Mario Mendonca: Okay. Final thing then perhaps this is for Scott. You referred – I think the phrase you used was prioritized markets. Perhaps this is going to be a part of your discussion in the refresh. But what do you mean by prioritized markets? Are you signaling that the bank with exit certain markets in Latin America, for example?
Scott Thomson: Mario, I think going forward, our plan is to prioritize capital allocation to areas where we see the highest risk-adjusted return on a full cycle basis. We’ll take into consideration where we can build competitive advantage and also connectivity across the platform. So we’ll have more to say on that at Investor Day. But no, I wouldn’t read too much into my comments that you referred to. And then secondly, I’d come back to the capital piece, just to reinforce what Raj said, recognizing on relatively new enroll. Right now, with what OSFI has highlighted, 12%, that’s the right number, plus 12%. So I don’t want at all you to think that we should be running here at 13%, but we do have a situation where there’s going to be some offsets in Q1 associated with Basel and there’s uncertainty with what OSFI is doing.
And so the objective here would be to get off the DRIP as soon as we can. And we also recognize that the risk transfer is not a good use of capital. And so trying to manage this prudently given the uncertainties, but also being rarely sensitive to the shareholder is the key objective here going forward.
Mario Mendonca: Thank you.
Operator: Thank you. Our next question is from Doug Young with Desjardins Capital Markets. Please go ahead.
Doug Young: Hi, good morning. Just maybe a two parted NIM question. I mean, NIM up in Canada, it’s up in international down at the all-bank level. Can you talk a bit about the drivers in corporate? And Raj, I think you signaled last quarter that you’ve made some changes in the hedge book. And as we think about what you’ve talked about and Dan has talked about on the deposit and the loan growth side, like how should we think about NIMs evolving over the next year, maybe at the divisional level, but also as it kind of goes through the corporate and to the all-bank level as well?
Raj Viswanathan: Sure. I’ll start, and I’ll try to cover all the confidence of your question, Doug. All bank level NIM had a modest compression of 3 basis points. I would attribute all of that to the corporate segment, which relates to the cost of funds increase. As you know, we recorded there. Since we talked in May, there’s been rate increases, both in Canada and the United States. And at that time, we did not expect rate increases in Canada. So what you’re seeing this quarter is the impact of that. The improvement in NIM in the Canadian Bank will continue. As we pointed out, this quarter’s improvement was all deposit driven, and I think that will continue. Asset margin is actually starting to show signs of growth, like Dan pointed out, mortgage margin is starting to go up.
So I’m optimistic that it will also contribute maybe modestly to next quarter so that you should see it happen. International Banking NIM [ph] many times in the past, I said there are so many moving parts within the International Bank segment. The Caribbean is benefiting from U.S. rate increases, particularly the English Caribbean, while the Pacific Alliance countries, inflation moves it around quite a bit, business mix also does. I think it will remain in about these levels. There might be a quarter where we grew a couple of basis points down or up. But when you take it to the all bank level, it’s about 20% of the assets of the bank, so it wouldn’t have a meaningful impact to the bank’s NIM going forward. The biggest impact will always be the cost of funds in this environment.
And as we talked about before, currently, the bank is neutralized to the sensitivity across the rate curve, which is what we disclosed. However, when you have rate cuts happening at the short end of the curve, which is where we expect it to benefit us, that will be a meaningful benefit when it happens.
Doug Young: Okay. And then maybe just on the strategic risk transfer, Scott, if I heard you, you said that’s not an efficient use of your capital. I mean – and Raj, I heard you wanted to test at the plumbing. But why do a strategic risk transfer at this point in time?
Raj Viswanathan: Yes. It’s a Synthetic risk transfer. So it’s not an actual elimination from the balance sheet, as you know. So it’s a synthetic exposure. I think it’s – capital management is going to be key as we see it going forward because of the significant changes that is happening all around those, including regulatory Basel, those kind of things. Having another tool in the toolkit is an important component of how we manage capital. So we look at it from that perspective. We’d rather test it early to see. We know how to make it work operationally, like I mentioned, and we’ve established that. So we feel very comfortable that we’ll be able to do it as required in quarters where we think it is the necessary first step [ph] to do.
Doug Young: Appreciate it. Thank you.
Raj Viswanathan: Thanks, Doug.
Operator: Thank you. Our next question is from Paul Holden with CIBC. Please go ahead.
Paul Holden: Thank you. Good morning. First question for Phil and so I appreciate the color on Canada [ph] you provided on the international bank. And I just want to ask in past experiences, what does history tell you in terms of how long unemployment may remain elevated and thereby, how long PCLs may remain elevated, assuming those two remain correlated?
Phil Thomas: Thanks, Paul. Are you referring to international specifically? Or do you want to – your Canada pertain – your question pertain to Canada mostly?
Paul Holden: International, mostly.
Phil Thomas: Okay. So if you look at where we’re having the most pockets of friction in Chile, as an example, they’ve decreased interest rates by about 100 basis points a few weeks ago, which we view as promising. We’re going to monitor that over the next quarter or so. And we expect that we’ll start to see some improvements in terms of purchasing power of our customers. But this is something that will stick around for a little bit. But you know what, one of the things I’ve been really pleased with, Paul, is the pivot – the strategy pivot we made around originations about 2 years ago to focus on affluent customers. This is really paying dividends for us right now. And as I look and we double-click on that customer base, they’re not – we’re not seeing the level of stress with those customers as we would see with some of our other customers.
And so I think that pivot that the IB team have been doing and Francisco is now focused on has been really positive for us. But this is going to be – this is something we’re working on closely. There’s a lot of activity with collections. A lot of activity between Francisco and I am looking at how we manage originations moving forward. I think, as Scott said in his opening remarks, focusing on primary customer being focused on that affluent segment international, will pay dividends for us.
Paul Holden: Okay. So a challenge in the near term, but how long we’ll wait to see…
Phil Thomas: Yes, you got it.
Paul Holden: Okay. And then second question, which is probably for Raj. I just want to ask on expenses. I see a decline in FTE notably in Canada quarter-over-quarter. It seems like expenses were kind of in line with what you’d expect yet still negative operating leverage. And I would argue for a challenging revenue environment going in next year for everyone, not just for Scotia but for everyone. So how are you thinking about the expense management going forward? Is there a potential to take additional actions to rein in operating expenses?
