Q2 2020 Earnings Call
[music].
All participants please standby your conference is ready to begin.
Good morning, Ladies and gentlemen, welcome to RBC is conference call for the second quarter 2020 financial results. Please be advised that this call is being recorded I'd now like to turn the meeting over Canadian on head of Investor Relations. Please go ahead.
Thank you and good morning, everyone speaking today will be day, Mccarthy, Vice President and Chief Executive Officer, Rod Bolger, Chief Financial Officer, and Graham upward Chief Risk Officer, then we'll open the call for questions give everyone a chance to ask questions. We ask you limit your questions and then you. We also have with us in the room illegal.
Walkman group head personal and commercial banking doesn't Doosan group had wealth management insurance and I, Yes endured Milner group had capital markets.
As noted on slide one our comments may contain forward looking statements, which involve assumptions and have inherent risks and uncertainties actual results could differ materially.
We also remind listeners that the bank it doesn't performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance with that I'll turn it over to do.
Thank you know Dean and good morning, Thanks for joining us and what is unprecedented in challenging times.
We do hope you on your loved ones were keeping safe and well.
Before I move into my comments on the macroeconomic environment.
I do want to say, how proud I am aware employees for all they've been doing throughout the crisis to bring our purpose for life.
Supporting your clients and our communities.
We moved quickly to support our clients, including granting payment relief to over 490000 client.
They could redirect their money to where it's most needed.
Our various client really programs represent over $76 billion of loans outstanding.
Graham will speak more on these programs later in the call.
That's the situation of all the regulatory monetary and fiscal actions taken by policymakers globally.
Provides stability and supports the economy and the financial system.
It's Canada's largest financial institution. We also have an important role to play in helping less than the financial impact of the crisis on our clients, while helping to restart our economy.
In Canada was and working closely with the government and implementing various federal programs.
And we provided access to $4.5 billion, an available funding to over 115000 clients through our Steve a program.
And given kind of was relatively strong fiscal position the country's finances are well positioned should further options be required.
In the U.S., we provided over you at $3.5 billion of funding.
<unk> clients to the paycheck.
Protection program.
I'll now provide some highlights of our financial performance.
Today, we reported earnings of $1.5 billion.
And a quarter, where we recorded a provision of $2.8 billion, which I will speak to shortly.
We carried our strong momentum from the last quarter into Q2, and North American equity markets hit all time highs in late February.
However, as a cobot 19 pandemic spread expanding public health, Chris has led to increased concerns around the global economic outlook.
Culminating in elevated market uncertainty in March.
We supported our clients through these volatile markets as they drew down on their credit facilities in light of liquidity concerns.
The severe correction in global markets and widening credit spreads in particular negatively impacted our results this quarter.
Including unrealized mark to market losses, and a number of portfolios. This was partly offset by elevated client activity related to significant volatility across asset classes.
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Trust macro at macro outlook concerns low equity valuations and elevated volatility meant companies largely side on the sidelines when it came to mergers and acquisitions.
As credit markets opened up in April following a significant.
Intervention by Central banks, we saw significant uptick in investment grade debt issuance.
Since mid March capital markets has been a book going on over $150 billion of global investment grade issuance and has led over 80% of corporate debt transactions in the Canadian market.
Our source of strength and stability for clients as reflected in a significant growth of consumer and business deposits.
And strong volume growth and are well franchises in Canada, and the U.S., particularly at city National.
We've also seen an acceleration of digital banking adoption, including all time high volumes in direct investing.
Rod will speak more to these trends later in the call.
More recently, we started to see a cautious reopening of certain economies, including those in Canada.
However, significant uncertainty remains on the severity and duration of the global economic downturn as a result of elevated unemployment low oil prices and disrupted supply chains.
With that background I want to focus my comments on the strength of RBC is financial position.
Our balance sheet remains strong, giving us a solid foundation to face these risks head on.
Yep.
Competence in a prudent risk management and diversified business model.
We have a proven ability to organically generate capital averaging over 17% return on equity over the last three fiscal years.
And in the quarter significant external stresses we generated pretax pre provision earnings of $4.6 billion.
The second highest in our.
Hundred 50 year history.
We also paid $1.5 billion in dividends to our shareholders, while growing our book value.
Well the economic downturn caused by the outbreak of Cobot 19 was unexpected we've been preparing for the potential of a recession for the shorter term.
Our focus in the last few years doesn't on driving market, leading organic growth, while building up capital buffers as opposed to acquisitions or ramping up share buybacks.
Furthermore, over the last two years, we've made a conscious decision on the composition of our loan portfolio, including prudently managing your corporate loan book growing our residential mortgage portfolio and maintaining both underwriting limits and strict discipline on not originating nonprime unsecured retail credit.
We are confident in a robust balance sheet underpinned by a strong 11.7% see tier one ratio, which is 270 basis points or $15 billion over the current regulatory minimum.
Even after increasing provisions and providing exceptional support to our clients.
We took prudent action to bolster our alliance for credit losses to $6 billion, given the economic outlook and our expectation of a prolonged recovery.
Our stress test should tests that even under a severe pandemic scenario our capital levels remain above current regulatory minimum levels and we remain well positioned to continue playing paying our dividend.
While our corporate clients have been drawing down on lines and accessing capital markets. Our retail clients have cut discretionary spending on debit and credit cards by over 20% a social distancing took hold in the beginning of March.
Physical distinct distancing measures have also impacted the Canadian housing market with sales activity retrenching, Although house prices are largely unchanged.
Although any recovery in the housing market will be gradual at first we believe the risk of a sharp near term price decline is low.
Despite rising unemployment levels, we remain confident that are prime Canadian retail portfolios will continue to perform well with a combined power of our client really programs and the government led initiatives providing support to our clients.
Even though the Canadian retail mutual fund industry had as tough as months ever in March as markets experienced extreme corrections RBC asset management continued to grow its leading market share in Q2 with a strong performance in February and a recovery in April.
And other parts of the bank activity levels have never been higher we are benefiting from our significant investments in technology over the last number of years to provide alternative ways to deliver products and services to clients.
We've seen a significant growth in digital banking volumes with mobile sessions up 20% from last year as we ensure our clients day to day financial needs continue to be met.
We have also seen increased each transfers and digital sales.
And direct investing recorded all time high volumes during the quarter.
We are also proud to note that RBC has been ranked number one and overall customer satisfaction among big five retail banks and the JD power 2020, Canadian retail banking satisfaction study.
After delivering very strong results in Q1 2020 and early into Q2, we entered this period of heightened uncertainty from a position of strength.
While much has changed in the past eight weeks is also important to focus on what does remain the same way.
We remain committed to creating long term value for our clients and our shareholders.
We will continue to leverage our strong balance sheet, our leading scale and distribution capabilities across our franchises to prudently and efficiently support our clients.
We believe our past investments in building unique capabilities, such as Borealis, AI insight edge and my advisor will significantly differentiate us in the future and enable us to deliver even more value for our clients.
Several of our ventures are also well positioned to support our clients, including owner, which helps entrepreneurs manage their businesses and build their brand online and Dr., Bill, which helps reduce the stress and complexity of medical billing for physicians.
Our entire leadership team is focused on how RBC can emerge from this differently and stronger in the future.
And with that I'll turn the call over to Rod.
Thanks, Dave and good morning, everyone.
Starting on slide eight we reported earnings of $1.5 billion and EPS of one dollar with real results impacted by $2.8 billion it provisions for credit losses.
Nearly seven times from last quarter.
Which Graham will touch on shortly.
Pre provision pre tax earnings were up 3% from last year to $4.6 billion driven by strength in capital markets Investor Treasury services and insurance a testament to the continued strength and success of our diversified business model.
Our record pre provision pre tax earnings through the first half of the year allowed us to prudently absorb over $3 billion of PCL and still generate nearly $5 billion of net income.
A few thoughts on expenses, which were essentially flat year over year.
Excluding FX and $30 million of coated related costs, mainly in Canadian banking, our expenses would have been down 1%.
Given the current environment, we saw slowdown in costs related to marketing and travel which were collectively down close to $40 million from last year and recall variable compensation largely acts as a natural hedge to lower market sensitive revenue.
As Dave noted the crisis is changing client behavior, and we have seen an accelerated shift towards digital engagement, we would expect to see opportunities for cost savings going forward, assuming client preferences continue to trend towards digital interactions.
Early last year, we spoke about managing our cost based on the earnings outlook and we remain diligent in this regard however, as always we will balance any project prioritization with our commitment to creating long term value for our clients and shareholders.
On taxes are lower effective tax rate largely reflected changes in our earnings mix given the elevated PCL taken in the quarter was largely in jurisdictions with higher tax rates.
Before I get this segment results I wanted to add to Dave's earlier comments on capital.
Moving to slide nine we reported a strong C. One ratio of 11.2% down 30 basis points from last quarter, but.
The largest driver of season Q1 was related to an increase in credit RW way, which lowered our cetone ratio by 41 basis points through both unprecedented levels of draws and credit downgrades.
Turning to slide 10, where we show our are to be a composition by the probability of default the composition of our largely Canadian retail portfolio remain consistent from last quarter underpinned by our high quality residential mortgage portfolio.
In our corporate portfolio. The majority of the credit line utilization was from our investment grade clients in capital markets, where the loan utilization rate increased by nine percentage points from last quarter to 38% on April Thirtyth.
This is down through March peak of above 40%.
Drawdowns from our Canadian banking in city National commercial clients are more muted at this stage.
The impact of credit downgrades. This quarter was largely from our capital markets loan book, we'd expect the impact of credit migration on our commercial portfolios to increase in the coming quarters.
I wanted to spend some time on the downside risks to our capital ratios.
Our disclosures on slide 30 highlight the assumptions that went into our IRS nine calculations in late April.
We have also run more severe stress test scenarios, including Canadian equity prices falling more than 50% over the next 12 months and Canadian and us GDP falling 18% to 20%. We also consider unemployment, saying over 14% for a number of quarters and that return into 2019 levels for a number of years.
Yes.
While we believe these scenarios are unlikely they do represent the inherent uncertainty still surrounding the healthcare and economic outcomes.
In our severe scenario, we believe our cetone ratio will remain well above our regulatory minimum.
To provide additional color in a very conservative scenario of a one notch downgrade across all sectors and geographies and are well devices diversified wholesale portfolio. This scenario would result in the R.W. density of these portfolios increasing by approximately.
15 percentage points over a number of quarters negatively impacting our cetone ratio by approximately 115 basis points over time.
Comparing this unlikely scenario to our 270 basis point buffer over the current regulatory minimum which represents an R.W.P. a buffer of approximately $165 billion or 30% increase above current are to be a levels.
Furthermore, our consistently strong organic capital generation will continue to act as the primary observer of any credit deterioration.
Also should credit spreads normalized we'd expect to recovery and unrealized losses carried at fair value through OCI. These impacted our cetone ratio by 19 basis points this quarter.
Moving to our business segment performance beginning on slide 11, personal commercial banking reported earnings of $532 million Canadian banking net income was $649 million with pre provision net pre tax earnings of 2.4 billion, which was relatively flat year over year strong volume growth was offset by lower net interest margins.
Down two basis points from last quarter due to the impact of lower interest rates. We continued our strong momentum in mortgages up 9% over last year. However, as Dave noted we are seeing them material slowdown in housing activity and this is reflected in much lower mortgage application volumes since April thirtyth.
We expect mortgage growth to slow to the mid single digits by year end.
Both business and personal deposit growth was strong up 14% and 8%, respectively, providing a partial offset to margin pressures, while strong growth trends in our core checking accounts continued into may we would expect these trends to moderate from here.
Noninterest revenue was impacted by lower card services revenue as climb purchase volumes declined as a result of the cobot 19 pandemic.
Turning to slide 12 wealth management reported earnings of $424 million with pre provision pre tax earnings of $653 million down 16% year over year.
The impact of market volatility contributed to mark to market seed capital losses, and RBC global asset management and unfavorable interest rate derivative valuation adjustments in city national.
The impact of market volatility also drove unfavorable changes to our us share based compensation plans adjusting for these are pre provision pre tax earnings would have been down 2% year over year.
Canadian wealth management benefited from higher fee base.
Average client assets and an increase in transaction volumes driven by higher client activity.
Global asset management, AUM was up 7% from last year, mainly due to strong net sales, including in our institutional business.
Canadian retail net sales recovered well in April, particularly in our money market and long term fixed income strategies.
Very strong double digit volume growth at city National and fee based asset growth in our U.S private client group was offset by the cumulative impact of the fed rate cuts as well as by higher cost to support underlying business growth.
We expect city nationals expense growth to slow over time as its elevated technology investments in regular regulatory costs begin to normalize.
Moving to insurance on slide 13, net income of $180 million increased 17% from a year ago, mainly due to higher favorable investment related experience and new longevity reinsurance contracts, partially offset by the impact of actuarial adjustments and lower benefits from favorable reinsurance contract renegotiations while.
Overall claims were largely flat from last year, we saw an increase in travel claims this quarter. We continue to help Canadians with their travel insurance claims were trips have been interrupted or canceled in light of over 19.
On to Investor and Treasury services on Slide 14 record net income of $226 million increased 50% from a year ago, primarily due to higher funding and liquidity revenue, reflecting a benefit from interest rate cuts in the current quarter as well as higher gains on the disposition of certain securities.
Asset services business benefited from higher FX revenues, reflecting increased client activity as a result of heightened equity and FX market volatility going forward, we would not expect to see the same level of benefits. We expect next quarter to be particularly challenged given our surplus liquidity position lower asset valuations and more.
Our normalized client activity.
Turning capital markets on Slide 15 capital markets reported earnings of $105 million pre provision pre tax earnings of $1 billion were up 16% year over year, and where our second highest level on record following our strong Q1 2020 performance.
The segment generated positive operating leverage of 6.5% with expenses kept flat as lower variable compensation costs were offset by higher cost to support business growth.
Corporate investment banking revenue was down 25% year over year, largely due to $229 million of unrealized mark to market losses in loan underwriting in the us in Europe as high yield credit spreads widened significantly.
M&A and IPO activity was muted given the market uncertainty in contrast, we saw strong debt underwriting activity.
Global markets had a record quarter with revenue up a strong 37% from last year, largely due to higher fixed income trading revenue across all regions our rates trading business performed well in the volatile interest rate environment. In addition, we saw higher earnings on our spreads in our repo business.
Lower results in our equities business were driven by losses in our structured products business given severe market dislocations in normal course, correlations and with that I'll turn it over to Graham.
Thank you Ron and good morning, everyone.
As Dave.
Excuse me.
Okay.
As Dave noted earlier Carbonite team has had a significant impact on financial markets in the global economy.
The significant progress has been made in slowing the players to managing economic followed.
The speed at which the economy recovers the efficacy of government support future potential waves of the players and the availability of a treatment were vaccine all remain highly uncertain and we'll continue to affect or risk profile going forward.
In response to these events, we increase our allowance for credit losses by 2.4 billion since last quarter as you'll note on slide 17.
With a significant increase we now have 5.9 billion in total allowances to absorb future loan losses. This represents 0.84% of all loans outstanding and 4.2 times or net write offs over the last 12 months.
Nearly 90% of this increase in our allowance. This quarter is a result of higher provision good performing loans up 2.1 billion from last quarter.
This was primarily driven by unfavorable changes in our macroeconomic forecast to reflect the current economic conditions was also impacted by readings migrations and drawdowns, mainly in our capital markets loan portfolio.
Additionally, two thirds of you increase related to our wholesale exposure, which spans capital markets personal in commercial banking and city National and one third alluded to a retail exposure, which is predominately in commercial personal and commercial banking.
Good or 10% of the increase allowances is due to higher peafiel on impaired loans.
Turning to slide 18.
Peafiel and impaired loans of 613 million were 37 basis points was up 16 basis points from last quarter, largely reflecting higher provisions in capital markets.
These provisions were mainly related to the oil and gas and consumer discretionary sectors reflective of the current macroeconomic environment.
In Canadian banking provisions were up 39 million from last quarter, we had higher impairments and reflect will be assessed commercial portfolio and higher impairments in our personal lending portfolio.
In city National provisions were up $80 million from last quarter, largely due to higher losses on previously impaired loans in the consumer discretionary sector.
Turning to slide 19.
Gross gross impaired loans of 3.5 billion was up $593 million were six basis points from last quarter, reflecting higher impairments and capital markets seem to sectors I noted earlier.
This was partially offset by lower impairments, mainly due to one real estate account that has returned to performing this quarter in our Canadian banking commercial portfolio and high repayments and recruit Caribbean banking portfolio.
In addition city national had lower impairments and its consumer discretionary sector, which is partially offset by higher impairments in the consumer staples sector.
I was sort of couple markets. The current macroeconomic weakness was not a significant driver of new impaired loans this quarter.
Turning to slide 20 to 23.
I'd like to provide some color on some of our more vulnerable sector exposures, which includes components of our consumer discretionary commercial real estate willing to us transportation the media sectors.
Consistent with our broad and diversified portfolio. These searchers accounted for about 7% of RBC pool loans outstanding.
Let me start with the oil and gas sector.
About 90% of oil and gas provisions this quarter related to companies that have been struggling to recover from the 2015 oil downturn.
Our exposure to this sector, which represents 1.3% of RBC is total loans outstanding increased by 22% from last quarter, driven by higher draws on existing facilities as well as new liquidity facilities that we provided to existing investment grade clients.
The majority of our exposure to this sectors to S&P companies, which was previously done through boarding based living structure, whereby loans secured by the value of proven and producing reserves.
About half of our oil and gas exposure is most sensitive to oil prices and many of those clients have hedges or production through the end of 2020.
Our NPL coverage ratio for the oil and gas sector is now at 4% of extending exposure and a slightly above the cumulative amount of provisions. We took in this sector from 2015 to 2017.
So deliverable bowl vulnerable sectors noted clients have been affected by business closures physical distancing measures and other government restrictions.
We totally to commercial real estate has been impacted by retail closures, creating challenges around tenants ability to pay rent.
Retailers in restaurant owners with limited to new online presence or that are independent businesses with without access to broader corporate support are being negatively impacted.
Hotels of seamless experience will drop in occupancy rates and recreational and media related companies have also seen a substantial drop in demand urban fourth to shut temporarily shut down.
We have sector is unique we feel that the support programs. We put in place for our clients are consistent and prudent approach, we're underwriting standards and the various government programs available to them will help mitigate potential loan losses.
This is additionally, supported by an allowance for loan losses of 1.1% of our total wholesale extending exposure.
Let me know discuss a retail portfolio turning to slides 24 and 25.
As I noted earlier, we had higher impairments in our personal lending portfolio and stable impairments for the remainder of our retail portfolio relative to Q1.
Cards utilization rates have declined in April and other revolving lines of credit Harbin stable through the quarter.
4% of our clients have taken advantage of frequent really program with the previous acquired pickups has decided over the past few weeks.
Preclinically programs. This offer the opportunity for lead retail clients to defer certain payments for up to six months.
Once these client relief auctions run their course, we do expect to see elevated delinquencies and insolvencies given the significant impact Quvenzhane team has had on the labor market.
As reflected in our allowances, we expect the weak economic outlook, we're acutely impact our cards and personal lending portfolios due to the unsecured nature of those products.
Given our prime focus in retail the vast majority of our clients credit profiles remains strong and we are proactively assisting clients. They meet that may be facing hardship to help them navigate through this environment.
Well, we're forecasting a decline in host prices declining credit performance in our mortgage portfolio will be mitigated by the very strong critical for clients as reflected in the FICO distribution as well as our strong security position as reflected in the LTV profile.
Let me know discuss market risk on slide 27.
We saw a sizable market movements over a few weeks in March that were equivalent to a greater them those experience over a number of months during the 2008 financial crisis.
This volatility led to 13 days of Mark to market losses for those these exceeded var projections in March due to Mark downs of the loan underwriting portfolio, the kroner pretty difficult and significant market volatility.
In April trading businesses were able to capitalize on the reopening of primary markets and better secondary market activity with Merck is recovered and volatility subsided.
Average workers of our increase from Q1 due to wider credit spreads and Merck and volatility that impacted our loan underwriting commitments as well as fixed income and equity portfolios.
Going forward, we do expect to our average for to be at higher levels than it has been historically as the volatility experience in March we will be reflected in our methodology for the foreseeable future.
Having said that bar has now declined by approximately 25% from its April peak as result of reduced loan underwriting exposure and improved market conditions.
But the noted earlier and earlier in 2019 are leveraged finance business employees and underwrite to distribute model with two primary risks market risk in relation to loans and bonds, we distribute and credit risk inratio the portion of the credit facilities, we retain.
For a loan underwriting activities, our primary protection against market volatility is in the form of price flex that helps mitigate against spreads widening during the distribution period.
Given the significant market volatility noted earlier, we saw spreads widen the quarter beyond our flex protection.
The spread movements have all been reflected in the valuations Rod mentioned earlier in referenced on slide 12.
We ended Q2 with a committed loan underwriting book of 3.9 billion and market activity. In me has allowed for the reductions subsequent to quarter end.
Overall postal leverage lending, including the portion we retain continues to adhere to our disciplined risk management approach.
The committed portfolio size is largely unchanged over the past year is a very well diversified portfolio with no sector, representing more than 16% of the portfolio and single in concentrations kept relatively small.
To conclude.
Our history of prudent underwriting the prime nature of our retail portfolios in the diverse nature were wholesale portfolio service strong mitigants against a deteriorating macroeconomic conditions that have arisen as a result of the coded 19 pandemic.
We believe we have taken appropriate provisions to reflect these deteriorating external conditions.
Based on our current view of the economic outlook, we believe that PCL and performing loans. This quarter has reached a high watermark. However, as I noted the beginning of my remarks, there is great uncertainty with respect to the speed at which the economy recovers the efficacy of government support future potential waves of the players and the availability of a treatment or vaccine, all which may impact provisions in the future.
We expect impaired loans will be associated losses to be muted in the near term given the prevalence of quite relief auctions with a more material impact beginning to show once the relief auctions when they're cores.
The result, we anticipate our PCL impaired loans to trend higher to the latter portion of 2020 move into the sort of 2021.
We expect to be able to drawdown on the allowance and performing loans that we built this quarter such that our total allowances, which really changes that will become impaired.
Turning to another allowance and performing loans will partially offset the expected PC OEM impaired loans were anticipating.
With that operator, let's open the lines for acuity.
Thank you we will now take questions from the telephone line.
The question, Andrew using a speaker phone. Please mr. Han crack before making years production. If you have a question. Please press star one on your telephone keypad.
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Please press star one at this time, if you have a question there will be a brief pause for the participants register thank you for your patience.
The first question is from Ebrahim Poonawala of Bank of America. Please go ahead.
Good morning.
Yes, I just wanted to follow up on something that drove you mentioned that ongoing expenses in operating leverage.
Hi seems create opportunities.
And when you look at noises coming to talk to argue that you won't be better off competitively the new what even coming into the cases talk to US just in terms of how youre thinking about.
Pulling back on discretionary expenses our investments.
Versus.
Any opportunities that are already beginning to emerge when either from a market share standpoint in retail capital markets debt.
Could be looking.
To sort of capital laser.
Thanks, Ebrahim I'll start and Dave might chime in.
In terms of investments, we've been ramping up our investments spend on technology with the client focus and then obviously also inefficiency focus but really on a client focus and market share growth focus.
Over the last five years, and so that was done in anticipation that if and when a recession hit we can dial that back and still be in a strong position and so that holds we will still continue to invest if it makes sense, where we're also taking back discretionary spending and kind of bucketed into into two or three buckets, which is.
What are the what's the low hanging fruit deacon dial back in a situation like this which I mentioned my comments marketing and travel.
Vendors the investment spend where we have definitely curtailed the growth.
We could take it down we could keep it at this at the same level, depending on what makes sense from an NPV and a investment in in future growth standpoint.
And then there is the other items, which kind of ratchet up and down within business volume such as variable compensation. So our strategy has not been significantly change by this we look to drive efficiency all through the cycle and mom has not changed.
I'll just add an example in city national where we've been investing in expanding our network and opening new branches and new locations with Us Nashville, or New York City.
So that will that will continue we see enormous growth opportunity you see in the results in the city National and a growth story at the same time, we've been investing and digital capabilities. There were launching as we've have launched a new cash management system for city National and we're we've delayed the launch, but we'll launch this summer a new mobile banking platforms those types of it.
Estimates, we use the tailwind of rates.
Now that we know that organization, obviously, three nationals facing tougher revenue headwinds with the decline in rates in the rapid decline in rates. We've got a lot of that work behind us we still want to invest where there is growth and I think so there is an example of where we're going to be careful but we still want to invest so no as Rod said, we'll look at where there is opportunity where this client growth.
We continue to invest but we have made a big chunk of our technology investments and if needed we can pull back depending on the revenue profile going forward knowing that.
We have very strong technology capabilities on our on a comparative basis.
Okay. Thank you.
Thank you.
The following question is from Steve Stereo of capital. Please go ahead.
Thanks very much.
That was great color on how your some of your most adverse stress tests will impact capital. You said you remain well above the regulatory minimum to does that is it safe to say that translates into greater than 10%. If we take that you mentioned 115 basis points will.
What would weigh on CD, one offer elevenseven you're out this quarter just want to make sure with messaging.
Yeah. Thanks, Steve So our current buffer is 270 basis points above the regulatory minimum of 9%, including the domestic stability buffer of 100 basis points.
Most of our scenario analysis would would suggest that we're going to.
Remain well above that 10% threshold that you mentioned.
If we do take some of our more suited as severe scenarios, we're still working through have those might play out.
Whether it's a w. type recovery or others, we are fine tuning and we've been these scenarios consistently constantly and as we work through those we remain well above our risk appetite, which includes a buffer above that 9% minimum and in per day.
Permanent number of cases, we are well above that 10%.
Okay, and then the 41 basis points of Drawdowns in downgrades, you mentioned and mining right to assume that the vast majority of that is the drawdowns we saw this quarter.
No. It's approximately a 50 50 split.
41 basis points figure 24, drawdowns in 21 for.
Downgrades.
Okay, and if I could sneak one more on current earlier in your question and Steve mortgage were rollout could you re queue.
Certain of our there thanks.
Thank you.
The following question is from many from Cormark Securities. Please go ahead.
Hi, Good morning, I know you mentioned, we slipped to moderation mortgage growth with if I look at.
What we've seen that through the quarter definitely are very strong and I'm wondering how you reconcile that strength when everything we now in terms of deferrals and markdowns and just.
The depression level economic indicators that recently in the short term so having hundreds that.
Ill make sense.
Tier.
Well. Thanks for the question we started the year exceptionally strong. So we were originations for the first quarter were exceptionally strong so that was really fueling the early growth.
As soon as we really saw the impacts of coal, but obviously you can't show a home and transactions just dried out.
So right through toll really.
The end of April we were at sea.
Annual lows for origination we've since seen that that come up a little bit probably about a third of from sort of peak to trough in may but.
Right now where youre on an annual basis, we're probably looking at an outlook offer originations of about.
80% to 85% of last year in a lot of uncertainty obviously, given we don't know what the what the.
The measures are going to be and how much access that clients are gonna have to go and actually look at home. So thats.
Thats, how we had really bridge the too.
Strong starting and then just a sudden breaking as.
The inventory just dried up.
And then just in terms of your commentary on pricing how would you contrast, your outlook for condos versus single family in terms of expectation for price declines.
Although we have.
I'll give graham old old answered.
Well I don't know five the split between the between the different.
Types of housing, but overall in our forecasting we built a 7% decline in host prices.
With kind of recovery period picking over about two years.
The who got would split by different geographies and different property types I, just don't have those numbers with me, but but the the national level. The climate, we're forecasting and modeling right now is the peak to trough of 7%.
Thank you.
Thank you.
The following question is from Gabriel Dechaine of National Bank Financial. Please go ahead.
First of all thanks for all of this closures and especially on the impact of downgrades.
And your commentary Rod.
On one hand, I could save your conservative.
But on the other hand.
You also have about 43% of your wholesale portfolio with non investment grade credit.
I would you address the economy.
Well so give me this is great most notably we pick up a good migrations a little bit obviously just to think through August was hoping for a broad gave you with the sensitivity that reflects that we did a one notch downgrade across the whole portfolio, which would be very broad and pervasive but it does give a good sensitivity against it in terms of what we've approached this so far.
We basically have gone through our corporate book and really taking the rating actions that we think are necessary in that space and we're very much able to do that in such a kind of the timely manner. There just because of the very public nature of those companies and we have a very visible data around the under the new good visible information in terms of markets in in a very constant dialogue with the company is on that.
So we think we've taken a prudent leading actions as necessary to there across the piece, where there is more I would say so any reductions there I would say will come by company specific information.
Or changes in macroeconomic environment that might have us changer, our view on these companies.
On the commercial and retail side is is where there is more ratings actions to calm given the leading information set that we get there are many those are more model driven as the model capture more information on our client activity on we will be in do expect to see.
For the credit actually migrations through the latter half of this year.
To give you some context, though on ROI rods number also oil and gas as an example, we talked about in her slides here would be one of the most highly impacted sectors.
In this environment and we will this sectors that we saw the moves downgrades in the average downgrade bear for companies that were downgraded was 1.8 notches. So it just gives us some context for the Kona.
Downgrade activity, we would see on average.
And that would be true regardless of whether its investment grade or non investment grade.
And while I have you Graham.
Before going to ask about your.
Oh expectation for Q3 in Q4 enough important but.
I'd like to know when you alluded to with the outlook for peak gross impaired loans. When do you expect that take place in roughly what level because I felt from of again a dictator.
The provisions are taking now in next quarter or are sufficient or more than sufficient.
Yes, sure your old old OCO walk you through Ho our thinking is on if you feel it because the gross impaired loans is really just the is really what we're forecasting it through the day when we're calculating our expected credit losses in the Retranslating nodded stuck into provisions.
And so we we have a lot of very rich tools in our toolbox certainly we've built a lot of a very very strong modeling capabilities for our efforts volume we've had a lot of strong modeling capabilities for our stress testing.
And so as we headed into into the covert pandemic that we're facing.
That's a great starting point, we have but certainly the storyboard here is very unique unlike anything we've ever seen and so we really took those.
Those tools that we can to reset the storyboard, we really reset it to reflect the environment. We think we're facing.
So your base case started with a with the storyboard that talked about.
This pandemic being a situation, where we can effectively being an economic lock down for three months on forget the virus under control before the economy starts to reopen.
Following that.
And we opened over extended period of time, and then we translated that into the macro variables I think that you saw in our disclosures there and then really took those all that information set and the modeling capabilities, we have to try and forecast gross impaired loans ultimately and the translation into stage three losses, which results. We then what we've kind of discount back to get to expect.
The credit losses that we established our stage one and two provisions.
We talked about the severity of different scenarios. When we established a base case, we're really trying to select the real acute severity of the economic condition were facing and we've already mentioned some of the variables there and Thats scenario, we're talking about HP idhone, 7%, we're talking about.
Unemployment going up to 15% and taking many years to recover.
We're talking about oil prices dropping down into the twentys and staying in the Thirtys before recovering over the next two to five years into the Fortys. We think we've reflected a very severe scenario in our base case.
That we use the projector.
Losses, no we did bring it because of the 30 situation. We did bring in a lot other tools here, we really leveraged.
Our portfolio management teams, our product specialists and really our credit experts that no other sectors inside out and we really have them kind of thing through these scenarios and assess what they thought impairments and loan losses could be and we're really able to bring all these together to really projected and good confidence in income of the impairments that we think we will face going forward and so the peak level of impairment.
I guess was your original question really ties Dakota the guidance. It provided on provisioning, which is to say we do think in the near term will there be some suppression and impairments in stage three losses with that in large part due to the deferral programs in the government programs, but as those run their course, many clients will return to hold back to good performing position and we will have CLI.
Since facing hardship and then as reflected in our early to levels of unemployment that we expected in the coming quarters in years, but we really expect to see that start to accumulate.
Kind of the latter half of this year in Williams early 2021 as those programs run their course.
Good morning currently 2021.
So that's the short answer thanks, Thanks Gabriel.
Another question.
Okay.
Thank you.
The following question is from Sumit Malhotra of Scotia Bank. Please go ahead.
Thank you good morning, Graham just to start with you towards the end of your prepared remarks, you were commenting on the on the increase in the allowance just wanted to make sure I heard you correctly did you indicate that the bank is of the view that the the level of the aggregate allowance should not change too much from here going forward or were you talking about one specific part of the reserves.
Yes. Thanks, no we are talking about reserved in aggregate rate I mean, we have built up a very significant allowance in stage willing to that is our expected credit losses, and assuming will be world plays out consistent with the forecast. We've made then we would expect to draw down on that and I would.
Offset the.
Impaired loan losses that we would expect to increase over the coming.
I'll make some quarters here I am so so we do all else being equal that that we do see those is largely offsetting no. There's a lot of uncertainty to that and so that will change obviously as the.
Each and every quarter as we reestablished kind of our forecast as we learn more about our client behavior relative to how we've modeled that will impact and our reserves each every quarter, but our baseline that is how we would expect us to play out and that's how it is.
By designs that up to operate one.
So said differently going forward for oil the provisions and then charge offs essentially net often in the assumptions that you've you've made going forward.
That is the assumption subject to all the uncertainty that we've we've put out there.
Last question is for Rod Bolger.
Thanks, I'll Echo the statements I really appreciate your credit disclosure this quarter and specifically on capital looking at your waterfall chart, the comment about 23 basis points.
Hi for Us nine capital modification.
Not only reference the expected credit loss transition or have you also does that number also pick up the.
Reduction in the stress far multiplier.
That's just for the 70%.
Modification on the stage one stage to build.
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That falls to 50% next year, and then 25% year. After so it does not include distressed bar.
Is the stress for I think your methodology and policy line and market R.W.A. It was down.
11, finally, I think it was for four to 5 billion.
Talk to both the Vars scenario updating next quarter to include the volatility in Q2, just curious as to how you were expecting that market risk line too.
Trend from here given given the change in bar and.
Frankly, what are what is already indicated would be the market environment in which that stressed far multiplier relief would be removed.
So on the first question, you'll see in the and the waterfall the six basis points in the 2.7 billion. That's a net figure. So we did get about 11 basis points of.
Benefit from the Escobar modification.
And thats offset by other model and methodology increases that were about five basis points.
We would actually expect as we roll through var, and you get a full quarter in.
The way our methodology works, we would expect market risk.
Our Wi Fi to increase next quarter, despite the 25% reduction net Graham outline.
Hi, My understanding is that osteen may change the might may change the multiplier back once we get to normal volatility levels and market conditions, which is not anytime soon that I would anticipate.
Thanks for your time.
Thank you.
The following question is from the Sohrab Movahedi of BMO capital markets. Please go ahead.
Thank you.
Graeme wind to thank Pat has hosted and Investor day, a couple of years ago.
I think one of that.
Benefits at the Tech ended data infrastructure, I think that and you had was highlighted voice.
A better risk management.
I guess perspective, it's January to quantify.
How much upside benefit.
That would have been reflected here or maybe put it differently, how much higher which youre provisions have been.
I do not had to benefit update investments you've made in technology and data and the like previously.
Its Graham maybe I'll start with it I don't know Theres, a way to quantify what our provision would have been if we didnt have the capabilities. We have today I guess the capabilities. We have today. Our think are just inherent to how effective we are capable we are at managing risk and with credit models can that we build and when.
Average all the data infrastructure, we have been really benefits in two ways.
Through a through a cycle one as we can you get to mitigate and not originate risks that we otherwise might have originated or we can use those models.
Take on new revenues for risk that we're quite comfortable with so it's not as opposed to saying how did the trim one part of the other.
When I look at this quarter in particular in how valuable those capabilities and that modeling woods, and we were really able to take that the infrastructure the data and really to people capabilities. We have there to really get down into account level modeling to understand income disruption with our clients understand the impact of payment the for all the account level there.
Government programs.
And really really helped support the loan losses, we established here today, we likewise on the fraud side, which is such an acute risk in this environment and we've really been able to leverage data to ensure a really strong performance on a fraud fronts cyber would be another example of that I mean, we just either all just incredibly strong capabilities, we have that really help manage risk effectively.
Through the environment to quantify you that for you I just I don't know how to put a number dialogue.
Only data point I would add as you've heard me talk about our retail scoring systems and bring in an expansive data set which we continue to do when we first implemented at 15 years ago, We got about a 30% lift so we've seen a material shift in more data the more insight you bring to decisioning that investment in in managing data, which allowed us to.
We're really focused on core checking accounts as as I told you before in the information value of our core checking business is not just.
On the purchasing habits and lifestyle habits of clients. It also comes down to Earth risk management, allowing us to to manage our book appropriately. So we've seen no two grams point, a really significant return on investment of technology and data and why we continue to make it a big part of our strategic set going forward.
Okay. Thank you.
Thank you.
The following question is from Mario Mendonca of TD Securities. Please go ahead.
Good morning, I think rightfully everyone. On these calls is focused on very here and now the short term because it's so meaningful right now at a few the banks on or about I want to just take a longer term perspective.
Coming out of the financial crisis every banks, our OE dropped pretty significantly.
We had with 20% plus are always and Dave as you said the banks averaged 13, sorry, a 17% or are we over the last three years.
I'm not sure if it's possible yet about when you look out.
To the end of this crisis.
Could we be looking at our Canadian banking sector.
Led by Royal was are always that are substantially lower than 17%, either because of higher capital requirements or much lower interest rates or just a much weaker Canadian consumer are you able to think staff are out yet and look at where are we potential royal has when this is all sudden though.
Well, maybe I'll start and ill hand, it turned to rod for more detailed balance sheet comments, but if you look at our strategy.
Mario its strategy of driving a premium our away and we've invested in businesses and in customer franchises and geographic expansion that allows us to to drive a premium R&D strategy or were not moving away from that we still think our collection of client franchises businesses, our scale of diversification technology investments in and.
Outage their allows us to drive a premium our early in the marketplace that continues to be our medium term objective and will be how we manage this organization going forward, we're learning a lot of boat.
The business as it stands through a crisis, we'll look at our businesses going forward, we'll look at how customers are changed and we'll continue to invest in driving a client franchise.
That.
That has a premium Mara we too and we'll have to exit businesses that we don't think.
Can drive that premium going forward and so we're going through a world of change it's early to call exactly which.
Customer franchises are products may not be part of the set going forward, but we're keeping a list to see okay. This business has been impacted significantly willett recover how recover as it can be a new capital ratio applied.
Out as liquidity perform so all of that will be taken into consideration, but we're starting from a position as you referenced.
Have enormous strength and I don't see a significant change from Britain's the premium retail franchise, we have a premium wealth and our focus on wealth growth in United States and kind of having said that as you said, we are expecting at a medium term headwinds as a from a low rate environment in the west that impacts are you.
Our U.S wealth franchise.
Significantly as you solid results, but that will recover but volume growth is helping offset that and we continue to see enormous opportunities to drive good volume growth. So we will we will manage the business Accordingly and were very much focus as you heard at the end of my comments on emerging from this is even stronger and more focused company.
Knowing that we can continue to lever all the capabilities the brand the technology this to fortress balance sheet the team and the people that we have to drive a premier MRO and I think that's what you should expect from us.
I'll just add on to structural elements Maya.
Looking at the financial crisis versus now different Basel III mechanisms, but if you if you do like for like in that kind of pro forma Basel, three and half back to the pre financial crisis, where it three times the capital ratio, we were entering than we did pretty well through that crisis, we did do a small equity issuance.
We don't expect to do any equity equity issuance. This time, and we expect to maintain well well above much higher regulatory buffer. So we don't think theres a structural need from working capital in the banking system. We think it's been elevated to levels that needs to be which means that we should be able to return to pre co vid.
Premium Aro, we as well you won't see that immediately because you're going to see inflated RW way, which means that you're going to be holding denser equity. If you will so there will be a couple a years, where thats going to be suppressed, but but structurally we don't think theres going to be a a seismic shift up in the equity, which would which would dampen those returns.
So just put a finer point on at the denominated here doesn't change much because unlike us announcer crisis I would hope we're not going to go through yet another update to capital requirements.
I guess, what I'm hearing is maybe you got to be a little careful about the numerator VR, we calculation that earnings could be somewhat depressed for sometime.
Is that fair.
Well, you're going to see earning suppressed in the short term until the economy recovers.
Absolutely and then once the once the economy gets back if you look at the chart 30 that we that we shared if the economy gets back to those levels. In 2022, you should start to see that are are we pick up again.
Thank you.
Thank you.
The following question is from Scott Chen of Canaccord Genuity. Please go ahead.
Good morning, Rod you talked about the U.S. NIM.
CMB and is down another 20 bps quarter over quarter, and I think you talked about it.
The decline short term, but do you have any color on when you expect.
That margin to stabilize from what you know right now.
Yes, we expect a couple more quarters of compression just because it's going to take a little time for that to flow through now we have seen.
Very significant deposit growth, which has continued so thats helped display some wholesale funding with with retail and core deposit funding.
What we would expect that to continue.
And it's fairly consistent if you look at the impact is fairly consistent with the impacts that we had disclosed previously in terms of the earnings compression and.
And we're managing the business that way, Dave outlined our our continued investment in that business are the core franchises growing extremely well.
And obviously, we have some margin compression to deal with and work through and so it's not unexpected, but we had expected continued for at least two more quarters.
Okay, and then just quickly on slide seven appreciate disclosure on the client activity just on that Canadian retail.
Have you noticed staab notable shift with their clients in terms of.
Penetration into active.
Mutual funds versus gas.
On a pre covered in what you're seeing right now.
Yes, Doug I'll take that.
So I would say there's been a real change because of co. The of the shift from active to passive has been much lower in Canada than the U.S., we've built a product shelf to address whatever the rate of changes in that.
In that direction in terms of the alliance that we've arranged in the with Blackrock around EPS, what we have seen in disrupted markets is.
Our higher than normal share of gathering assets and a lot of that ends up in cash deposits.
In the retail bank.
And for mutual fund sales across the industry our share those sales has been very strong.
Disproportionately strong answer or market share of the active long term funds continues to rise and we just like we've seen in prior disruptions in those markets normalize people will do what they should with their savings, which will start to invested across asset classes and we'd expect to slide over into into mutual funds, so that that business remain.
Since extremely healthy from our perspective.
Thank you.
Thanks.
Thank you.
The following question is from Steve Carell of a capital. Please go ahead.
Thanks, very much I just want to ask a question on cards for for Neil We've heard from some of the other banks that activity levels bounced back pretty close to precluded levels, maybe that's temporary maybe not but can you give an update there on what you're seeing your card book and in particular for your Westjet portfolio, how much impact are you seeing now.
Our from with air travel being mostly on Pos.
Yes. Thanks. The question, Yes, I mean, if you look at if you break down the categories I mean for the quarter travel was down about 90% largest airlines.
We're seeing.
You know is this just evaporated.
Dining is down about 50% gas sort of these large categories down about 50%.
It's really only kind of the daily essentials. Its food. It's you know things like pharmacy, they're up about 20%. So those are the I think the big category swings net net for the quarter, we were down about a third 12 or 13% in terms of spending so that would translate there's about.
$5 billion or purchase volume that we had anticipated that did not materialize because of the the coveted measures.
In terms of splitting it between the Westjet Steve Your question, we're seeing if we lump sort of all of the reward products together spending was down about 30%. When we look at the portfolio did that does not carry rewards. It was down 20% for the quarter. If you look at sort of through the quarter.
I Wouldnt say it is it weve bounced off the bottom, but we're nowhere near kinda back to normal.
And for that for the West check card add that earns west our dollars westar towards their ability to serve earned sort of regular RBC loyalty points.
No no. So those now they earn those dollars and we immediately.
Pay westjet for those and that liability is transferred over to Westjet.
And that 30% you mentioned for the loyalty type products like to western sort of in line with that.
Yeah.
Okay. Thank you.
Thank you. The following question is five Nigel this is as their test investment. Please go ahead.
Thank you good morning.
I wanted to tackle your commentary on non impaired delek for impaired loans in delinquencies.
So as you into year and a lot of that will depend on.
Our fiscal support programs play out and how the deferral.
Loan programs wind down so I was wondering if you could maybe give us a sense of what's already baked into performing loan loss. This year. So so in other words.
The deferred loans.
Are you currently have which is pretty sizable for mortgages wholesale for example, how much of those zones are currently.
Certified as stage, two or the majority of them still in stage one.
No no script I'd have to go I don't have that that breakdown off the top of my head.
Yes, I would say again going back the commentary we had on the modeling we've done.
That's exactly what we've been putting or we go down to the.
The account level and really trying to understand the income disruption there overlay our views on on the unemployment situation that we talked about earlier.
And then in the government support automated kind of low low what we think the delinquencies in impairments will be in most of the loan losses.
The disclosure we provided on the payment to full programs, which is even some context.
As you as you said certainly the biggest dolls has come in the mortgage space a couple of pieces I would maybe just give you for context on that.
One as you go so wouldn't deferrals about 40% of our clients took a a one month deferral on that so that's the first cohort we've been able to look out a little bit. We've just gotten some early insights on that and about 50% of those clients have returned back in into a payment status.
Just one point of contact so it's a bit of the earliest data we have to start to validate the assumptions we've been making.
The other piece just in terms of you had kind of the higher response. There. If you if you take kind of that again those claims that have opted for deferral plan the programs.
And you look at our mortgage book uninsured component of it and kind of the high LTV the over 80% you're talking about $900 million imbalances right now that that fit that kind of high risk out of category. So those are just kind of so the points, but I'm going to yield a modeling. We do is obviously much richer than just kind of capturing those points and certainly as we kind of see you arclight behavior going forward, we will come.
He did reflect that into our modeling and any adjustments, we need to making her provisions that right now that's pretty much. The granular approach we've taken to it if you really want to get into the details night you can look at page 70, 70, Rts, where we break out this staging by our risk category by product which includes.
Residential mortgages, so by 8% of our portfolio is currently in stage two so that is up off from from year end and from the prior quarter.
Yes, Thats really useful commentary appreciate it.
Thanks.
Okay.
Operator.
Within their liquidate.
Thanks, Dan and thanks, everyone for your calls I recognize how deferral difficult. The last two days have been for the analysts and particularly this morning with a two banks reporting is really kind of three themes that I want to ends are hoping that you took away from.
Our commentary and as many of you have noted the enhanced disclosure that we provided to give clarity on on the strengthens and.
And power of our franchise, our number one our strong financial position.
The diversification of our business model on the scale, we talk about on almost every call for Haas, five or six years and I think it really showed again at a time of crisis and with balance sheet strength, we've been preparing as we said in our comments for a recession sometime in 2022 at caused us to approach and build our capital to not make acquisitions to not buyback shares and therefore.
We started this crisis, which we did see with a very very strong 12% cetone ratio and you see after a crisis, where we took over $2.8 billion of charges and 11.7% C. One ratio. So there are diversified model ours, the size and scale of our business the capital base the fortress balance sheet.
Really give us an opportunity to support our clients to absorb the uncertainty with resilience and to take advantage of opportunities going forward I think we're in a very good position to do all three I also hope you from our disclosure from the commentary from how we've approached the uncertainty of the health.
And economic outcomes, the conservatism with which the management team here at RBC is approach. This from the reserves we've taken from our approach and the discussion that we're taking a very conservative our base case as you heard Graham describe is quite a severe scenario and they should you should begin to that but we've we've approached this entire crisis.
With a very conservative approach to protect our balance sheet to protect our shareholders.
Third is very strong earnings power, we exited Q1 2020 with a fantastic quarter carried that momentum and you saw a very strong pretax pre provision earnings and that that talks again to the diversification the quality of our client franchise, so conservatism a strength of diversification and earnings capability position us well.
To withstand the uncertainty and turnaround and exit this a stronger banking on a bank that can take advantage of the opportunities that will present itself in the future. So thank you very much for your questions and we look forward to talk into over the coming quarter.
Thank you.
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