Dear Fellow Shareholders,
While the pace of change in the banking industry continued to accelerate in 2015, Scotiabank responded with a comprehensive set of efforts to build an even better bank. Our strategic agenda is set, and will position Scotiabank to continue to adapt and thrive in an increasingly competitive and evolving industry.
Our solid results this year were delivered by a strong and growing foundation in Canada, diversified through our priority international markets of Mexico, Peru, Colombia and Chile. Our results reinforce the benefits of a well-diversified business model, where we have consciously chosen a prudent mix of geographies and businesses.
While we have seen modest improvement in some of the markets we operate in, market volatility, historically low interest rates and uneven global growth may in fact constitute the “new normal”.
We are adapting to these operating conditions with increased investments in technology, to transform and simplify the customer experience. These investments will also help to enhance our growth and reduce our structural costs.
I strongly believe that building an even better bank for the long term is the best way for us to enhance shareholder value. In that context, I am pleased to share some of the significant progress we’ve made.
Despite the volatile operating environment, your Bank delivered more than $24 billion of revenue and $7.2 billion of net income. Diluted Earnings per Share were $5.67, representing growth of 4.4%. In addition, return on equity was solid at 14.6%and we maintained strong capital levels with a Common Equity Tier 1 ratio of 10.3%. Earnings growth was driven by strength in our personal, commercial and wealth businesses in both Canada and internationally.
The Bank’s earnings growth and strong capital position allowed us to continue investing in our businesses. We have increased investments in technology, alongside continuing investments in organic growth initiatives, such as commercial banking, credit cards, payments and new deposit-type products. And we have done all of this within our risk appetite.
We also announced several acquisitions – such as the credit card business in Canada from JP Morgan, and Citibank’s retail & commercial banking operations in Peru, Panama and Costa Rica. Our acquisition of Cencosud’s credit card business in Chile, and these transactions will continue to help us build scale and offer customers more products and services.
We also maintained our longstanding track record of returning capital to you through dividends – with two quarterly dividend increases this year, up 6% from 2014.
Operating earnings from our Canadian Banking division, which includes our personal and commercial businesses, grew 10% in 2015. This performance was underpinned by prudent retail asset growth, strong deposit growth, and an eight basis point increase in margin. This improved margin reflects our conscious effort to deepen customer relationships and broaden our suite of products. The result is a more balanced asset mix and a better return on your capital.
Commercial lending results were also higher on solid asset growth of $4 billion or 13%. Wealth management also continued to deliver strong results in 2015.
Operating earnings from our International Banking division grew 10% in 2015. The division includes all of our personal and commercial businesses in Latin America, Central America and the Caribbean– as well as our investments in personal and commercial banking operations in Asia. Results here strengthened in the second half of the year due to strong asset growth, steady margins and stable credit losses; earnings also benefitted from a weaker Canadian dollar relative to international currencies. Our performance in the Pacific Alliance region was particularly strong, with assetgrowthof12%. These businesses represent more than60% of International Banking’s earnings and have the greatest growth potential; as a result, they are the bellwether for the division.
Our Global Banking and Markets division provides corporate loans, capital markets products, and investment banking solutions to customers across our entire global footprint. For the year, operating earnings declined by8% from 2014. This decline resulted from several factors, including lower investment banking revenue – mainly due to challenging market conditions in the energy and mining sectors –margin compression in our lending business – which offset stronger loan growth– and a lower contribution from Asia. In the case of Asia, the repositioning of this business is mostly complete, and performance there is expected to improve in 2016.
The results in Global Banking and Markets are disappointing, and we are accountable for our performance and are committed to improving these results.
Much has been written recently about threats to the ‘traditional’ banking industry. There is no single game changer – no one company or technology is driving this. Rather, we are seeing a confluence of events that are creating some fundamental shifts in the competitive landscape. Of particular note, we see rapidly evolving customer expectations, innovative digital technologies and new service models – all of which are changing how customers are served.
The effect of these shifts is powerful, driving a fundamental transformation of the banking industry in customer-facing applications, end-to-end processes and cost structures. The digital transformation is being led by both financial technology players – known as “FinTech” – and established industry players. In the case of FinTech, there are some who seek to disrupt incumbent banks, while many others seek to actively partner with them. As a result, FinTech represents both threats and opportunities. We are investing in our own digital strategies and partnering with some FinTech players.
Through both of these approaches, we expect to improve our customers’ experience and reduce our structural costs.
We are operating in a different environment than we were just a few years ago. It is clear that the financial services industry continues to evolve rapidly, and Scotiabank is embracing the change. Your Board and Management Team have been working diligently over the past year to adapt and evolve our enterprise-wide strategic agenda. This medium-term agenda clearly articulates those areas where we must be sharply focused going forward.
As an overall strategy, we continue to believe strongly in our diversified business model, and our geographic mix. We have well-defined growth plans for Canada, and are focused on growing in our priority international markets.
As part of our strategic agenda, we have identified five important priorities to guide the Bank’s efforts:
Customer Focus: we are shifting to a much more customer-centric model, where a sharper focus on the customer informs all decision-making, operations and investments across the Bank.
Leadership: we are adapting our leadership team to reflect the skills and diversity we need going forward.
Low Cost by Design: We are shifting to a “low cost by design” approach, which will benefit our customers, employees and shareholders.
Digital: we have embarked upon a digital transformation of the Bank to ensure a consistently excellent customer experience and highly efficient operations.
Business Mix: we are evolving our business mix to align with opportunities where we have, and can build, deeper relationships with our customers.
There is a lot of work to be done, without question. We have made solid progress, and we know that Scotiabank is very good at execution. We will have more to say on our transformational journey over the next year, and I look forward to sharing more with you about our continuing progress.
In addition to shifting competitive dynamics in our industry, we also expect that uneven economic conditions will likely persist in 2016. Both of these will present challenges for us at times, but 2016 will also be filled with opportunities for us to continue building an even better bank.
We will continue to partner with our customers – whether they are in our higher growth markets, or those that are facing challenging economic conditions. In Canada, we provided more than$5billion in loans to help small businesses grow and create jobs; and we also helped many Canadians finance their homes, valued at $400 billion. At the end of the year, we had $1.3 billion in consumer and micro-finance loans outstanding in Peru. And in Mexico, we financed $1 billion worth of auto loans. These activities are fundamental to our role as a bank, and they demonstrate our commitment to banking the real economy, wherever we operate.
We will also continue to give back to the communities in which we live and work. Scotiabank employs approximately 90,000 people around the world, with each Scotiabanker contributing in their own way to the local community and economy. Your Bank also provided approximately $70 million in donations and sponsorships, helping to promote education, active lifestyles and the arts across more than 50 countries.We believe in strong communities, and will continue this strong tradition of giving back.
At the end of the day, banking is all about trust. Our customers must believe that we truly have their best interests in mind. Scotiabankers believe deeply in helping our customers become better off; in fact, that is “why we bank”.
All in all, we have a lot to be proud of. Scotiabank is a great bank, with a well-recognized global brand. We have an attractive geographic footprint that is valued by our stakeholders. We have a strong financial position, great people and a highly motivated team of leaders. We also have supportive shareholders, who are ably represented by your Board of Directors. I thank you for that support, and for the Board’s guidance and high level of engagement.
In closing, I would like to thank our 23 million customers around the world for their business and – just as importantly – for their trust. I would also like to thank Scotiabankers all around the world for the work they do day-in and day-out to earn this trust, and to help our customers become better off. I am proud of our team and confident in the Bank’s future.