Canadian Banking Finally Earns Its Keep, But the Quarter's Marginal Dollar Came From Tax and Mark-to-Market

Results vs. Consensus

Scotiabank reported fiscal second-quarter results before the open on May 27, with the call at 7:15 a.m. ET. All figures are Canadian dollars under IFRS. The bank reports on a fiscal year ending October 31, so this quarter covers February 1 to April 30, 2026.

The consensus range across the two independent sources we cross-checked was C$1.93 to C$1.94; C$1.93 is the more widely quoted figure and is the one used above. No directly published Canadian-dollar revenue consensus was available, so the revenue line uses the surprise percentage from vendor data, which is currency-invariant, with the level back-translated at the implied rate.

Year-over-year comparison

Sequential comparison

The sequential view is where the quarter changes character. On a reported basis it looks like a blowout, because the prior quarter carried a C$423M loss on the completed sale of the Colombia, Costa Rica and Panama operations. Strip that out and the bank earned slightly less than it did in the January quarter.

Six-month view

Adjusted operating leverage on the filed six-month figures is 5.3 points. Management quoted 4.9%, which is the same measure computed against a prior-year base restated to exclude the divested operations. The reported six-month operating leverage of 15.2% is not an operating result at all: it exists because the prior-year expense base carried a C$1,388M impairment on the Latin American businesses being sold.

Revenue

Reported revenue of C$9,837M grew 8.3% year over year, with net interest income up 4.8% and non-interest income up 13.3%. That split matters: two-thirds of the revenue dollars added in the quarter came from fees, marks and associate income rather than from spread. Net interest income actually declined 1.1% sequentially on three fewer days in the quarter, partly offset by a four basis point rise in the all-bank margin to 2.49%, the fourth consecutive quarter of margin expansion.

Management consistently quoted a different set of growth rates: revenue up 13%, net interest income up 10%, non-interest income up 17%. Those are correct on a base restated to exclude the divested Colombian, Costa Rican, Panamanian and Peruvian consumer-finance operations, and the bank discloses the restated base clearly in its supplementary material. They are not the growth rates in the income statement, and the gap between 8% and 13% is large enough that any comparison to a competitor's headline revenue growth needs to specify which one is in use.

Assessment: Underlying revenue momentum is genuine, particularly in Canada, but the reported top line is growing at roughly two-thirds the rate management describes. The honest framing is that Scotiabank sold about C$390M of quarterly revenue in the past eighteen months and is now growing the remainder at a high-single-digit rate.

Margins and expenses

The productivity ratio is the cleanest evidence of operating progress. Adjusted expenses of C$5,171M grew 2.1% against 8.2% adjusted revenue growth, taking the adjusted productivity ratio to 52.5% from 55.7%, a 320 basis point improvement. On the reported basis the improvement is 350 basis points to 52.8%. Canadian Banking's ratio of 46.5% is 230 basis points better than a year ago and is the best of the four operating segments.

The 2% expense growth headline requires the same basis caution as revenue. Ex-divestitures, adjusted expenses grew 7%. Within the line items, performance-based compensation rose 20% to C$719M and advertising and business development rose 13%, while professional fees fell 23% and communications fell 12%. Technology-related spend of C$1.4B, which the bank defines to include technology personnel, depreciation and amortization, professional and direct technology costs, was up C$114M or 9% ex-divestitures. Salaries and benefits, the largest line at C$1,978M, grew only 1%.

Assessment: The efficiency gain is real but is being delivered while the underlying cost base grows 7%. That works while revenue grows 13% on the same basis. It stops working the moment capital-markets revenue normalizes, which is precisely the composition risk in the quarter.

Earnings per share

Adjusted diluted EPS of C$2.02 grew 32.9% year over year against 31.2% growth in adjusted net income attributable to common shareholders, so roughly 1.7 points of the EPS growth came from the smaller share count. The bank repurchased 6.4 million shares in the quarter and 22.1 million since fiscal Q3 2025, taking the weighted average diluted count to 1,232 million from 1,246 million a year ago.

The reported figure of C$2.00, up 35.1%, is the number that led every wire story. It is also the number most distorted by the year-ago comparison, because the prior-year quarter carried C$43M of pre-tax adjusting items in expenses and the trailing six-month prior-year base carried the C$1,388M Latin American impairment.

Assessment: On the measure that matters for a bank, adjusted earnings power per share, Scotiabank went backwards this quarter. C$2.05 in January became C$2.02 in April. The direction is not alarming given three fewer days and a normalizing capital-markets quarter, but it is worth stating plainly, because nobody on the call did.

Segment Performance

Scotiabank reports four operating segments plus Other. A basis note before the tables: the bank presents segment results both as total net income and as net income attributable to equity holders, and the two differ where non-controlling interests exist, principally in International Banking. The press release headline paragraph quotes total segment net income (International Banking "C$736 million, up 3%"); the segment review, the return-on-equity tables and the investor materials all use net income attributable to equity holders (C$701M, up 4%). The tables below use net income attributable to equity holders throughout, which is the basis on which segment ROE is struck.

Canadian Banking

This is the segment on which the investment case now rests, and it delivered the cleanest quarter in years. Net income attributable to equity holders of C$935M was up 52.5%, ROE reached 17.8% against 12.0% a year ago, and pre-tax pre-provision earnings grew 13%. The margin expanded four basis points sequentially to 2.36%, a fourth consecutive increase, with the bank attributing three of those points to retail banking and one to business banking. Revenue of C$3,483M split C$2,565M retail and C$918M business banking; the business line grew 9% year over year against retail's 7%.

Two engines are running. The first is the mortgage book repricing: renewals from the 2021 vintage are rolling onto materially higher risk-adjusted margins, and the segment's risk-adjusted margin of 1.85% is 31 basis points above the year-ago quarter. The second is fee income, up roughly 10% year over year, which the segment head unpacked into three components.

"First is on the card book. Even though the balances have not grown, what you're seeing in the card book is a real shift in the quality of the card book,45% of new card acquisition now is in the premium card segment. That obviously has a huge impact on purchase volumes, transactions and balance growth." — Aris Bogdaneris, Group Head, Canadian Banking

The weak spot is balance growth. Average loans grew only 3%, with mortgages up 4% and commercial and small business up just 1%, and average deposits fell 3% as term balances ran off. Spot commercial loans grew 2% sequentially, which management flagged as the inflection point, and the CEO committed to catching the market by year end.

"Average loan growth remains in the low single digits. But by the end of the year, we expect to catch up to the broader market, thanks in large part to an acceleration in commercial loan growth." — L. Scott Thomson, President and CEO

Assessment: Margin and mix have carried this segment for four quarters while volume has not. That is a high-quality way to grow earnings, and the ROE improvement from 12.0% to 17.8% is the single most important number in the release. But the next leg has to come from balances, and the commercial-loan promise is now specific enough to be graded in October.

International Banking

The segment produced a 4.76% net interest margin, a level the CFO himself described as a high-water mark, and a 47.9% productivity ratio that is 350 basis points better than a year ago. Net income attributable to equity holders of C$701M was up 3.7%, and ROE held at 16.0%. On a constant-dollar basis excluding divested operations, revenue grew 7% and pre-tax pre-provision earnings grew 12%.

The margin move is the story and the caution at the same time. The 22 basis point sequential expansion breaks down as 19 points from Mexico, Peru and Chile on lower funding costs, two points from the Caribbean and one from Brazil and other markets. The Caribbean contribution exists because U.S. rates did not fall, which is a tailwind the bank did not underwrite.

"If I look forward, this quarter, there was some nuance. There's some seasonality to some Q2 benefits that we get in International Banking NIM. I call it somewhere between 7 to 10 basis points, Mario." — Rajagopal Viswanathan, Group Head and CFO

Underneath the margin, the balance sheet is still contracting. On a constant-dollar basis excluding divestitures, average loans fell 2% year over year, with retail up 4% and non-retail down 8%. Deposits are the offset, up 5% on the same basis with non-personal balances up 7%. The segment head framed this as deliberate.

"So we have been optimizing expensive deposits out and replacing them by operational deposits sustainably across all business lines." — Francisco Aristeguieta, Group Head, International Banking

Assessment: International Banking's return profile is improving because the denominator is shrinking and the spread is widening, not because the franchise is growing. Both of those levers have a visible end: the margin carries seven to ten basis points of acknowledged seasonality plus a U.S.-rate tailwind, and the non-retail book cannot fall 8% a year indefinitely without eroding the earnings base. Management points to fiscal 2027 for consolidation of the growth pivot, which is a long time to hold a 16% ROE on a shrinking book.

Global Wealth Management

The least complicated segment and the most consistent. Net income attributable to equity holders of C$474M was up 18.8%, ROE of 17.9% was 210 basis points higher year over year, revenue grew 14.2%, and spot assets under management reached C$450B, up 18%, with assets under administration of C$820B up 15%. Canadian AUM of C$401B grew 19% and international AUM of C$49B grew 15%.

Net sales of C$4.7B in the quarter were roughly four times the prior-year figure and marked a seventh consecutive quarter of positive flows. The mix of those flows is what makes this durable rather than market-driven.

"I think what really stands out to me in the quarter, Aris, is that we saw really strong AUM growth driven by net new client flows. Like markets were actually pretty choppy during the quarter. They were up for the full quarter, a bit down in March. And in that kind of environment, we might typically see clients moving to the sideline. But what I found really encouraging is we saw positive client flows throughout the quarter despite that backdrop." — Jacqui Allard, Group Head, Global Wealth Management

The internal referral machine is the differentiator. Closed referrals across Canadian wealth, retail and commercial reached C$9B year to date, of which C$2.8B came from commercial banking, double the prior-year first half. Long-term retail mutual fund sales rank moved to third among bank peers from fifth a year ago and sixth at the Investor Day.

Assessment: This is the segment that most clearly justifies the strategy of trading balance-sheet growth for relationship depth. Expenses grew 12% against 14% revenue growth, so the operating leverage is thin at 2.1% year to date, but flows compound and the fee base is stickier than spread income. If the ROE bridge to 14% is going to work, a meaningful share of it comes from here.

Global Banking and Markets

A strong revenue quarter inside a weak expense year. Revenue of C$1,592M grew 9.2% year over year, with capital markets up 25% and business banking down 7%. Within capital markets, global equities revenue of C$382M grew 44% and fixed income, currencies and commodities of C$540M grew 15%, while business banking revenue of C$670M fell from C$723M. Net income attributable to equity holders of C$457M was up 10.7% year over year but down 16.1% sequentially from an exceptional January quarter, and ROE fell to 12.4% from 14.3%.

The segment is the only one running negative operating leverage, at negative 1.6% year to date, with expenses up 10% against 9% revenue growth. The loan book is also the smallest it has been, with average loans down 4% year over year, though the CEO framed the decline as deliberate portfolio management.

"GBM loans grew 1% quarter-over-quarter or up 3%, excluding our Asia portfolio, which is in runoff." — L. Scott Thomson, President and CEO

Management attributes the gap between the reported and ex-Asia growth rates to the Asia portfolio being in run-off, but does not size it: GBM loans grew 1% sequentially, "or up 3%, excluding our Asia portfolio, which is in runoff." The dollar quantum of the run-off is not disclosed.

Assessment: A 25% capital-markets revenue quarter with a 12.4% ROE is not a good trade. The segment is carrying C$15.2B of attributed equity against Global Wealth Management's C$10.8B, and earning C$457M on it where Wealth earned C$474M on two-thirds the capital. Management is investing into that gap rather than shrinking it, and the deal pipeline commentary suggests the third quarter starts strong, but this is the segment most likely to mean-revert against the fiscal 2027 ROE target.

Other

The Other segment, which houses Group Treasury, investments in associated corporations and unallocated corporate items, swung to a C$28M reported profit from a C$416M loss in the prior quarter and a C$125M loss a year ago. On an adjusted basis it went from a C$41M loss to a C$35M profit. The driver is not recurring.

"There are 2 items that have gone into that line this quarter. One, I talked about the mark-to-market gains, which is on the private equity book that we have in treasury. That contributed somewhere between $35 million to $40 million." — Rajagopal Viswanathan, Group Head and CFO

The second item was roughly C$46M from an equity-accounted associate's own asset marks following a transaction, picked up after tax. Separately, the bank's approximately 14.9% stake in KeyCorp contributed C$77M on a reported basis and C$85M adjusted, worth C$0.06 and C$0.07 a share respectively, down from C$81M and C$89M in the prior quarter.

Assessment: Roughly C$81M of pre-tax gains in a segment that management expects to return to a modest loss. That is a clean, disclosed non-recurring item, and the right way to read the quarter is to move it out.

Key Performance Indicators

Credit Quality

Total provisions of C$1,217M represented 66 basis points of average net loans and acceptances, down nine basis points year over year but up five sequentially. The year-over-year improvement is entirely a performing-provision comparison: last year's quarter carried a C$346M performing build against U.S. tariff uncertainty, while this quarter's was C$88M. Underneath that, impaired provisions rose in both directions, up C$77M year over year and C$26M sequentially.

The impaired provision line has now risen for four consecutive quarters, from C$975M in fiscal Q3 2025 to C$1,129M. Read against the performing line, which collapsed from C$346M to a range of C$66M to C$88M over the same span, the composite has been flattered by the absence of a build rather than by improving loss content.

The gross impaired loan continuity walk is instructive: opening balance of C$7,248M plus C$2,662M of new formations, less C$685M of declassifications, C$447M of payments, C$1,099M of write-offs and C$71M of currency and other movements, closing at C$7,608M. Non-retail formations rose C$368M sequentially, driven by one account in International Banking and one in Canadian Banking. Retail formations declined in both Canada and International.

The allowance walk tells the same story in provision terms. The performing build of C$88M decomposes into C$15M of volume, C$23M of credit quality and C$50M of forward-looking indicators; stage three provisions of C$1,129M and net write-offs of C$958M then take the allowance to C$7,444M before a C$100M currency and other reduction.

Canadian retail: the headline improved, the mortgage book did not

The unsecured improvement is genuine and management earned it. Credit card delinquency fell 31 basis points sequentially and lines of credit fell eight, which the Chief Risk Officer attributed to expanded collections capacity, better client segmentation and self-service channels. The bank quantified the effect as a 20 basis point sequential improvement in 90-plus-day delinquency across unsecured products.

Mortgages went the other way, and have risen in each of the last three quarters: 0.24%, 0.24%, 0.28%, 0.31%, 0.32%. The bank attributes this to COVID-era vintages with stress concentrated in Ontario and the Greater Toronto Area, where uninsured 90-plus-day delinquency sits at 41 basis points against 27 a year ago. The portfolio itself is high quality on paper, with an average FICO score of 808 and 61% loan-to-value on uninsured originations in the quarter, and Canadian retail loans of C$404B are roughly 94% secured. But a mortgage book that deteriorates for three consecutive quarters while the policy rate is forecast to rise from 2.25% to 3.00% by March 2027 is not a portfolio that has cleared.

International retail and the Brazilian corporate account

International retail 90-plus-day delinquency improved six basis points sequentially to 3.25%, with credit cards down 26 basis points and personal loans down 22, while mortgages ticked up one basis point to 3.18%. The bank flagged Mexican mortgage and auto vintages and softness in the Chilean consumer finance book as the areas still under pressure.

The quarter's single largest credit event was a corporate exposure in Brazil, which the Chief Risk Officer sized at roughly seven basis points of all-bank impaired provisions, or about C$130M of the C$1,129M.

"So in terms of this specific file, it was essentially driven by company-specific factors rather than broader macroeconomic or trade-related pressures. This is a long-standing client for us, investment-grade rating. It's in Brazil. And so this is a domestically important file within that economy." — Shannon McGinnis, Chief Risk Officer

The mitigating detail offered was that Scotiabank was one of a syndicate and held less than 5% of the total amount outstanding, that the non-retail watch list remains below 2% of total outstandings, and that cumulative impaired provisions in the Brazilian book had run at roughly C$65M before this quarter.

Assessment: The credit picture is two-speed and the split is uncomfortable. Retail is improving on collections execution and the improvement looks durable. Non-retail is producing single-name surprises in consecutive quarters, in International in Q2 after "a few in Q1," and the impaired provision ratio has climbed from 57 to 61 basis points over a year on a book that is not growing. A 96 basis point allowance ratio, 24 basis points above where it sat in Q1 2023, is a reasonable cushion. It is not a cushion that survives a genuine Canadian consumer break, and the mortgage delinquency series is the number to watch.

Capital and Shareholder Returns

CET1 finished at 13.3%, unchanged sequentially. The walk is worth reading because it shows a bank generating capital and spending it: earnings less dividends added 24 basis points and risk-weighted asset changes excluding currency added eight, for 32 basis points of internal capital generation. Against that, model and methodology updates cost 13 basis points, share repurchases cost 13, currency and other cost four, and fair-value securities cost three.

Risk-weighted assets were essentially flat sequentially at C$474.4B, with a C$1.5B currency reduction and a C$2.9B decline in credit-risk book size offset by a C$4.5B increase from model and methodology updates and C$1.0B from operational risk. In other words, the bank shrank its credit book and the regulator's models gave the capital back.

Capital return was the loudest part of the prepared remarks. The dividend rose C$0.04 to C$1.14, a 4% increase, and the bank repurchased 6.4 million shares in the quarter, taking cumulative repurchases since fiscal Q3 2025 to 22.1 million shares.

"Over the past 12 months, we have returned $7.5 billion in capital to our shareholders through share buybacks and dividends. And looking ahead, we expect to keep this pace while maintaining strong capital ratios." — L. Scott Thomson, President and CEO

Assessment: CET1 at 13.3% against an OSFI minimum leaves genuine room, and the 32 basis points of quarterly internal capital generation comfortably funds the current return pace. The less-discussed side is that TLAC fell 170 basis points year over year and the leverage ratio fell 20, so the balance sheet is being levered modestly even as the risk-weighted ratio holds. That is a deliberate trade and not yet a concern, but it means the CET1 headline overstates how much capital flexibility has actually been added.

Key Topics & Management Commentary

Overall Management Tone: Management was confident and, for the first time in this turnaround, specific: dated commitments on commercial loan growth, a named quarter for the ROE target, and a margin guide with a number attached. The confidence was expressed almost entirely through restated growth rates that exclude divested operations, and the sequential decline in adjusted earnings went unmentioned by anyone on either side of the call. Analyst pushback was narrow and concentrated on credit, where the answers were candid and quantified; on the composition of the beat, one question was asked and answered fully, and then nobody followed up.

1. Two pre-tax pre-provision growth rates on one call

Within nine minutes of each other, the CEO and CFO quoted different growth rates for the same metric. Both were correct. Neither said which basis they were using.

"Adjusted earnings came in at $2.7 billion or $2.02 per share. Pretax pre-provision earnings were up 16% year-over-year as we continue to drive revenue growth and manage our expenses effectively." — L. Scott Thomson, President and CEO

"This resulted in a pretax pre-provision profit growth of 20% year-over-year." — Rajagopal Viswanathan, Group Head and CFO

The 16% is adjusted pre-tax pre-provision profit as filed, C$4,674M against C$4,031M. The 20% is the same measure with the prior-year base restated to exclude the Colombia, Costa Rica, Panama and CrediScotia operations, C$4,674M against C$3,886M. Reported pre-tax pre-provision profit grew 17%, and on an ex-divestiture reported basis, 22%. Four rates, one quarter.

To the bank's credit, all four are disclosed side by side in the investor materials, and the CFO opened by stating that all-bank commentary would be on an adjusted basis while business lines moved to reported this quarter.

"My All Bank and other segment comments will be on an adjusted basis, which includes the usual amortization of acquisition-related intangibles. The business line results will be on a reported basis beginning this quarter." — Rajagopal Viswanathan, Group Head and CFO

Assessment: This is the single most important thing to get right about the quarter. A reader who takes management's spoken growth rates at face value will overstate revenue growth by five points, net interest income growth by five points and expense growth by five points. The ex-divestiture basis is legitimate and arguably the better read of underlying momentum, but it is not the basis on which the stock's earnings are reported, and it flatters everything except expenses.

2. Canadian Banking's ROE step-change is four quarters old

Canadian Banking's ROE went from 12.0% a year ago to 17.8% this quarter, and the intervening quarters were 18.4%, 17.8% and 18.1%. That pattern matters more than the year-over-year headline, because it means the step-change happened in fiscal Q3 2025 and has held for four quarters rather than being a single favourable comparison against a quarter that carried a C$317M performing provision build.

The segment head connected the improvement to a strategy set several years ago and named four drivers: deposit and lending mix shift, risk-adjusted margin improvement on mortgage renewals, fee income growth across cards, mutual funds and insurance, and referrals into wealth.

"I think in line with what you heard, the numbers this quarter really affirm the direction and the strategy we embarked on a few years back, and you see it in the numbers. And you have to go back, I think, to 2022 to see growth rates at this level across revenues, PTPP and the like." — Aris Bogdaneris, Group Head, Canadian Banking

Assessment: Sustained. The risk-adjusted margin at 1.85% against 1.54% a year ago, and the productivity ratio at 46.5% against 48.8% implied by the 230 basis point improvement, are structural rather than cyclical measures. This is the pillar of the investment case and it is intact.

3. The commercial-loan promise moves from pipeline to proof

Canadian commercial and small business loans grew just 1% year over year on an average basis, but spot commercial balances rose 2% sequentially, and management put a date on the catch-up. The pipeline explanation was more specific than in prior quarters.

"The pipeline has grown substantially, as I mentioned, on loan pipeline and the deposit pipeline. And all you're seeing now is these pipelines materializing. The paydowns we saw in real estate have stabilized now. So that is also helping the overall balance growth." — Aris Bogdaneris, Group Head, Canadian Banking

The build-out was described as roughly eighteen months of sales-force reconstruction in mid-market, adding relationship managers in British Columbia and Quebec, with growth described as broad-based across real estate, mid-market and agriculture.

Assessment: This is now a gradeable commitment. Management said commercial growth would match market rates in subsequent quarters, credit card spot growth would reach mid single digits by year end, small business would stay in high single digits, and total loan growth would catch the market by the end of fiscal 2026. Two quarters remain. If the October quarter shows commercial still at 1%, the margin-and-mix story has to carry Canadian Banking alone for another year.

4. Deposits: winning the mix, losing the balance

Canadian Banking average deposits fell 3% year over year even as personal day-to-day and savings balances grew 3%. The gap is term. Industry-wide GIC balances are contracting as customers reallocate, and Scotiabank is retaining the money but not on the balance sheet.

"Industry-wide term deposit balances continued to contract during the quarter, but we've been able to consistently retain over 90% of retail GIC maturities despite intensifying deposit competition." — L. Scott Thomson, President and CEO

Day-to-day and savings deposits grew 3% year over year while total deposits fell 3%, the decline concentrated in term — a mix shift management describes as being in line with its strategy, though it does not disclose the resulting share of personal deposits. The bank launched the Scotia High Interest Savings Account this month, structured to pay tiered rates based on a client's total relationship balance. Global Wealth Management average deposits grew 17%, which is where a meaningful share of the departing term money went.

Assessment: Strategically coherent and financially awkward. Shifting from term to operating deposits lowers funding cost and improves margin, which is visible in the four-basis-point Canadian margin expansion. But the loan-to-deposit ratio drifted to 105% from 104% and wholesale funding rose to 19.6% of total assets from 19.1%. The bank is funding a flat loan book with slightly more wholesale money while telling a deposit-quality story. Both things are true.

5. International Banking's margin is at a high-water mark and management said so

The 4.76% international margin is 26 basis points above a year ago and 22 above the prior quarter, against a long-standing guide of 4.40% to 4.50%. Asked what drove it, the CFO led with the disclosure that it will not hold.

"Absolutely, Mario. I think you're right. 4.76% is a high watermark for the international margin this quarter." — Rajagopal Viswanathan, Group Head and CFO

He decomposed it into rate cuts in Mexico, Chile and Peru that were expected, an unexpected tailwind from the absence of U.S. rate cuts holding up Caribbean margins, an asset mix shift toward non-mortgage retail lending, and seven to ten basis points of second-quarter seasonality. The forward guide was 4.65% to 4.70% for both the third and fourth quarters.

Assessment: Credit to management for volunteering the seasonality rather than letting the Street extrapolate. The guide still implies a structurally higher margin than the 4.40% to 4.50% framework, which is a genuine upgrade worth roughly 20 basis points of segment margin. The dependency is uncomfortable, though: a material share of the improvement rests on the Federal Reserve not cutting, which is a position the bank has taken by accident rather than design.

6. International Banking is being fixed by shrinking

Strip out currency and divestitures and the segment's average loans fell 2% year over year, with retail up 4% and non-retail down 8%. Deposits grew 5% on the same basis. Revenue grew 7% and pre-tax pre-provision earnings 12%, so the segment is producing more profit from less balance sheet, which is what the strategy intends. The question is when the shrinking stops.

"And remember, this year was a pivot to growth, right? And we wanted to ensure that the new value propositions resulting from the segmentation exercise generated high-quality vintages that allow us to get to primacy faster and sustainably. So we are in that journey." — Francisco Aristeguieta, Group Head, International Banking

Pressed on when non-retail growth would appear, the answer pointed to Mexico showing early progression this quarter, similar early progress in Peru, Chile and the Caribbean, and consolidation by 2027.

Assessment: "Pivot to growth" is now in its second year and the non-retail book is still contracting at 8%. The segment's 16.0% ROE is the second-highest in the bank and is being earned on a base that fell from C$18.1B of attributed equity a year ago to C$18.0B. That is a defensible way to run a business in transition. It is not a growth asset, and pricing it as one is the mistake available here.

7. The Brazilian fallen angel

A single investment-grade corporate borrower in Brazil accounted for roughly seven basis points of all-bank impaired provisions and most of the C$272M sequential increase in International Banking gross impaired loans. The Chief Risk Officer was direct about what it was and what it was not.

"I think when you look at a corporate portfolio, you do from time to time, see what I would call a fallen angel. And I would put that in this category. And we do not expect to see those frequently. And I would say we haven't seen those frequently. And again, back to this particular portfolio in the last, I guess, more than 15 years, we've had one." — Shannon McGinnis, Chief Risk Officer

The supporting detail was reasonable: a syndicate position of under 5% of the total outstanding, a non-retail watch list below 2% of total outstandings, and a Brazilian portfolio described as selective and concentrated in high-grade names. The bank expects non-retail impaired provisions to moderate meaningfully from this level.

Assessment: Taken alone, episodic. Taken with the acknowledgement that there were "a few in Q1" as well, and with Global Banking and Markets' own impaired provisions running at 12 basis points on "additional provision on one account," the pattern is that single-name corporate surprises have now appeared in consecutive quarters. The individual explanations are each convincing; the sequence is less so.

8. Credit guidance moved the wrong way

The most important disclosure of the quarter was a downgrade. Impaired provisions are now guided to the mid-50 basis point range for the balance of fiscal 2026, above what the bank told investors in December.

"we do expect impaired PCLs to settle in the mid-50 basis points range for the remainder of '26, which I mentioned in my remarks. I think it is important, though, that we still expect a gradual trend down from first half levels, although more modest than we originally anticipated." — Shannon McGinnis, Chief Risk Officer

The moving parts named were prolonged inflationary pressure on vulnerable Canadian consumer segments, elevated energy costs feeding into Latin American economies, and continued trade uncertainty. Against that, retail collections are working and non-retail is expected to moderate from an inflated second quarter.

Assessment: Mid-50s against a Q2 print of 61 basis points is still an improvement of roughly six basis points, worth around C$110M of quarterly pre-tax provision or about C$0.07 a share after tax. The problem is direction of revision rather than level. Five months ago the guide was better than this; the environment got worse; the guide moved. A bank targeting 14%-plus ROE next year has now built in a slower credit tailwind than it had planned on.

9. Wealth is the cleanest part of the story

Net sales of C$4.7B, roughly four times the prior year, a seventh consecutive quarter of positive flows, AUM up 18% to C$450B, and a mutual fund sales ranking that moved from sixth at the Investor Day to fifth a year ago to third now.

"We were #3 this quarter for the third quarter in a row compared to our bank peers in long-term mutual fund sales. That's up from #5 a year ago, #6 at Investor Day. And net flows in the first half of the year and Aris' business alone exceeded our full year flows for 2025." — Jacqui Allard, Group Head, Global Wealth Management

The referral engine between Canadian Banking and Wealth is the mechanism: C$9B of closed referrals year to date, of which C$2.8B originated in commercial banking, double the prior-year first half. Fee-based assets in the advisory businesses reached an all-time high.

Assessment: Confirmed and accelerating. This is the highest-quality earnings stream in the bank and the one least exposed to credit or rate cycles. At C$474M of quarterly earnings on C$10.8B of attributed equity it is also the most capital-efficient. If there is an argument for paying up for Scotiabank, it starts here rather than in Canadian Banking.

10. Global Banking and Markets: a good revenue quarter inside a bad expense year

Capital markets revenue grew 25% year over year, with global equities up 44% and fixed income, currencies and commodities up 15%. Business banking revenue fell 7%. Expenses grew 10% against 9% revenue growth, leaving year-to-date operating leverage at negative 1.6% and ROE at 12.4%, down from 14.3% in the prior quarter.

The CEO framed the U.S. build-out as the strategic priority within the segment, singling out mortgage capital markets as the capability that is working and the one he would extend by acquisition.

"As we've highlighted before, I think pretty transparently, there's some capabilities in Travis' business that we need to address, particularly around mortgage capital markets. It would be nice to get some FDIC insurance." — L. Scott Thomson, President and CEO

Assessment: The revenue is welcome and the pipeline commentary suggests the third quarter starts well, but a segment earning 12.4% on C$15.2B of capital during a 25% capital-markets quarter is telling you what it earns in a normal one. This is where the ROE target is most vulnerable, and it is the segment for which management offered no efficiency or return commitment.

11. Capital allocation: buybacks framed as an arbitrage, acquisitions sized small

Asked whether the buyback still makes sense at a higher share price, the CEO answered with a relative-value argument rather than an absolute one.

"And I say that because of the valuation gap between us and our peers, which will narrow over time. And so we should take advantage of that while we're in this position." — L. Scott Thomson, President and CEO

On acquisitions, the framing was unusually concrete. The targets are a U.S. capability that brings FDIC insurance and sticky deposits to support mortgage capital markets, and a U.S. offshore booking point for the Mexican and Canadian wealth businesses.

"When I say tuck-in, what's the size? I don't know, think $200 million, $300 million, $400 million. I mean we're not talking about billions of dollars here. We're talking about tuck-in. And frankly, I would like to do that sooner rather than later because I think the opportunity in those 2 businesses is so material." — L. Scott Thomson, President and CEO

Assessment: The buyback logic is honest and self-limiting: it says the repurchase is attractive because the discount exists, which implies it becomes less attractive as the discount closes. After a 52% twelve-month move that closing is well underway. The acquisition sizing at C$200M to C$400M is small enough to be irrelevant to capital but large enough to signal that the U.S. build is a real strategic direction rather than a talking point.

12. Technology spend and the AI platform

Technology-related expenses reached C$1.4B in the quarter, up 9% ex-divestitures, and the bank used prepared remarks to launch two platforms: Scotia Intelligence, described as the unified enterprise layer for data and AI governance, and Scotia Navigator, the employee-facing assistant that "automates routine tasks and redirect capacity towards more complex, higher-value tasks." What management supplied alongside the launch was a governance framework rather than a scoreboard: four stated principles, led by security, then model-agnostic flexibility, data, and the platform layer itself. No adoption metric, no user count and no productivity figure was disclosed for either platform.

"Our approach is grounded in 4 key principles, but at the top of the list is security, which has taken on added importance given the cybersecurity risk posed by advanced AI models." — L. Scott Thomson, President and CEO

Assessment: The metrics are activity measures, not outcome measures, and none of them appears in the expense bridge as a saving. The honest read is that technology spend is running ahead of overall expense growth by five points and the return is still prospective. That is the correct investment to be making, and it is also the reason the 2% headline expense growth is not a durable run rate.

Guidance & Outlook

Scotiabank does not guide to revenue or earnings per share. What it does guide is credit, margin and the medium-term return target, and all three moved this quarter.

Implied second-half arithmetic. First-half adjusted EPS of C$4.07 annualizes to roughly C$8.14. Holding that flat implies a second half broadly in line with the first, which is what the moving parts point to: the international margin guide of 4.65% to 4.70% gives back six to eleven basis points from this quarter, the Other segment gives back roughly C$0.06 a share, and the tax rate normalizes. Against those headwinds, the impaired provision guide of mid-50 basis points against a Q2 print of 61 is worth roughly C$110M of quarterly pre-tax provision on the C$759B average loan base, or about C$0.07 a share after tax, and Canadian Banking margin and commercial-loan growth should both add.

Guidance style. Conservative on credit, specific on margin and unusually dated on volume. The bank has been willing to publish a number and then revise it, which is more useful than a bank that publishes nothing. The revision that matters is the credit one, and it is the second time in this cycle that the pace of improvement has been pushed out rather than the level moved.

Where the ROE target stands. Adjusted ROE of 13.2% needs roughly 80 basis points to hit the 14%-plus objective in fiscal 2027. The disclosed sources are Canadian Banking margin and volume, International Banking mix, wealth flows and the share count. No bridge was presented on the call and none was requested.

Analyst Q&A Highlights

Eight exchanges with seven analysts, and then the operator closed the session. Credit consumed the first and last thirds; the composition of earnings got a single, well-answered question in the middle.

The impaired-provision guidance revision

The first question of the call went straight to the guidance change, and asked management to confirm that the full-year outlook had in fact moved higher before asking what supported the still-implied improvement. The answer confirmed the revision without hedging, then walked through the three portfolios that drive it: international retail elevated and unchanged from the original outlook, Canadian retail helped by collections but exposed to inflation, and non-retail expected to moderate from an inflated second quarter.

Q: "So just the guidance that you gave, so the impaired PCL guidance of mid-50 basis points for the remainder of fiscal '26. So that is -- I guess, your guidance for the full year now is higher than it was before. I just wanted to confirm that. And then the moderation in PCLs in the back half of this year, can you talk a bit about what gives you the confidence in the moderation?"
— Doug Young, Desjardins

A: "So if I take a look at the macro when we gave guidance back in December, the macro environment has evolved meaningfully since that time. And so considering this, we do expect impaired PCLs to settle in the mid-50 basis points range for the remainder of '26, which I mentioned in my remarks. I think it is important, though, that we still expect a gradual trend down from first half levels, although more modest than we originally anticipated."
— Shannon McGinnis, Chief Risk Officer

Assessment: A straight answer to a direct question, which is the right way to handle a guidance downgrade. The substance is less comforting than the delivery: the improvement now depends on non-retail normalizing after a quarter that was inflated by a single name, which is a thin foundation for a full-year credit call.

Adequacy of the performing allowance

The follow-up pressed on whether the performing reserve is sized to the forward-looking view that produced the higher impaired guidance. The response quantified the build for the first time, splitting the five-basis-point performing provision into its drivers, and made the point that roughly C$50M of it was specifically the forward-looking indicator overlay.

Q: "Can you maybe quantify or talk about or just put in perspective how confident you are in your performing loan allowances relative to your forward-looking indicators and your expectations for impaired?"
— Doug Young, Desjardins

A: "And so as we think about the performing build this quarter, which was 5 basis points, about $50 million of that was related to our forward-looking indicators, which we do think appropriately captures what we see as we look forward. And so when I look at the scenarios and what we leverage to generate the performing build, we're quite comfortable with our reserves."
— Shannon McGinnis, Chief Risk Officer

Assessment: The disclosure reconciles exactly to the allowance walk, where volume contributed C$15M, credit quality C$23M and forward-looking indicators C$50M for the C$88M total. The uncomfortable read is that the performing allowance of C$4,936M is still C$139M below where it sat a year ago while the impaired guide has moved higher.

What actually sat inside the corporate segment's other income

The only question of the call aimed directly at earnings quality. It identified an unusually large other income line in the corporate segment and asked for its composition. The answer named two items, sized both, and specified the tax treatment.

Q: "Just a quick numbers one to start the other, other income. I heard mark-to-market gains in the explanation for the corporate segment. Can you tell me what was in that other, other income line item that was pretty high this quarter, please?"
— Gabriel Dechaine, National Bank Financial

A: "There are 2 items that have gone into that line this quarter. One, I talked about the mark-to-market gains, which is on the private equity book that we have in treasury. That contributed somewhere between $35 million to $40 million."
— Rajagopal Viswanathan, Group Head and CFO

Assessment: Full marks for the disclosure, and it is the most consequential exchange on the call for anyone modelling forward earnings. Combined with the equity-pickup item that followed and the later confirmation that the segment reverts to a modest loss, this exchange effectively identified about C$0.06 a share of the quarter as non-recurring. Nobody returned to it.

Sustainability of the international margin

A recurring theme in prior quarters has been how far above its own framework the international margin can run. This quarter it ran 26 basis points further, and the question asked both what drove it and where it settles. The answer led with the high-water-mark characterisation, decomposed the drivers, and quantified the seasonal component.

Q: "And then on international, the margin there in international remains well above the outlook you've offered in the past of 4.40% to 4.50%. Can you talk about what drove such a meaningful increase in the quarter and what your outlook is?"
— Mario Mendonca, TD Securities

A: "If I look forward, this quarter, there was some nuance. There's some seasonality to some Q2 benefits that we get in International Banking NIM. I call it somewhere between 7 to 10 basis points, Mario."
— Rajagopal Viswanathan, Group Head and CFO

Assessment: Management volunteered the discount rather than defending the print, and then set a forward range of 4.65% to 4.70% that is still well above the old framework. That is a genuine structural upgrade of roughly 20 basis points, and it is honestly presented. The dependency on U.S. rates not falling is the part that was named but not stress-tested.

The Canadian margin path and deposit competition

The question set out the competing forces explicitly: mortgage renewals as a tailwind against intensifying deposit competition as a headwind. The response reaffirmed the roughly two-basis-point quarterly cadence set out at the start of the year and, notably, relocated the source of future expansion from the liability side to the asset side.

Q: "I want to ask you about the net interest margin outlook for Canada. Obviously, a positive result, I think, in Q2. A number of moving parts there, which is why I asked the question, right? Like the residential mortgage renewals, which should be a nice tailwind. I think we're hearing about increasing deposit competition, so maybe a little bit of a headwind there. Anyways, maybe you can give us an outlook and sort of wrap all of those components together would be helpful."
— Paul Holden, CIBC

A: "I think the net interest margin expansion we saw this quarter will continue, maybe not to the same magnitude. But like in the beginning of the year, I had mentioned 2 basis points a quarter improvement driven by better deposits, the mix."
— Rajagopal Viswanathan, Group Head and CFO

Assessment: The interesting content was in the segment head's follow-on, which said future margin gains come "primarily now" from the asset side as commercial, business banking and personal lending grow. That makes the Canadian margin guide contingent on the same volume recovery that the commercial-loan commitment depends on. Two guides, one dependency.

What is actually driving the commercial pipeline

A short, well-targeted question asking whether the commercial acceleration reflects market demand, sector opportunity or share gain. The answer was unambiguous about which: a rebuilt mid-market sales force in specific geographies, with an eighteen-month lag between hiring and production now closing.

Q: "You've spoken about strong commercial momentum and the expectation for that growth to continue accelerating. Could you maybe unpack what's driving that outlook, whether it's broader demand recovery, sector-specific opportunities or maybe just that increasing deeper client activity?"
— Matthew Lee, Canaccord Genuity

A: "So as I mentioned earlier, the commercial growth we expect in the subsequent quarters to match the market growth rates you'll see, and it's on the back of work we started probably 1.5 years ago as we started to rebuild the sales force, particularly in mid-market, starting to add what we call boots on the ground to be able to compete more effectively in high-growth markets in BC, in Quebec."
— Aris Bogdaneris, Group Head, Canadian Banking

Assessment: A share-gain answer rather than a market answer, which is the more credible of the two given Canadian GDP is forecast at 1.3% for 2026. It is also the more falsifiable: if the market grows and Scotiabank grows with it, the thesis was demand; if commercial outgrows the market, the sales-force investment worked.

Concentration risk in the international corporate book

The sharpest exchange of the call. The first question asked how many comparable exposures exist and where this one ranks by size. The answer characterised the file. The follow-up rephrased the same question twice, asking directly how many similar-sized names sit in Brazil and whether a seven-to-ten-basis-point impaired surprise is within tolerance. A dollar exposure figure was never provided.

Q: "Shannon, how many other similar large loans do you have in the non-retail international banking segment? Where does this kind of rank in the order of magnitude from a concentration risk in the portfolio, please?"
— Sohrab Movahedi, BMO Capital Markets

A: "So in terms of this specific file, it was essentially driven by company-specific factors rather than broader macroeconomic or trade-related pressures. This is a long-standing client for us, investment-grade rating. It's in Brazil. And so this is a domestically important file within that economy."
— Shannon McGinnis, Chief Risk Officer

Assessment: Three attempts, three qualitative answers. What was given is useful: a sub-5% syndicate hold, a non-retail watch list below 2% of outstandings, one fallen angel in this portfolio in fifteen years, and roughly C$65M of cumulative Brazilian impaired provisions before this quarter. What was not given is the size of the exposure or the number of comparable names, which is the question that was actually asked.

Buybacks versus tuck-in acquisitions at a higher share price

The closing exchange addressed capital deployment after a substantial re-rating, and asked management to pre-frame what an acquisition would look like so the market would not be surprised. The answer ranked the uses of capital, defended the buyback on relative valuation, and then sized the acquisition ambition more concretely than the bank has previously done.

Q: "One, at these valuations, do you still want to lean into buybacks the way you have over the last 6 to 12 months? Or do you sort of become more opportunistic? And give us a sense so that the Street is not surprised what a tuck-in deal would look like?"
— Ebrahim Poonawala, Bank of America

A: "The second would be share buybacks. You've seen what we've done over the last year. I would expect that to remain consistent going forward. And I say that because of the valuation gap between us and our peers, which will narrow over time. And so we should take advantage of that while we're in this position."
— L. Scott Thomson, President and CEO

Assessment: The buyback rationale is explicitly a discount-closing argument, which means it weakens as the discount closes. The acquisition targets named, a U.S. deposit-gathering capability with FDIC insurance and an offshore booking point for wealth, are small in dollars and specific in purpose, and both point at the same strategic direction: build the U.S. franchise around fee and deposit capabilities rather than around the corporate loan book.

What They're NOT Saying

1. That adjusted earnings fell sequentially: adjusted EPS went from C$2.05 to C$2.02 and adjusted net income from C$2,695M to C$2,652M. Every spoken reference framed the quarter against the prior year on a reported basis, where the comparison is +35%. No one on the call, on either side, mentioned the sequential direction.
2. The bridge from 13.2% to 14%-plus ROE: the fiscal 2027 target was asserted three times in prepared remarks and never decomposed. The bank did not say how much of the remaining 80 basis points comes from Canadian volume, international mix, wealth flows or the share count, and no analyst asked for the walk.
3. Canadian mortgage delinquency: 90-plus-day arrears have risen in each of the last three quarters, 0.24% to 0.32%, with the uninsured Greater Toronto Area book at 41 basis points against 27 a year ago. This appears only in a deck footnote attributed to COVID-era vintages. It was not in prepared remarks and not in Q&A, and the Bank of Canada policy rate is forecast to rise 75 basis points by March 2027.
4. That the underlying expense base is growing 7%: the spoken and headline framing was +2%. The ex-divestiture figure of +7%, which is the same basis on which management quoted 13% revenue growth, was disclosed in writing but never said aloud.
5. Global Banking and Markets' negative operating leverage: year-to-date operating leverage of negative 1.6% and a segment ROE of 12.4% received no commentary. The 25% capital-markets revenue growth was highlighted; the 10% expense growth that produced the negative leverage was not.
6. The leverage and TLAC trajectory: capital commentary was confined to CET1, which was flat. The leverage ratio fell 20 basis points year over year to 4.3%, TLAC fell 170 basis points to 28.6%, the TLAC leverage ratio fell 90 basis points to 8.0%, and the liquidity coverage ratio fell 700 basis points to 124%.
7. The size of the Brazilian exposure: asked directly, twice, how large the account was and how many comparable names exist, management gave a relative hold percentage and a watch-list ratio but no dollar figure and no count.
8. Anything about fiscal 2027 credit: the question was asked explicitly and declined, with the response redirected to the 2026 guidance. Given that the 2026 guide was itself just revised on a worse macro, the refusal to extend is informative.
9. How much of the international margin is the Federal Reserve: the CFO named the absence of U.S. rate cuts as an unexpected tailwind to Caribbean margins and built it into the 4.65% to 4.70% guide, but never sized it. The bank's own forecast has the U.S. policy rate falling 50 basis points by March 2027.

Market Reaction

• Pre-print setup: the Toronto line closed at C$111.00 on May 26, up 9.7% year to date, 6.5% over the trailing 30 days and 52.2% over twelve months, against a 52-week closing range of C$71.69 to C$111.00. The shares entered the print at their 52-week closing high. The New York line closed at $80.40, up 9.1% year to date and 52.5% over twelve months, against an S&P 500 up 9.8% year to date and an S&P/TSX Composite up 9.3%.
• Reaction session: Toronto opened at C$110.00, a 0.9% gap lower, traded C$110.00 to C$113.57 and closed at C$111.57, up 0.5% or C$0.57. New York opened at $80.25, traded $79.90 to $82.22 and closed at $80.68, up 0.3%. Toronto volume was 3.4 million shares against a 3.5-million 30-day average, in line with the norm; New York volume was 4.9 million against a 2.1-million average, 2.4 times the norm.
• Relative: the S&P/TSX Composite fell 0.7% on the session, so the 0.5% Toronto gain was roughly 120 basis points of relative outperformance. The S&P 500 was unchanged.
• Peers: Bank of Montreal, which reported the same morning, closed up 0.9%. National Bank, which also reported that morning, closed down 4.0%. The three banks yet to report closed between down 0.2% and down 0.3%.

Sell the beat, buy the dividend. A 4.7% adjusted EPS beat, a 4% dividend increase, an ROE that improved 280 basis points and a Canadian Banking segment that grew earnings 53% produced half a percent. That is not a market missing the news; it is a market that had already paid for it. The stock arrived at the print having compounded 52% in twelve months, at a 52-week closing high, and the incremental information was mostly confirmation.

The gap-down at the open is the tell. Toronto opened 0.9% lower and New York 0.2% lower before recovering through the session to close green, with the Toronto line touching C$113.57 intraday. The early read was the provision miss, which came in roughly 10% above expectations, and the recovery came as the composition of it, one Brazilian name, became clear on the call. The full round trip from a 0.9% opening decline to a 2.3% intraday high to a 0.5% close describes a market that spent the day deciding whether the credit line was idiosyncratic, and mostly concluded it was.

Relative performance is the honest measure. On a session where the composite fell 0.7% and the one peer that missed on its own print fell 4.0%, holding a half-percent gain is a decent outcome. The dispersion within the group on the same day, from up 0.9% to down 4.0%, says the market is now differentiating between Canadian banks on execution rather than trading them as one rate-sensitive block.

Street Perspective

Debate: Is the Canadian Banking turnaround structural or rate-driven?

Bull view: Four consecutive quarters of margin expansion, a 230 basis point productivity improvement, ROE at 17.8% against 12.0%, and a documented mix shift toward premium cards, mutual funds, insurance and non-mortgage lending. The bull case on the Street is that this is a franchise repair with several years left to run, and that the segment's ROE has room above 18% as volume returns.

Bear view: The improvement coincides with a mortgage renewal cycle that mechanically reprices 2021 vintages onto wider spreads, and with a Bank of Canada policy rate at 2.25% that flatters deposit spreads. On that reading much of the 31 basis point risk-adjusted margin gain is a cycle the bank did not create and cannot repeat, and loan growth of 3% with deposits down 3% is what the underlying franchise actually looks like.

Our take: Both are partly right and the split is roughly visible in the numbers. The productivity ratio, the fee mix and the referral engine into wealth are structural and would survive a rate move; the renewal-driven margin is cyclical and finite. The tell will be the October quarter, when the commercial-loan commitment either produces volume or it does not. Structural improvements show up in the expense line whatever rates do, and Scotiabank's has moved 320 basis points on the adjusted all-bank measure. We lean structural, with the caveat that the segment has not yet grown a balance sheet.

Debate: Does International Banking deserve credit for the margin, or a discount for the shrinkage?

Bull view: A 4.76% margin, a 47.9% productivity ratio that improved 350 basis points, 16% ROE, and deposits growing 5% on a constant-dollar ex-divestiture basis. The optimistic framing is that the segment has been reshaped from a low-return balance-sheet business into a high-return relationship business, and that the forward margin guide of 4.65% to 4.70% is a permanent upgrade to the 4.40% to 4.50% framework.

Bear view: Ex-divestitures and ex-currency, loans fell 2% with non-retail down 8%. The margin carries seven to ten basis points of self-declared seasonality plus an unearned tailwind from U.S. rates that the bank's own economists expect to reverse. A single Brazilian name cost seven basis points of all-bank impaired provisions, and international retail delinquency at 3.25% is ten times the Canadian rate. The bear framing is that the returns are real but the franchise is still in retreat.

Our take: The bear case is factually stronger and the bull case is directionally more useful. Non-retail loans cannot contract 8% a year indefinitely and produce a growing earnings stream, and management's own answer put consolidation of the growth pivot in 2027, which is a long wait. But the deposit growth is genuine, the mix shift toward operating balances is exactly what a bank should be doing in these markets, and the productivity gain is not seasonal. We treat International Banking as a stabilised, non-growing 16% ROE contributor rather than as an engine, which is a materially lower valuation than the market appears to be assigning it.

Debate: Has the re-rating already happened?

Bull view: At roughly 13.7 times annualized first-half adjusted earnings with a 4.1% dividend yield and an ROE heading from 13.2% to 14%-plus, the shares still trade at a discount to the better-regarded Canadian banks. The CEO said as much on the call, framing the buyback as an arbitrage on a peer valuation gap that "will narrow over time." Closing the remaining gap on unchanged earnings is worth real upside.

Bear view: The stock has compounded 52% in twelve months and entered the print at its 52-week closing high. At roughly 2.2 times average tangible common equity it is no longer priced as a problem bank. The earnings that support the multiple contain roughly C$0.13 a quarter of tax and mark-to-market that management said reverses, and the credit guide moved the wrong way. The bear framing is that the discount is closing because it should, and most of that has now occurred.

Our take: The bear case wins on timing without winning on the business. Nothing in this quarter argues against the operating turnaround, and the fiscal 2027 ROE target looks achievable rather than aspirational. But a 52% move ahead of a quarter that delivered flat sequential adjusted earnings, a provision miss and a worse credit guide leaves very little cushion for the second half, where the international margin steps down, the Other segment reverses and the tax rate normalizes. That combination is a Hold, not a sell.

Model Update & Valuation Framework

This is our first published work on Scotiabank, so the table below sets the initial working assumptions rather than revising prior ones. Every input traces to the filed quarter or to a guide management gave on the call.

Valuation

Valuation impact. At 13.7 times annualized first-half adjusted earnings and 2.2 times average tangible common equity, Scotiabank is priced roughly where a 13% ROE bank with a credible path to 14% should trade. The multiple is no longer a discount to fundamentals; it is a fair price for the fundamentals now visible. Getting materially more from here requires either the fiscal 2027 ROE target to be beaten rather than met, or the second half to prove that the margin, tax and corporate-segment normalization we have assumed does not happen. Neither is our base case, which is why our rating is Hold rather than Outperform despite a genuinely improving business.

What would change the rating. An upgrade requires two of the following three: Canadian commercial and total loan growth reaching market rates in the October quarter, the impaired provision ratio printing at or below the mid-50s without a further guidance revision, and Global Banking and Markets returning to positive operating leverage. A downgrade requires Canadian mortgage 90-plus-day delinquency continuing to climb past 35 basis points, or a second consecutive quarter of single-name corporate impairments in International Banking, either of which would reframe the credit story from idiosyncratic to systemic.

Thesis Scorecard Post-Earnings

This is initiation, so the pillars below are established rather than graded against a standing thesis. Each will be carried forward and scored in subsequent quarters.

Overall: The operating thesis is stronger than the market gave it credit for two years ago and roughly as strong as the market now prices it. Canadian Banking and Wealth are working, capital return is funded, and the fiscal 2027 return target is credible. The offsets are that International Banking's returns rest on a contracting book and a seasonal margin, credit guidance moved the wrong way, and the share price has already absorbed most of the improvement.

Action: Hold. Own it for the 4.1% yield and the ROE trajectory, but wait for either the October quarter's loan-growth proof or a valuation reset before adding. The commitments management made on this call are specific and dated, which makes the next print unusually informative.