Executive Summary / Key Takeaways

• Strategic Transformation Bearing Fruit: The Bank of Nova Scotia ($BNS) is executing a multi-year "value over volume" strategy, demonstrating tangible progress in Q3 2025 with adjusted earnings up 15% year-over-year and a return on equity (ROE) of 12.4%. This transformation is driven by a focus on client primacy, disciplined capital allocation, and operational efficiency.
• Strengthening Balance Sheet and Capital Discipline: BNS has significantly improved its balance sheet, with the loan-to-deposit ratio falling to 104% in Q3 2025 from 116% in Q4 2022. A robust CET1 ratio of 13.3% and a commitment to internal capital generation (targeting 15-20 basis points per quarter) provide flexibility for growth and shareholder returns, including a recently initiated share buyback program.
• Technology as a Differentiator: Strategic investments in AI, including the "Ask AI" internal chatbot and an external AI chatbot handling over 125,000 inquiries monthly, are enhancing productivity and client experience. AI processing of commercial client emails is delivering faster service and lower costs, positioning BNS for future efficiency gains.
• Diversified Growth Engines: Global Wealth Management and International Banking are exceeding Investor Day commitments, with International Banking achieving a 15% ROE in Q3 2025. Global Banking and Markets is also demonstrating strong fee income growth and balance sheet optimization, contributing to a more diversified and resilient earnings profile.
• Positive Outlook with Cautious Optimism: Management projects 5-7% EPS growth for fiscal 2025, accelerating to double-digit growth in 2026, supported by moderating credit provisions, benefits from rate cuts, and continued strategic execution. While macroeconomic uncertainty and potential trade tensions remain risks, BNS's strengthened balance sheet and proactive risk management position it to navigate these challenges.

A Foundation for Growth: Primacy, North America, and Digital Edge

The Bank of Nova Scotia, commonly known as Scotiabank, has been a cornerstone of the Canadian financial landscape since its founding in 1832. Today, it stands as a diversified financial services provider with a significant footprint across Canada, the United States, Mexico, Peru, Chile, Colombia, the Caribbean, and Central America. The company embarked on a pivotal strategic transformation in late 2023, outlined at its Investor Day, shifting towards a "value over volume" approach centered on "client primacy" and optimizing its North American corridor strategy. This strategic pivot, now well into its execution phase, aims to deliver sustainable, profitable growth and maximize shareholder value by deepening client relationships, allocating capital more efficiently, and enhancing operational excellence.

Broad industry trends, such as fluctuating interest rates and geopolitical uncertainties, particularly concerning potential U.S. tariffs, have shaped the operating environment. However, Scotiabank's strategy is designed to capitalize on the long-term economic growth potential of an integrated North American economy. This includes Canada's focus on a growth-first agenda, addressing productivity, and leveraging natural resources, as well as the evolving policy landscapes in the U.S. and Mexico. The bank believes the changing U.S. regulatory environment will create tailwinds for the banking sector across North America, benefiting its operations.

A key differentiator in Scotiabank's strategic toolkit is its focused investment in artificial intelligence (AI) to drive both internal efficiency and enhanced client experience. The bank has completed the rollout of its "Ask AI" internal chatbot to all Canadian retail branches and client experience centers. This platform, developed using large language models, is designed to assist frontline employees with a wide range of client inquiries, thereby improving service speed and consistency. Furthermore, an external AI chatbot handles over 125,000 inquiries monthly, demonstrating a commitment to digital self-service. In its commercial banking operations, over 70% of commercial client emails received by the business service center are now processed by AI to create structured case files, leading to faster service delivery and lower operational costs. These technological advancements are not merely incremental improvements; they are foundational to BNS's strategy, contributing to its competitive moat by enhancing operational efficiency, improving customer satisfaction, and ultimately driving better financial performance through reduced costs and improved client engagement. The "so what" for investors is clear: these targeted AI investments are expected to yield tangible benefits in productivity and client experience, reinforcing the bank's competitive position and supporting its long-term growth objectives.

Strategic Execution and Operational Momentum

Scotiabank's strategic initiatives are yielding measurable results across its business segments, reflecting a disciplined approach to capital allocation and client-centric growth.

Canadian Banking: Primacy Driving Performance

The Canadian Banking segment is steadily improving, with a strong focus on building deeper, multi-product client relationships. This is evident in the success of its "Mortgage Plus" solution, which accounted for approximately 90% of new mortgage originations year-to-date in Q3 2025. A significant 95% of new clients acquired through Mortgage Plus retained their day-to-day accounts after one year, with average balances 1.5 times higher than standard acquisitions. Moreover, 30% of these new clients opened a credit card with higher average balances. Retail savings and day-to-day deposits were up 6% year-over-year in Q3 2025, underscoring the success of the primacy strategy. In commercial banking, loan growth was flat, yet revenue rose by 16% year-to-date, and pre-tax pre-provision earnings were up 25%, indicating successful balance sheet optimization. The small business segment is acquiring clients at approximately twice the market rate, with about 50% becoming primary by month three. While Canadian Banking reported a 2% year-over-year earnings decline in Q3 2025, its pre-tax pre-provision profit was up a strong 7% quarter-over-quarter, and management anticipates achieving positive operating leverage going into next year as technology investments mature.

Global Wealth Management: Exceeding Expectations

Global Wealth Management continues its strong positive momentum, with earnings up 13% year-over-year in Q3 2025. This growth was broad-based, with Canadian earnings up 13% and International Wealth Management earnings up 21%, including 18% asset growth in Mexico. The segment's revenues increased 12% year-over-year, driven by higher mutual fund fees, brokerage revenues, and investment management fees. Net fund inflows across retail and advisory businesses saw an $11.2 billion improvement year-to-date, reaching $6.2 billion compared to $5 billion in net redemptions in the same period last year. Assets Under Management (AUM) increased 12% year-over-year to $407 billion, and Assets Under Administration (AUA) grew 9% to over $750 billion. The segment's positive operating leverage of 1.9% year-to-date highlights its efficiency. Management views wealth as "the glue to the client primacy strategy," and its performance is exceeding initial Investor Day expectations.

International Banking: Ahead of Schedule

International Banking is trending ahead of its Investor Day commitments, delivering Q3 2025 earnings of $675 million, up 7% year-over-year on an adjusted and constant dollar basis. The segment's ROE reached an impressive 15%, an increase of 180 basis points year-over-year. This performance is largely attributed to solid execution of its regionalization strategy, disciplined expense management (expenses were flat year-over-year and quarter-over-quarter despite inflation), and effective balance sheet optimization. Since Q4 2023, pre-tax pre-provision earnings have increased by 22%, contributing to a 360 basis point improvement in ROE. While loans were down 3% year-over-year due to a decline in business loans, retail loans grew 3%. The focus is now on pivoting to profitable growth, particularly in Commercial and Retail Banking, by enhancing "wallet share" and ensuring "higher returns around every dollar of capital deployed."

Global Banking and Markets (GBM): Fee-Driven Resurgence

Global Banking and Markets delivered a strong Q3 2025, with earnings up 29% year-over-year. Revenue increased 21% year-over-year, propelled by a 54% surge in capital markets revenues and a 23% increase in non-interest income. Underwriting and advisory fees grew 28% year-to-date, and trading-related revenues were up 50% year-to-date. Despite a 14% year-over-year decrease in loans due to balance sheet optimization, pre-tax pre-provision earnings increased by 29%, and ROE improved by 310 basis points. The U.S. contributed a significant 42% of GBM earnings in Q3. The segment is actively investing in its U.S. capabilities, including the pilot launch of a modern U.S. cash management offering, a crucial step in connecting its North American footprint and strengthening client primacy. GBM's strong league table rankings—number two in Canadian debt capital markets and reaching new highs in U.S. investment-grade DCM market share—underscore its competitive strength.

Financial Strength and Capital Discipline

Scotiabank's consolidated financial performance in Q3 2025 reflects the positive impact of its strategic initiatives. Adjusted earnings reached $2.5 billion, or $1.88 per share, a 15% increase year-over-year. Pre-tax pre-provision earnings grew 17% year-over-year, and the bank achieved positive operating leverage for the sixth consecutive quarter. The return on equity (ROE) improved to 12.4%, up 110 basis points from the prior year.

The bank's balance sheet has been significantly strengthened. The loan-to-deposit ratio improved to 104% in Q3 2025, a notable reduction from 116% in Q4 2022. The wholesale funding to total assets ratio also decreased to 18.8% from 21.6% over the same period. These improvements enhance funding metrics and reduce reliance on wholesale funding. Capital levels remain robust, with a Common Equity Tier 1 (CET1) ratio of 13.3% at the end of Q3 2025, an increase of 10 basis points quarter-over-quarter. Internal capital generation was a strong 13 basis points. Management aims for internal capital generation of 15-20 basis points per quarter through 2026 and potentially into 2027. The bank repurchased 3.2 million shares under its NCIB in Q3 2025, demonstrating confidence in its capital trajectory and valuation. Management is comfortable operating with a CET1 ratio in the 12.5% to 13% range, providing ample buffer above regulatory minimums while supporting growth and shareholder returns.

Competitive Landscape and Strategic Positioning

Scotiabank operates in a highly competitive banking industry, primarily contending with other major Canadian banks such as Royal Bank of Canada (RY), Toronto-Dominion Bank (TD), Bank of Montreal (BMO), and Canadian Imperial Bank of Commerce (CM). Each competitor presents unique strengths and strategic focuses.

Royal Bank of Canada (RY) is a diversified financial powerhouse, often leading in digital transformation and U.S. expansion. While RY's aggressive digital strategy may offer faster customer onboarding, Scotiabank's extensive international network, particularly in Latin America and the Caribbean, provides a broader geographic reach and diversified revenue streams. This international diversification enhances BNS's ability to capture opportunities in global trade, offering a unique value proposition in emerging markets where RY is less dominant.

Toronto-Dominion Bank (TD) emphasizes retail expansion, particularly in the U.S., and digital banking enhancements. TD's focus on user-friendly digital interfaces could lead to faster adoption rates in North American retail. However, BNS's international banking operations differentiate it, potentially offering more tailored solutions for cross-border clients. BNS's diversified segments also provide an edge in risk management during economic uncertainty, though it must enhance its technological capabilities to counter TD's retail innovation.

Bank of Montreal (BICKER:BMO) is known for its strong commercial banking presence and cost efficiency, with significant U.S. operations. BMO's focus on cost management could provide an advantage in profitability in shared domestic markets. Scotiabank, while potentially lagging in cost efficiency compared to BMO, leverages its global banking services to offer a unique value proposition in emerging economies where BMO is less prominent.

Canadian Imperial Bank of Commerce (CM) is more domestically oriented, focusing on digital innovation and Canadian market dominance. BNS differentiates itself through its stronger international banking offerings, providing a unique value proposition in global markets that CIBC lacks. While CIBC may achieve faster growth in Canada due to its concentrated focus, BNS's international advantages are poised to drive long-term growth, necessitating improved domestic competitiveness to counter CIBC's strengths.

Beyond direct bank competitors, indirect rivals include fintech companies, online banks, and alternative investment platforms. These entities impact BNS by offering accessible digital solutions, potentially eroding market share in retail and wealth management. Scotiabank's strategic investments in AI and its universal bank model in its international markets, allowing it to provide comprehensive services like payroll to multinational clients, are crucial competitive responses. This integrated approach, particularly in global transaction banking, positions BNS uniquely against both traditional and non-traditional competitors.

Outlook and Forward-Looking Trajectory

Scotiabank's management is optimistic about the bank's future trajectory, projecting strong earnings growth for 2025 and beyond. The bank expects to deliver 5-7% EPS growth in fiscal 2025, a figure that now includes the benefits from its investment in KeyCorp (KEY), largely offsetting a significant performing allowance build taken in Q2 2025 due to U.S. tariff uncertainty. Looking further ahead, management anticipates double-digit EPS growth in 2026, driven by a normalized provision for credit losses (PCL) environment, the benefits of rate cuts, and sustained business momentum across all segments.

Underlying these projections are several key assumptions. The bank expects net interest income to benefit from lower funding costs as central banks continue to ease interest rates, particularly in Canada. Expense growth is projected to remain modest, supported by ongoing productivity initiatives and strategic investments, ensuring positive operating leverage. While PCLs were elevated in the first half of 2025, management expects a more positive trend in the latter half of the year, assuming no significant deterioration in the macroeconomic environment or the imposition of meaningful tariffs. The impaired PCL ratio is expected to remain at or slightly above the Q2 2025 level of 57 basis points for the balance of the year. The Canadian Banking net interest margin (NIM) is expected to see "continuous sequential but small improvements" starting next quarter, assuming no further Bank of Canada rate cuts. International Banking NIM is projected to remain "stable between 4.45% to 4.5% for the foreseeable future" before improving with better core deposit growth.

Scotiabank is committed to achieving a 14%-plus ROE over the medium term. The strategic pivot to growth in International Banking, particularly in Commercial and Retail, is expected to materialize in 2026, driven by wallet share expansion and higher returns on deployed capital. The ongoing investments in AI and digital capabilities are central to this outlook, promising continued efficiency gains and enhanced client experiences that will support sustainable growth.

Risks and Challenges

Despite the positive momentum, Scotiabank faces several pertinent risks and challenges. The operating environment remains challenging, particularly in Canada, where the lack of a trade deal with the U.S. and mixed macroeconomic results continue to add uncertainty. In International Banking, while credit trends have improved, navigating the macroeconomic environment in Mexico remains a focus, with some pockets of weakness observed in mortgages. The potential for U.S. tariffs on Canadian and Mexican imports introduces significant macroeconomic uncertainty, which could impact credit performance and necessitate further allowance builds. While the impact on impaired PCLs is expected to lag into 2026, the bank remains cautious.

Credit migration in non-retail portfolios and some pockets of weakness in Canadian retail, particularly among younger clients, also warrant close monitoring. Although the 90-day plus mortgage delinquency rate has held steady, rising delinquencies in fixed-rate clients facing higher payment obligations at renewal present a potential headwind. The bank's exposure to emerging market volatility, despite its diversification benefits, also poses a risk during economic downturns. Furthermore, while BNS is investing in digital innovation, a lag compared to some peers could impact its ability to compete effectively for market share in certain segments.

Conclusion

The Bank of Nova Scotia is in the midst of a compelling strategic resurgence, systematically transforming its operations to unlock greater value for shareholders. The "value over volume" strategy, underpinned by a relentless focus on client primacy and disciplined capital allocation, is clearly gaining traction. Q3 2025 results, marked by robust earnings growth, an expanding ROE, and significant improvements in balance sheet metrics, underscore the efficacy of this strategic pivot.

Scotiabank's commitment to technological differentiation through targeted AI investments is a critical enabler, enhancing productivity and client experience across its diverse operations. This digital edge, combined with the strong performance of its Global Wealth Management and International Banking segments, and the fee-driven resurgence in Global Banking and Markets, positions the bank for sustained growth. While macroeconomic uncertainties and potential trade tensions present ongoing challenges, BNS's strengthened capital position, proactive risk management, and clear forward guidance for double-digit EPS growth in 2026 provide a compelling investment thesis. For discerning investors, Scotiabank represents an opportunity to participate in a well-managed financial institution that is strategically positioning itself for long-term success within the dynamic North American corridor and beyond, leveraging its core strengths and embracing innovation to drive superior returns.