Yahoo Finance The Bank of Nova Scotia (BNS) Q2 2019 Earnings Call Transcript
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The Bank of Nova Scotia (NYSE: BNS)
Q2 2019 Earnings Call
May 28, 2019, 8:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Philip Smith -- Senior Vice President of Investor Relations
Good morning. And welcome to Scotia Bank's 2019 second-quarter results presentation. My name is Philip Smith, Senior Vice President of Investor Relations. Presenting to you this morning are Brian Porter, Scotia Bank's President and Chief Executive Officer, Raj Viswanathan, our Chief Financial Officer, and Daniel Moore, our Chief Risk Officer.
Following our comments, we'll be glad to take your questions. Also present to take questions today are Scotia Bank's business line and group heads, James O'Sullivan from Canadian Banking, Nacho Deschamps from International Banking, and Jake Lawrence and James Neate from Global Banking and Markets.
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Before we start and on behalf of those speaking today, I will refer you to slide 2 of our presentation, which contains Scotia Bank's caution regarding forward-looking statements. With that, I will now turn the call over to Brian Porter.
Brian Porter -- President and Chief Executive Officer
Thank you and good morning, everyone. Our second quarter results were highlighted by a strong operating performance across all three business lines. We achieved strong earnings growth in international banking, delivered improved results in global banking and markets, demonstrated prudent expense management across the bank, and made progress on our comprehensive strategy to de-risk and simplify the bank.
Global wealth management, which will report as a stand-alone division of the bank beginning in fiscal 2020 also experienced strong earnings growth, AUM growth. And Canadian Banking delivered positive operating leverage in the quarter.
The quarter demonstrated our ability to manage expenses prudently by prioritizing investments both business and regulatory. This resulted in an improvement in our adjusted productivity ratio to 52.3% for the quarter. We remain focused on improving our productivity target to achieve positive operating leverage this year.
Our strategy to reposition the bank's geographic footprint achieves several key milestones in the quarter. In the Dominican Republic, we completed the acquisition of Banco Dominicano del Progreso as well as a sale of our pension and related insurance businesses.
In El Salvador we announced a sale of our banking and insurance operations. In Asia, we announced a non-binding MOU to reduce our ownership stake in the combined Thanachart Thai Military Bank.
The net gain on the divestures announced and closed this quarter contributed $0.11 to reported diluted earnings per share in the quarter and added approximately 8 basis points to our common equity tier 1 ratio.
Our focus on our six key markets in the Americas, which account for roughly 80% of our operating earnings will continue to drive market share and earnings growth.
Turning to our financial performance for the quarter. The bank delivered adjusted earnings of $2.3 billion and diluted earnings per share of $1.70. We saw strong growth in our personal and commercial businesses with earnings up 8% year-over-year, led by international banking with earnings up 14% year-over-year on an adjusted basis.
International banking results were led by our Pacific Alliance countries, where we are increasing our market share and making very good progress in our integration efforts. Raj will speak more on that in just a moment.
Canadian Banking delivered 4% adjusted earnings growth, driven largely by good growth in commercial lending and wealth management and better expanse management. On the digital front, we also made progress enhancing our customer experience and increasing digital adoption rates with the launch of our fully digital end-to-end eHOME mortgage lending platform and our new mobile banking app, Nova.
Global banking and markets results rebounded from Q1 with earnings up 25%. We also demonstrated strong expense management and an improved productivity ratio from last quarter. The other segment, which includes the banks funding center, experienced a slightly elevated loss due to a flattening yield curve and some prefunding activity.
Turning to risk, credit quality remains high and the outlook is stable. Growth in PCLs was substantially driven by acquisitions and volume growth. Our PCL ratio is in line with our long-term average. Daniel Moore will have more to say on that in a moment.
Strong internal capital generation in the quarter allowed us to be more active in our share buyback program. We ended the quarter with a common equity tier 1 capital ratio of 11.1 or 11.3 on a pro forma basis, considering the impact of announced divestitures expected to close in fiscal 2019. The potential monetization of our interest in Thanachart Bank would add another 25 basis points and provide even further capacity for shared buybacks.
In summary, the bank continues to make progress toward meeting it's medium to long-term objectives and we are focused on driving stronger momentum in our results.
I wanted to briefly discuss our recently announced plan to break up Global Wealth Management in a fourth business line, effective November 1, 2019. Establishing Global Wealth Management as a stand-alone division reflects the importance of this business to our bank, our growth aspirations, and provides increased transparency to our external stakeholders. This new division will be led by Gwen Gowland, who will report directly to me.
The decision to create a fourth business line also fundamentally changes the scope of our Canadian Banking business, resulting in a change of role for James O'Sullivan. I, along with the board and the management team, want to personally thank James for his leadership of Canadian Banking and I look forward to his role as a strategic advisor to the bank.
Dan Rees, who currently runs our global operations group, which closely supports Canadian Banking, will lead our Canadian P&C and insurance businesses. Dan joined the bank nearly 20 years ago and has six years' experience within the Canadian Bank. He'll be sharing the division's priorities for the business in the near future.
I will now turn the call over to Raj. Thank you, Raj.
Raj Viswanathan -- Chief Financial Officer
Thank you, Brian, and good morning, everyone. Before reviewing our financial results, I'd like to start on slide 6 and provide an update on the material acquisitions BBVA Chile, MD Financial, and Jarislowsky Fraser. These integrations are proceeding very well, as reflected in improved market share, very high customer retention rates, and strong performance against integration metrics, such as synergies, which are on-track to meet our targets.
In international banking, our operations in Chile have seen an increase in the combined market share, a significantly lower productivity ratio, and strong growth and earnings following the acquisition of BBVA Chile.
In wealth management, both MD Financial and Jarislowsky Fraser have experienced positive asset growth since they were acquired. MD surpassed $50 million in assets during the quarter for the first time in its history. Customer retention rates are higher quarter-over-quarter and above pre-acquisition levels.
And we have co-located Scotia Private Banking in all major MD offices in Canada. This quarter the acquisitions contributed approximately $60 million to the bank's earnings. We are well on our way to exceed our goal of $0.15 of adjusted diluted EPS accretion in 2020.
Turning to the financial results, I'd like to draw your attention to our new disclosure on slide 20, titled Other Items Impacting Financial Results, which list the items we have discussed in prior quarters in our MD&A and investor presentation, but did not adjust reported earnings.
Turning now to the Q2 2019 Performance on slide 7. All my comments that follow, including the discussion of business line results, will be on an adjusted basis that excludes acquisition and divestiture-related amounts.
The bank did over $2.3 billion in earnings and diluted EPS of $1.70 for the quarter, down slightly compared to last quarter, last year. Revenue increased 8% from last year, primarily driven by the impact of acquisitions. Net interest income was up 6%, driven mostly from the impact of acquisitions. Also, contributing to the increase was growth in commercial and retail landing and international banking, solid loan and deposit growth in Canadian Banking, as well as higher carpet loans in global banking and markets. These increases were partly offset by lower contributions from asset liability management activities.
The core banking margin declined 2 basis points versus last year, primarily driven by the impact of a flattening yield curve on our asset liability management activities. The bank earning higher margin from international banking, from change in business mix driven by the acquisitions, and then Canadian Banking primarily from deposits that were partly offset by lower margins in global banking and markets.
Non-interest income grew 11% compared to last year. Also contributing to the growth was higher banking revenues, wealth management and underwriting fees, higher income from associated corporations, partly offset by the impact of the adoption of IFRS15.
Expenses were up 8% year-over-year. The increase was largely driven by the impact of acquisitions, partly offset by the adoption of IFRS15 on the expense line. Excluding the impact of these items, expense were only up 1% year-over-year, reflecting the bank's efforts to prudently manage its expense growth by prioritizing its regulatory and business growth-related investments.
Consequently, the bank's productivity ratio declined to 52.3%, an improvement of 20 basis points year-over-year. Our PCL ratio on impaired loans was 49 basis points, up 3 basis points from last year. There were net provisions on performing loans of $22 million and when combined with provisions on impaired loans resulted in a total PCL ratio of 51 basis points.
Our tax rate was in line with last year and in line with our outlook of 21 to 25% through 2019. On slide 8 we provide an evolution of our CET 1 capital ratio over the last quarter. The bank reported a common equity tier 1 ratio of 11.1%, in line with the last quarter. The bank's strong internal capital generation of 21 basis points was deployed in organic assets growth across the businesses, absolved by the net impact from the bank's acquisitions, which closed during the year, and offset by shared buyback activities and increased employee pension and post-retirement benefits liability. That was impacted by the discount rate changes in the quarter.
Liquidated assets increased by 1.6%. During the quarter, we repurchased 4 million common shares or 7.25 million shares on a year-to-date basis at an average price of $17.19 per share.
In the last 12 months, the bank has repurchased and cancelled 13.25 million shares. The pro forma impact of announced non -- divestitures that are yet to close will increase the CET1 ratio to be approximately 11.3%.
The monetization of our significant investment in Thanachart Bank would further increase our pro forma CET1 ratio by approximately 25 basis points. We are pleased with the pace of capital rebuild, driven by strong internal capital generation, foreign management of risk-weighted asset growth, and the divestitures that will continue to improve the bank's CET1 ratio.
In addition, the Bank of Xi-an in China, in which we have an 18% ownership position, recently completed its initial public offering. At current market valuations, our equity stake stands at over $1.2 billion and provides additional flexibility for capital over the medium term.
Turning now to the business line results beginning on slide 9. Canadian Banking reported adjusted net income of $1.1 billion, up 4% year-over-year. The Q2 2018 benefits from aligning the reporting of our Canadian insurance business and higher-level of real estate gains and reduce the division's earnings throughout by approximately 4%. As you can see on slide 20, the earnings growth rate in the second half of 2019 will benefit from lower real estate gains in the same periods last year.
In retail lending, residential mortgages grew 2%, personal loan 3%, and credit card, 6%. Meanwhile, business lending grew 9%. Given a slower start to the housing market in 2019, we would expect low single-digit volume growth for the year in mortgages. Deposits grew a strong 11% and for the third straight quarter outpaced asset growth. The net interest margin was up 3 basis points year-over-year and 2 basis points quarter-over-quarter, driven by higher deposit spreads. We expect margins to be stable to modestly higher for the balance of the year.
Non-interest income was up 5% due to higher fee income from banking, wealth management business, and higher credit fees. The lower level of real estate gains and the alignment of the reporting of our Canadian insurance business last year reduces growth by 4%. Wealth management adjusted earnings increased a strong 26% year-over-year, driven by contributions from recent acquisitions as well as the core businesses.
AUM growth was strong at 6.3% quarter-over-quarter, reflecting positive net sales and market appreciation. We delegate past operating leverage of 1.1% this quarter through prudent expense management. Consequently, the productivity ratio improved 60 basis points to 50%.
Turning to the next slide on International Banking. My comments are based on results on a constant dollar basis. Adjusted earnings of $787 million were up 14% year-over-year, driven by strong contributions from organic and acquisition-related asset growth, well above our medium term adjusted net income growth target of 9% plus.
Q2 results reflected strong asset growth in the Pacific Alliance, positive operating leverage, good credit quality, and growing digital sales. The Pacific Alliance had very strong net income growth of 11%, driven by a strong performance in Chile, double-digit growth in Peru, and improve portfolio quality in Columbia.
Our GBM operations in Latin America were also very strong, up more than 25% year-over-year, driven by both our capital markets and corporate banking businesses. Revenue grew 22% with net interest income up 20% and non-interest income growing at 26%. Net interest income growth was driven by loan growth in the Pacific Alliance region, which increased 42% year-over -year, including our acquisitions in Chile and Columbia.
Non-interest income growth was driven by higher banking and credit card fees and increased contributions from associated corporations. More than three-quarters of the expense growth was from acquisitions, with the remaining growth in line with business while in growth and the impact of inflation.
Current expense management contributed to the productivity ratio improving by 210 basis points year-over-year. Operating leverage was strong at +5% for the quarter, marking the 18 straight quarters of positive operating leverage.
Moving to slide 11, Global Banking and Markets. Net income of $420 million was up a strong 25% from Q1 due primarily to better market conditions. Net income was down 6% year-over year. While revenues were in line with last year, higher non-interest expenses and lower credit loss and recoveries impacted the net earnings. Corporate loan growth was strong, up 16% year-over-year, reflecting strong growth in the US and Canada.
Overall, the M&A and corporate lending pipelines remain strong. Lending margins remain stable while deposit margins were lower compared to last year. Non-interest income grew mainly due to higher trading revenues and fixed income and improved underwriting and credit fees. Expenses were down 8% quarter over quarter and up a modest 5% year-over-year. The year-over-year increase was driven by a higher regulatory and technology investments, partly offset by lower performance-related compensation. The productivity ratio improved by 840 basis points, versus last quarter, to 51.6%.
I'll turn now to the other segment on slide 12, which incorporates the results of group treasury, smaller operating units, and certain corporate adjustments. But it also includes the net gain on divestitures and the net impact of asset and liability management activities. The other segment reported lower revenues from asset liability management activities and lower returns from our holdings of high-quality liquid assets that were negatively impacted by the flattening yield curve. Some prefunding done late last quarter of TLAC-eligible instruments to meet the 2021 TLAC requirements also impacted the results this quarter.
Given the current shape of the yield curve, we expect continued margin compression on our high-quality liquid asset portfolio.
This completed my review of our financial results. I'll now turn it over to Daniel, who will discuss risk management.
Daniel Moore -- Chief Risk Officer
Thank you, Raj. I will turn to slide 14. Our credit quality is high and our underlying credit performance remains stable. This is evidenced by our stable delinquency rate in Canadian retail and our improving rates in international retail, as evidenced by our stable GIL ratios in Canadian Banking and our improving ratios in international banking and global banking and markets.
Moreover, our loan-off provision covers 9 quarters of write-offs. And our impaired PCL ratio of 49 basis points is in line with our 30-year historical average of 46 basis points. Our PCLs were impacted by day 1 adjustments of $151 million, relating to our acquisitions in Latin America, as required by IFRS 9. My comments that follow will exclude this amount. On an all-bank basis, total PCLs of $722 million were up 5% from last quarter and up 35% year-over-year. Roughly 1/3 of the year-over-year increase was due to acquisitions, another 1/3 was due to volume growth, and the balance was due to changes in forward-looking indicators and other items.
More importantly, however, the PCL ratio on impaired loans was generally stable quarter-over-quarter and year-over-year. In our retail portfolio, we remain focused on A and B customers in using proactive analytics and collection efforts. Our nonretail portfolio continues to perform very well with modest levels of PCLs in stable to declining formations.
Given our portfolio quality, our diversification and our continuous oversight, we are well-positioned for economic growth while remaining downturn ready. Our risk management philosophy is to provision conservatively and we certainly believe we are ahead of the curve in this regard.
Turning now to slide 15. You can see the recent trend and loss ratios from each of our businesses. On an impaired loan basis, PCL loss rates are generally in line with last quarter across all three business lines. Increase in our total PCL ratio was largely driven by Canadian Banking, led by less favorable forward-looking macroeconomic inputs as well as by volume growth, but partially offset by the impact of our continued improving credit quality.
Looking now at other credit metrics on slide 16, gross impaired loans increasing modestly to $5.4 billion from $5.3 billion last quarter, with the growth primarily due to acquisitions and underlying organic portfolio growth. Therefore, the gross impaired loan ratio remained flat versus last quarter and down compared to a year ago.
Net formations of $861 million were down 9% quarter-over-quarter, but up 24% year-over-year. Lower net formations versus last quarter were driven primarily by lower net formations in global banking and markets in the Canadian PNC business. Partly offset by a lower reversal international commercial. The increase compared to prior year relates mostly to increases in our international retail portfolio largely due to acquisitions.
Turning to our net write-off ratio, it remains stable, with a small impact in international banking from recent acquisitions.
In summary then, we continue to see the benefits of our diversified business model and the benefits of investments in digital and in analytics that support our adjudication models and our collections processes, as evidenced by our generally stable credit metrics. And we remain confident in the underlying credit quality of our portfolio.
And now I'll turn the call back over to Brian for some closing remarks.
Brian Porter -- President and Chief Executive Officer
Thank you, Daniel. As we look to the second half of 2019, we expect our financial performance to be better than the first half of this year for a number of reasons. Further contributions from recent acquisitions, along with the positive benefits from our integration efforts. Secondly, continued strong growth in international banking. Thirdly, stronger second half performance in Canadian Banking and global banking and markets. Fourthly, our continued focus on prioritization and expense management and productivity improvements. And lastly, strong capital ratios, which provide the bank optionality.
That concludes my comments on the quarter and I'll turn the call back to Raj.
Questions and Answers:
Raj Viswanathan -- Chief Financial Officer
Thanks, Brian. We'll now be pleased to take your questions. Please limit yourself to one question and then rejoin the queue to allow everyone the opportunity to participate in the call. Operator, can we have the first question on the phone, please?
Operator
Our first question comes from Robert Sedran of CIBC Capital Markets. Please go ahead.
Robert Sedran -- CIBC Capital Markets -- Analyst
Just wanted to come back to the loan losses and that slide that shows the long-term average on there. I mean, Daniel, if I take out Argentina and the global financial crisis, which arguably are very unusual events, I guess we're comfortably above that longer-term average? And do you feel like given the evolution of loan and geographic mix, does it suggest that the 49 basis points this quarter on impaired is going to continue to migrate higher just given where the growth is coming from?
Daniel Moore -- Chief Risk Officer
No, I think -- Rob, thanks for the question. The bank is a very different bank than it was over the long-term averages. We've increased international banking credit exposure and we're getting paid for that risk. But to our discipline at the bank, we are very focused on originating the right sorts of customers, originating AB in retail, and we're very focused on making sure that impaired loans maintains our conservative underwriting discipline. So, we would have a cautiously optimistic outlook from here regarding forward-looking, empiric PCLs.
Robert Sedran -- CIBC Capital Markets -- Analyst
Well, I didn't mean to suggest that there wasn't revenue attached to that shifting loan and geographic mix. It just seems like the loss rate should be rising commensurate with that higher revenue that you're getting in some of the different -- the shifting mix, the structurally higher loan losses should come with the structurally higher revenue. Is that the right way to think about it?
Daniel Moore -- Chief Risk Officer
Right. I think that's the right way to think about it, but it is offset significantly by the improving credit quality in the book.
Robert Sedran -- CIBC Capital Markets -- Analyst
Okay, thank you.
Operator
Our next question comes from Meny Grauman of Cormark.
Meny Grauman -- Cormark Securities -- Analyst
Hi, good morning. Question about the broker channel. We're hearing that competition in the broker channel is increasing quite significantly and I noticed that if you look at published market share data, that your market share fell, I think it's about 640 basis points, in Q1, the latest data that we have. So, I'm just wondering what the outlook is from your perspective in the broker channel and what -- where do you see your share going, going forward?
Daniel Moore -- Chief Risk Officer
Yeah, well, thanks, Meny. I think in the broker channel we are consistently #1 or #2. And my observation on that channel as compared to some others would be that there continues to be a strong consumer preference for that channel, particularly among millennials. So, that remains a channel that we are very, very committed to, bearing in mind that we also have a direct salesforce, we also have the branch channel, and most recently we have both Scotia eHOME as well as Tangerine. So, lots of channels, but that's one we're committed to because Canadians love it.
Meny Grauman -- Cormark Securities -- Analyst
And just to follow-up. Is competition getting tougher there and what's driving that competition from some of the non-bank peers, from your perspective?
Daniel Moore -- Chief Risk Officer
Yeah, I don't know that it's -- I'd say, tougher, yes, but I'd say it's been getting tougher over four or six quarters, frankly, maybe since B20, but it's always been. I mean there's a lot of participants in that market, so it is a competitive channel, but nothing -- Meny, nothing markedly different this quarter than say last quarter.
Meny Grauman -- Cormark Securities -- Analyst
Okay, thank you.
Operator
Our next question comes from Steve Theriault of Eight Capital. Please go ahead.
Steve Theriault -- Eight Capital -- Analyst
Thanks very much. Question on capital markets. We saw the revenue line get back to Q2 levels of last year, but expenses still elevated and operating leverage negative. So, I guess, in terms of a question, as capital markets -- it sounds like you think it'll continue to get back on track here. How much of that is about higher revenues and how much of it is about getting the expense base back to sort of the 550, 560 range, versus the closer to 600 range this quarter? I know you cited higher regulatory costs and technology costs, maybe also some comments around do you expect those to alleviate or is it contributing to a higher run rate on expenses?
Raj Viswanathan -- Chief Financial Officer
Steve, it's Raj. I'll start with expenses and then maybe Jake can talk about the revenue side of it. GBM expresses growth is a modified percent, as you know this quarter, compared to the double digit we had in Q1. Looking forward, it's going to have elevated expenses because of all the regulatory investments we have made. So, the run rate of the $550 million that he quotes is probably going to be higher than that.
You know if I were to guess, it won't be the $645 that we had in Q1 because you also had some seasonality relating to our performance-based compensation, which always happens in Q1 and it shows up more significantly in GBM being a lower cost-space. Without giving a specific number, I think it would be anywhere between $550 and $600 million, probably closer to $600 million as the quarterly run rate on the expenses, as we look forward for the next two to three quarters.
But I think, more importantly, if you look at the bank as a whole, I think we are very pleased with our productivity ratio implements that's happened. And you know GBM is also a big part of it, as it contributed to the banks productivity ratio. You know we'll continue to manage expense growth by prioritizing our spending across the bank and GBM is also part of it. And we'll be informed by revenue growth that happens across our businesses so that we can generate [inaudible] while creating leverage for the bank as a whole.
Jake, you want to talk about the revenue?
Jake Lawrence -- Head-Global Banking and Markets
Yeah, just one other point on the expense. In addition to the regulatory cost, we also are investing in our business and our people. We think that's going to be important to help drive the revenue growth going forward. And when James and I look at some of the underlying fundamentals in the business this quarter, loan growth up 16%, deposit growth also up double digits, we're encouraged that we're going to see some more stability in that revenue line moving forward, assuming we get reasonable market conditions to operate in. So, we're comfortable with the revenue outlook and we're getting our hands on the expenses, as Raj noted.
Steve Theriault -- Eight Capital -- Analyst
Thank you.
Operator
Our next question comes from Mario Mendonca of TD Securities. Please go ahead.
Mario Mendonca -- TD Securities -- Analyst
Good morning. Daniel, can I just take you to page 25 of your presentation? There are a few numbers that had stood out for me and it'd be helpful to get an understanding. What I'm getting at here is the sequential increase in the PCLs ratio impaired loans and personal loans, specifically. Now, I imagine that's mostly auto we're looking at. And would you point us to something like seasonality or anything in particular that would drive that increase, the sequential increase?
Daniel Moore -- Chief Risk Officer
Yeah, you see a bit of seasonality in those numbers, in the impaired loan line in particular, as well as some particular one-off risk strategies that we had to learn around, that we wouldn't see reoccurring in the future.
Mario Mendonca -- TD Securities -- Analyst
Can you elaborate on that? You said one-offs? What do you mean by that?
Daniel Moore -- Chief Risk Officer
So, as we continuously improve through our risk strategies, we are looking at various different ways of originating and improving that risk return curve. By and large, as you see through our numbers, if you look through our unsecured line across all segments, we have an improving delinquency rate, we have improving GIL rate, we have improving formation rate. But in this one quarter we have a nonrecurring personal loan adjustment largely driven through that line that we talked about, that we don't see going forward.
Mario Mendonca -- TD Securities -- Analyst
Is that the same thing we're seeing in credit cards? Because over 400 basis points in Canadian credit cards. Again, not a huge number for cards, but it's unusual in Canada. Is the same thing happening there?
Daniel Moore -- Chief Risk Officer
Yeah. Yeah, so the interesting thing about cards is that as we work through the complexities of the IFRS 9, Mario, these forward-looking indicators come into our unsecured lines disproportionately. So, as we look to conservatively reserve against our future loan losses and we look to the point in time where the Canadian economy was at the end of the quarter, those forward-looking indicators flow disproportionately through to the card lines.
But if I take that number out, Mario, and I look at the core underlying impaired PCL metric for cards, that is declining, has been declining for a number of quarters, and we anticipate it will continue to decline as we exercise more advanced analytics, de-risking strategies, origination strategies, and collection strategies across the bank. So, that has been declining for six quarters now across the bank.
Mario Mendonca -- TD Securities -- Analyst
So, just to put a final point on this, this sequential change we're seeing now on this page doesn't affect your strategy in domestic retail lending? Maybe James, maybe you want to comment on that?
James O'Sullivan -- Group Head, Canadian Banking
Yeah. No, not at all. I mean we spent a lot of time on this and the bulk of this was driven by FLI. So, in cards, Mario, you know as you know, we've identified that as one of two areas where we are not solidly a top three bank in this country and over time we're determined to be. So, cards continues to be a growth focus with an emphasis on A&B customers, given where we are in the cycle.
Daniel Moore -- Chief Risk Officer
And James, if I could just lean on that one more time. I think you'll see that feed, Mario, through to the top line PCL ratio of banking as we have grown 10%, almost 10% year-over-year in our card portfolio. But, as I said, that PCL ratio in that line item is declining. And as we look through all our line items, PCL ratios are flat to declining through [inaudible] in banking. So, our delinquency trends continue to perform very well on cards, down 15% year-over-year.
Mario Mendonca -- TD Securities -- Analyst
Okay, quick question for Nacho then. Is there anything going on in Mexico from a regulatory perspective that you want to highlight either as it relates to restrictions on fees or rates or anything? Has there been any change or anything you anticipate?
Nacho Deschamps -- Group Head, International Banking
No, Mario, there have been no changes. The fee proposal by congress was negotiated with the banks and it's a reasonable proposal. It has no material impact for the financial system or for us. We continue to see Mexico performing very well on the top line. Q over Q and wholesale loans grew 4% and retail loans grew 2.5%, revenues grew 9%. So, Mexico, we have to remember is 120 million population and even with a lower GDP forecast, we see banking and lending penetration relatively low at 40% levels. So, we expect Mexico to continue growing both in the business and retail market.
Mario Mendonca -- TD Securities -- Analyst
Thank you.
Operator
Our next question comes from Doug Young of Desjardins Capital Markets. Please go ahead.
Doug Young -- Desjardins Capital Markets -- Analyst
Yeah, just on expenses. I mean the expense trend looked favorable in the quarter. I guess the question is, you know, is this sustainable? And I gather from your comments that you do believe that this is and we should be expecting next growth to be more in line with revenue growth going forward. So, just wanted to get a little more detail on that.
And then the SCT Program, I think your plan was to remove $750 million in fiscal '19. Just wondering where you are with that. And then just kind of maybe tagged on, you know, Brian, I guess the 52% next target is what you put in for fiscal '19. I assume that you still think that's more than achievable? Thanks.
Raj Viswanathan -- Chief Financial Officer
Okay, thanks, Doug. I'll start on the expenses and see if I can cover the SCT as well as your last question on the next rate. I'll start with SCT. As you know, the SCT Program has been around since 2016. It was a concerted effort to help the bank take out structural costs over a billion dollars and has been very successful, if I can add. The effort is mostly complete on the structural cost side. About 80% of the savings has been redeployed back into the bank in all of the initiatives we have talked about in the past: digital banking, data analytics, as well as strengthening the control functions of the bank, including the risk management, the AMO, et cetera.
The teams that were part of the successful effort are now focused on improving the enterprise productivity as we call, which is primarily looking at revenue initiatives across all the business lines to see how we can assist the business lines in enhancing the revenue growth pace that this bank has had across the business.
The bulk of the redeployment has happened in the technology space. We see a city program [inaudible] and you can see it in the productivity ratio improvements across the years.
We're getting close to our 52% target for 2019. You know based on our expectation for the balance of the year, we should be pretty close to that, if not at that rate, to answer your third question.
But in general on expense and on rate, I would say that we expect to have it on rate, which would be the low single-digit growth, completely guided by our revenue growth, so that we expect to generate positive operating leverage for the bank. You know both -- international banking has had strong past of operating leverage, as you have probably seen, the 5% year-over-year. Canadian Banking is now generating positive operating leverage for this quarter and we expect it to finish with positive operating leverage for the year. The GBM business, once the revenue gets to more normalized levels, we expect that they would contribute to the operating leverage as well.
But the bank as a whole, we expect at the end of the agreed, we would be delivering part of new operating leverage.
Doug Young -- Desjardins Capital Markets -- Analyst
And that's for the full year positive operating leverage?
Raj Viswanathan -- Chief Financial Officer
That's correct, Doug.
Doug Young -- Desjardins Capital Markets -- Analyst
Okay, thank you.
Operator
Our next question comes from Gabriel Dechaine of National Bank Financial. Please go ahead.
Gabriel Dechaine -- National Bank Financial -- Analyst
Hi, good morning. Just a couple quick questions. One on the international business, the -- you know trying to peel away into the organic growth here. It looks like Asia had a big quarter and I'm wondering what is underlying that. And then the other one is on the corporate side. You were helpful in your comment there on what's behind the negative carry item and you said it could persist. I'm just trying to figure out which sections of the yield curve I should be looking at and what your outlook for that dragged to persist is and if there is anything you can do about it in the interim.
Raj Viswanathan -- Chief Financial Officer
Okay, Gabe, I'll start on Asia, relating to international banking and I'll address the carpet segment negative numbers as well. As far as Asia goes, you know the biggest contribution to us is the Thanachart Bank equity pickup that we have, the 49% that we hold. It tends to be lumpy and it tends to move around quarter-over-quarter because it's an equity account investment. You know we don't get too far down to figuring out is it a higher PCL, is it expenses? We have some visibility. This quarter you notice we picked up $130 million. It's kind of consistent, if you go back, Q4 was a high number too. Before that, it tends to be $80, $90 million. The point I'm trying to make is you will see a level of volatility in those numbers that is driven by the equity pickup base on the operations that happen in Thailand.
A couple of years back, if you remember, they had a lot of provisions relating to floods that they had in Thailand. It could be impacted by that and this quarter certainly was a pickup, which was greater than our normal run rate attached to the Thai investment.
Gabriel Dechaine -- National Bank Financial -- Analyst
Okay. And then while I have you on the international -- sorry, the Mexico, if I look at one of your disclosures, it shows Mexico was down year-over-year. I know stage two additions were part of that. Is that the main issue?
Raj Viswanathan -- Chief Financial Officer
I think it was stage two, but it was also the tax benefits that we've had in prior years that Mexico, Gabe, which has gone away. And that contributes to the negative road. But like Nacho mentioned, Mexico has grown 9% year-over-year if I exclude the tax benefits.
Gabriel Dechaine -- National Bank Financial -- Analyst
Okay.
Raj Viswanathan -- Chief Financial Officer
As far as the carpet segment goes, which was the other half of your question, the carpet segment did indicate in the past we tend to have between $50 and $100 million of losses in the carpet segment. You know it depends a bit on how our investment securities moves as well on the realized gains. This quarter was slightly elevated at $121 million, primarily driven by the yield curve, as you mentioned. We expect that Q3 might not be too dissimilar to Q2, but we expect it to gradually improve as the yield curve gets you a more normalized level, if I can use the term, a better slope.
But these are HQLA assets, which are high-quality liquid assets we maintain for liquidity purposes and the LTL ratio purposes. They tend to be US cables, government of Canada bonds, as you know, is low yielding, and that will have an impact to the other segment.
Gabriel Dechaine -- National Bank Financial -- Analyst
If the yield curve doesn't normalize, is there anything you can do? Could you just reduce liquidity? Is there an impact that that causes anywhere else?
Raj Viswanathan -- Chief Financial Officer
No, I wouldn't say that just liquidity would. As some of these securities mature and some tend to be fixed-rate securities that we hold in the portfolio, they will reset at higher rates, which will improve the spread.
Gabriel Dechaine -- National Bank Financial -- Analyst
Okay, thank you.
Operator
Our next question comes Darko Mihelic of RBC Capital Markets. Please go ahead.
Darko Mihelic -- RBC Capital Markets -- Analyst
Hi, thank you, good morning. I just wanted to go back a little bit to the discussion around the provisioning for credit losses. I just want to make sure that I understand this. The commentary is that in auto loans there was a little bit of seasonality. And I just want to make sure that I understand that comment because you're the only bank actually to highlight auto as an area that's sort of impacted. Was there also an element on the auto portfolio of forward-looking information or was it purely just actual delinquency?
Daniel Moore -- Chief Risk Officer
So, Darko, we addressed the response in the context of the question, but we don't see a material change in the auto portfolio. There's been a small uptick, but the auto portfolio continues to perform generally very, very well. There is, of course, in retail, some element of forward-looking indicators built into all the retail lines, particularly what we think of as the untiered lines, which include autos and credit card. So, there's some element to that. But if you look through to the core underlying delinquency, there's not been a material change there.
Darko Mihelic -- RBC Capital Markets -- Analyst
Okay. And then with respect to your discussion on what you're going through on the risk side, you mentioned analytics, improved recoveries and so on. Is this just an ongoing or is this a new sort of initiative or is this just ongoing improvements to the way you manage your credit risk?
Daniel Moore -- Chief Risk Officer
So, this has been something we've been undertaking with velocity now for about six to eight quarters, Darko. And as we get improved access to data, improved analytics practices, we're seeing this really start to create some traction. We're doing this in partnership with the business line across all elements of the primarily retail lifecycle through strategies around AB origination and focus, through de-risking strategies through credit line management through the lifecycle of credit, and better segmentation strategies on the collections portfolio. And we're seeing that really start to impact the overall numbers of the bank.
And those issues will continue in flight as we continue to stand up and improve the overall banks capabilities. And you'll see more from us on that.
Darko Mihelic -- RBC Capital Markets -- Analyst
Okay, and if I can just sneak one last question in. I apologize, but on the international side, the discussion was that 75% of the expense growth was due to acquisitions. For my modeling purposes, do you have a similar number for the revenue impact of the acquisitions?
Raj Viswanathan -- Chief Financial Officer
Yeah, I'll try to give you some perspective on that, Darko. It's Raj. I think from the revenue side we see almost a billion dollars growth across the acquisitions, which includes our wealth acquisitions. And I would say of that growth, about 60% comes from our international banking business. So, it gives you a good understanding of how much was contributed from the international business, primarily in net interest income.
Darko Mihelic -- RBC Capital Markets -- Analyst
Okay, that's very helpful. Thank you.
Operator
Our next question comes from Scott Chan of Canaccord Genuity. Please go ahead.
Scott Chan -- Canaccord Genuity -- Analyst
Good morning. Just sticking international, maybe going about it the other way, you know total loan growth was up 29%, Pacific Alliance was 42%, and that was similar to last quarter. If you kind of strip out or exclude acquisitions, can you provide like an organic growth rate perhaps this quarter or year-to-date?
Nacho Deschamps -- Group Head, International Banking
Sure. If you exclude acquisition impact in the Pacific Alliance or long growth, it's 12%. And this is double the growth both in retail and commercial. And we are seeing these as a very positive trend, even in Chile, where it's the most material impact. Excluding acquisition, we have double-digit growth in retail and commercial. And this is driving revenue growth and 500 basis points, positive operating leverage in the quarter.
Scott Chan -- Canaccord Genuity -- Analyst
That's helpful. And maybe sneak in one more, Nacho, just on the international margin side it was up 8 beeps quarter for quarter and kind of in line with your prior guidance of 4.5 plus/minus 10 beeps. Is there anything to change within that guidance you provided last quarter?
Nacho Deschamps -- Group Head, International Banking
None. We see our margins stable and you basically to business mix these plus/minus 10 beeps and we will remain around that level for 150 basis points and plus/minus 10 beeps.
Scott Chan -- Canaccord Genuity -- Analyst
Okay, thank you very much.
Operator
Our next question comes from Sohrab Movahedi of BMO Capital Markets. Please go ahead, sir.
Sohrab Movahedi -- BMO Capital Markets -- Analyst
Yeah, thanks. Just wanted to stay with international, again, with Nacho. Nacho, the international expense to revenue ratio has improved steadily and now you're just around 50% or maybe a trifle below that. Is this the byproduct of building scale and how sustainable is it as you kind of think through over the next 12 to 18 months?
Nacho Deschamps -- Group Head, International Banking
I would say, Sohrab, this is the opportunity that we have, especially driven by Pacific Alliance country, so solid loan, deposit, and revenue growth, and the very focused plan in international banking and the bank to capture cost savings as part of our performance. And this is driving, not only the operating leverage that it has been for the last 18 quarters positive, but also consistently proven in the productivity index, which has improved in international 200 basis points year-over-year. And this is our business, to be very focused both on our revenue growth and on our efficiency improvements.
Sohrab Movahedi -- BMO Capital Markets -- Analyst
And I guess maybe a question for Brian. Just when you stand back and you think about it, Brian, I mean obviously the acquisitions have helped in international, but the growth -- the earnings contribution growth in international, even on based on the targets, is larger/greater than domestic banking operations. I guess domestic is slowing. Is there any limitations as to how much of the overall bank can come from international banking over the medium term?
Brian Porter -- President and Chief Executive Officer
Look, it's a good question, Sohrab, and thank you. It's that we are very proud of what the international bank has delivered for our shareholders. We see a very positive outlook for the balance of this year and into 2020. And you can see as Nacho just answered, the benefits of scale in these markets is critically important.
The other point I'd make is that I was in Mexico the week after last and there's been lots of news about Mexico, but you know sometimes you have to pull yourself away from a Bloomberg screen. And when it comes to some of these countries, and as Nacho said, Mexico is a country of 120 million people. The biggest driver for the economy is how the US is doing, point one. There's a huge growing middle class and they're consuming, so you can't mix that up with GDP forecast or outlook from time to time. And you're seeing that in our Mexican numbers, which are up 9% year-over-year, despite all the noise and rhetoric of what's going on, on a political level.
So, you know, we see stronger performance out of Peru this year, great performance out of Chile, our integration both on a financial and an operational basis is ahead of schedule. Columbia is performing much better as a country and our integration there is going exceedingly well. So, the Pacific Alliance countries are performing very well and we'll continue to deliver for our shareholders.
Sohrab Movahedi -- BMO Capital Markets -- Analyst
Thank you.
Raj Viswanathan -- Chief Financial Officer
Thank you everyone for participating in our call today. We dealt with solid second quarter results and on behalf of the management team I want to thank all of our employees for their hard work. The bank has made good progress to strengthening our businesses and offering a superior customer experience. Looking ahead to the second half of 2019, we expect to deliver a stronger performance. We remain focused on delivering gains to our differentiated strategy and achieving consistent long-term growth.
I also want to remind investors that we'll be hosting an international banking investor day on October 24th and 25th in Santiago Chile. We hope you can join us to learn more about our bank.
In closing, we look forward to speaking with everyone in late August and have a great summer.
Duration: 54 minutes
Call participants:
Operator
Philip Smith -- Senior Vice President of Investor Relations
Brian Porter -- President and Chief Executive Officer
Raj Viswanathan -- Chief Financial Officer
Daniel Moore -- Chief Risk Officer
James O'Sullivan -- Group Head, Canadian Banking
Nacho Deschamps -- Group Head, International Banking
Jake Lawrence -- Head-Global Banking and Markets
Robert Sedran -- CIBC Capital Markets -- Analyst
Meny Grauman -- Cormark Securities -- Analyst
Steve Theriault -- Eight Capital -- Analyst
Mario Mendonca -- TD Securities -- Analyst
Doug Young -- Desjardins Capital Markets -- Analyst
Gabriel Dechaine -- National Bank Financial -- Analyst
Darko Mihelic -- RBC Capital Markets -- Analyst
Scott Chan -- Canaccord Genuity -- Analyst
Sohrab Movahedi -- BMO Capital Markets -- Analyst
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