deposits and loans, so balance sheet combined, we're No. 1 in Q2.

And that's an impressive result given that we had said just two short years ago that this is a priority area for us. In Q2, we reached the No. 3 spot in terms of total deposits in the sector. There's nothing unusual happening on the government side, this is all business growth in the business bank.

Lemar Persaud -- Cormark Securities -- Analyst

Gotcha. Thank you.

Philip Smith

Operator, can we have the next question, please?

Operator

Thank you. Our next question is from Doug Young with Desjardins Capital Markets.

Doug Young -- Desjardins Securities -- Analyst

Hi, good morning. So, just going back to international banking quickly. Just based on my calculation, I mean, pre-tax, preprovision earnings, it looks like it's down 31% in Peru, but 22% in the Caribbean, Chile, Mexico, Colombia, is roughly flat. So -- and I kind of get the Caribbean.

So I want more focus on Peru. And I guess, specifically, you know, what you're seeing in that market? And I would imagine most of the credit card comments relate to that market. But really, what's -- you know, and specific to Peru, you know, what are the drivers that are going to turn that around? And then just the second part of the question, Raj. You know, can you remind us how you are hedged in terms of currency for the international banking? And if you can kind of talk a bit about it by region, that would be helpful.

Thank you.

Raj Viswanathan -- Chief Financial Officer

Yeah. Let me take you -- take the first part of the question. Yeah, definitely, it's Peru, where we have the biggest opportunity upside in terms of credit card, personal loans growth. The unsecured portfolio has declined more.

And also, we expect an acceleration of commercial growth that was muted this quarter. However, in Peru, we have grown significantly in mortgages. We continue to -- we expect to continue to do that, 10% year over year. And similar to the rest of the country, the positive signal I can share with you is retail bookings, not only in mortgages, but also in credit card, personal loans, had a 20% increase in Q over Q.

So we are seeing definitely a better trend. On the other hand, while revenues have been soft, we have had very good expense management in Peru with an 11% reduction year over year. So we are trying to offset as much as we can once revenue has come back. And also, like Daniel mentioned, credit quality is a very good story.

In terms of PCL, we have declined 35% year over year. And we've had a very good payment behavior on the back of the early disbursement of pension followings, employment recovery in the economy, and our collections and digital capacity supporting collections. So I would say credit and expenses are a very good story. We are really waiting for the economy that we expect strong economy -- strong recovery, sorry, on the second half of the year, with GDP growth of 9%, potentially, even more, to help us grow revenues with unsecured lending coming back.

Brian Porter -- President and Chief Executive Officer

Doug, it's Brian. I just want to add a little something there is that, you know, you're pointing to the recovery in the Pacific Alliance is lumpy. And that's the nature of our footprint and the maturity of the banking markets in the individual countries. So I'd highlight our return on equity in our Mexican business was 15% this quarter.

Mexico and Chile have returned to pre-COVID level of earnings, and Peru is the laggard, and that's just a function of it had a very, very difficult COVID. The nature of the banking market is more unsecured than secured there. The mortgage market is in its nascent stage. So it's, you know, going to take time to come back.

So -- and we're showing signs of that. So regardless of the election of the outcome, the GDP or the growth rate in Peru this year will be 9%. And we'll see how it does next year. But, you know, we expect a strong recovery in Peru, but it will work out sequentially quarter by quarter.

Raj Viswanathan -- Chief Financial Officer

And just on currency, Doug, it's Raj. I'll tell you, the philosophy of the hedge is appropriate to reduce the volatility of the bank's quarterly earnings. That's the principle. And to give you a little bit of context, including the international bank, our exposure in U.S.

dollar earnings actually significantly is higher than our exposure to the Pacific Alliance countries. So U.S. dollar business and GBMs, we have other businesses, which are part of international banking, which have offshore. Then we have -- we consider several factors, you know? Expected currency volatility, reason for the volatility, is it structural short term, macroeconomics, and of course, the ease and cost of hedging.

So one example I'll give you is the Jamaican dollar. It's not possible to hedge it. So we think about it as a basket of currencies and how do we want to manage the, you know, hedge relationships into the volatility is reduced from an earnings perspective. So we disclosed the impact of FX, as you know, in our tables in the quarterly report.

This quarter was slightly elevated at, you know, about $0.06; impacted EPS, about $17 million or so. Slightly higher than what you would expect. That's because, you know, the Canadian dollar strengthened against pretty much every currency other than the Chilean peso. Most of that impacts are to give you context of the $74 million or the $97 million we have year to date, almost 90% of it relates to the U.S.

dollar. So the U.S. dollar spent in almost were 9.2%, I think, year over year, that has an impact to us. And the U.S.

dollar is one currency we now will move around and helps us. And, you know, it's a little bit outsized impact this quarter, but generally, our hedging philosophy is to raise some volatility, and we try to hedge. You know, it could be 50% in one quarter, it could be 100% on another quarter. It depends on the various factors that we consider.

Doug Young -- Desjardins Securities -- Analyst

Thank you.

Philip Smith

OK. Operator, can we have the next question on the line?

Operator

Thank you. Our next question is from Mario Mendonca with TD Securities. Please go ahead.

Mario Mendonca -- TD Securities -- Analyst

Good morning. Raj, probably for you. When I listen to the banks talk about results, and there seems to be a greater emphasis on ALM and what you do to hedge interest rate risk, a greater emphasis from Scotia than what we hear from your peers. And sometimes I struggle to understand whether this is just emphasis or whether Scotia is actually doing something being more active than the peer group.

So when I look at the results, when I drill down, it does seem like there's something more meaningful going on here because the margin for the bank, outside of your domestic and U.S. -- I'm sorry, domestic and International P&C businesses, that margin, if you will, is performing a lot better than what we see for your peers. So I guess what I'm getting at now is if the bank was able to have the successful ALM as interest rates decline, how do you then position yourself for rising rates without some cost? Like how do you just flip that from one quarter to the next? What's out there being some cost from changing the hedges? How does that work?

Raj Viswanathan -- Chief Financial Officer

Thanks for your question, Mario. That's a very detailed question. And, you know, I'd be happy to talk to you offline more than what I will speak on the call here. But your point is valid.

I'd use the term that we do hedge the interest rate risk on our balance sheet, what I would call dynamically. We look at it, not to exaggerate, we look at it every day. We look at the asset profile changes. We look at the liability profile changes.

We look at what the markets tell us. And then we look at saying, "OK, how should we position the bank?" So there's a natural positioning that the bank has. Interest rate risk, as you know, is just inherent to the business that we do. How well we manage will reflect in the results.

That's not to say we'll get it right all the time. Our expectation is we either have to reduce the volatility of interest rates on our earnings, if we can enhance it, even better. Some of the examples I quoted was, you know, how we positioned the bank Q1 '20 and how we benefit it. Right now, we are positioning it primarily through derivatives that we put and how we use a simple example of interest rate swaps.

How do you use it to position the balance sheet appropriately depending on the tenure of the balance sheet, either on the asset side or on the liability side and the interest rate curve? Your point is valid on net interest margin compression. Just look across, you know, Q1 2020, our margin was 2.45%. At the all-bank level, it's 2.26%. That's about an 8% decline.

That's significantly lower than all our peers. Some of it is because of our asset mix granted. You know, we are more secured than some of our peers. But some of it is what you point out, how we manage the interest rate risk.

We'd like to keep it flat. We'd like to keep it stable, and we'd like to enhance it in an increasing interest rate environment. But right now, we have positioned the bank, not just through the balance sheet, how it's positioned, but also some of these hedging activities, which will help us enhance those returns. Like I mentioned, we're happy to talk offline to give you more color and any further questions that you might have on that as a follow-up.

Mario Mendonca -- TD Securities -- Analyst

Yeah. Just as a follow-up then, is it fair to say that when rates go down, Scotia wins; when rates go up, Scotia wins, that Scotia just guesses right. Is that the right way to look at it?

Raj Viswanathan -- Chief Financial Officer

Yeah. If we get our hedging right, yes, absolutely. And in the past years, future, I hope so.

Mario Mendonca -- TD Securities -- Analyst

Thank you. Thanks.

Philip Smith

You know, operator, can we have the next question, please?

Operator

Thank you. Our next question is from Sohrab Movahedi with BMO Capital Markets. Please go ahead.

Sohrab Movahedi -- BMO Capital Markets -- Analyst

Of course, if I can. I'm not sure -- obviously, a tough operating environment in the Pacific Alliance region, in particular, over the last year. And I think you have done quite a bit of work certainly around expenses. We're seeing the recoveries come through now.

But I'm just curious to know what else is left for you to do besides waiting for that economic tailwind or the higher tide that's going to hopefully raise all boats. I'm trying to understand what other levers are at Scotia's behest here to help push this forward. And whether or not you can paint a picture of what your loan book may look like, for example, from a secured, unsecured retail versus commercial, 18, 24 months from now, and how that would compare to a pre-pandemic level. So I'm just trying to kind of get a feel for what is happening to the risk appetite, if anything, between now and when we get through it.

Raj Viswanathan -- Chief Financial Officer

Thank you for your question, Sohrab. Look, I would put it this way. Big picture, there's a delay. We are -- it's going -- it's taking a little bit longer in the Pacific Alliance countries to move for the economies to boom that is happening in North America.

But I think this will happen. I'm very optimistic about the economic recovery and thinking in 12, 18 months. I think it's very likely we will see the Pacific Alliance countries loan growth of double digit, 10% growth. As the economy is recovering, let's think about, again, the demographics relatively low lending, low level of lending to GDP.

So one economy starts reactivating financial services will have a very significant opportunity. Now even today, Sohrab, I expect that between Q2 numbers and the balance of the year, our loan book will grow around mid-single digits. And this will be to continue to be driven by commercial, by mortgage that continues to be strong, but retail will come back gradually, including unsecured lending. Also, as I mentioned, we will see an important fee recovery.

There's a $60 million gap. And I'm glad you mentioned expenses because we have, I think, a very strong performance in expenses. We reduced another $70 million in the last quarter, 5% reduction in expenses. And it's because there's a great digital growth that is helping us to improve -- NPS scores improved in all Pacific Alliance countries in all channels.

Our retail sales are around 50% of all sales in units. And this is driving tremendous productivity in branches as we deploy the e-comm onboarding that allows us to adjust our sales force capacity in branches. So I see opportunities across the board. But you are right.

I think loan growth is going to be the key driver. And I expect retail to start to resume growth in Q3. And in commercial, we already grew 1.5% this quarter. I expect commercial will accelerate in future quarters with the economic recovery.

Sohrab Movahedi -- BMO Capital Markets -- Analyst

But now, I should -- can I ask you a two quick -- yeah, go ahead, sorry.

Brian Porter -- President and Chief Executive Officer

It's Brian. I just want to add, too, that just to reemphasize that we increased our stake in Scotiabank Chile, too, 7% to 82%. And that's an asset we know very well. A country we're very comfortable operating in and those types of opportunities after a period of time like this come up occasionally, and we're obviously in a position to capitalize on.

Sorry, you go ahead, Sohrab.

Sohrab Movahedi -- BMO Capital Markets -- Analyst

Sorry. I just wanted to just -- I appreciate that, Brian. Thank you very much for that reminder. I just wanted to get from -- but not sure, there is no change in risk appetite.

Is that the right way to think about this?

Raj Viswanathan -- Chief Financial Officer

Absolutely. There is no change of risk appetite, Sohrab. What we have done is to grow within our strategies. We are gradually reopening our lending activity in retail following the economic recovery.

That's really following the market opportunities, and we expect to have a loan -- strong loan growth in the last part of the year and accelerating into 2022, which I expect international banking will experience strong growth driven by loan demand, driven by double-digit growth in loans and deposits and strong economic activity.

Sohrab Movahedi -- BMO Capital Markets -- Analyst

OK. Thank you.

Operator

Thank you --

Raj Viswanathan -- Chief Financial Officer

OK. Thank you all. Thank you all for participating in our call today. On behalf of the entire management team, I want to thank everyone for participating in our call.

We look forward to speaking with you again at our Q3 2021 call in August. This concludes our second-quarter results call. Have a great day.

Duration: 59 minutes

Call participants:

Philip Smith

Brian Porter -- President and Chief Executive Officer

Raj Viswanathan -- Chief Financial Officer

Daniel Moore -- Chief Risk Officer

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

Nacho Deschamps

Scott Chan -- Canaccord Genuity -- Analyst

Glen Gowland -- Group Head of Global Wealth Management

Paul Holden -- CIBC

Gabriel Dechaine -- National Bank Financial -- Analyst

Lemar Persaud -- Cormark Securities -- Analyst

Dan Rees -- Group Head of Canadian Banking

Doug Young -- Desjardins Securities -- Analyst

Mario Mendonca -- TD Securities -- Analyst

Sohrab Movahedi -- BMO Capital Markets -- Analyst

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