Q2 2020 Earnings Call
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 would like to turn the meeting over to Canadian on head of Investor Relations. Please go ahead.
Thank you and good morning, everyone speaking today will be day, Mcauley, Vice President and Chief Executive Officer.
Bolger, Chief Financial Officer, and Graham Hepworth, Chief Risk Officer.
Well open the call for questions give everyone a chance to ask questions. We ask you limit your questions and them.
We also have with us in the room, you Mclaughlin group had personal commercial banking that Susan group had wealth management insurance benign, yes. There are no their group <unk> capital markets as noted on slide one.
MS may contain forward looking statements, which involve assumptions have inherent risks and uncertainties actual results could differ materially I will remind listeners that debate. It doesn't performance on a reported and adjusted basis I consider supposed to be useful in assessing underlying business performance.
I'll turn it over to do.
Thank you know Dean and good morning, Thanks for joining us and what is.
It end up 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 to life.
Supporting our 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 on the call.
That's a situation of all the regulatory monetary and fiscal actions taken by policymakers globally.
I'll provide stability and supports the economy and to the financial system.
That's Canada's largest financial institution. We also have an important role to play in helping lessen the financial impact of the crisis on our clients, while helping to restart our economies.
Hey, cannibalism working closely with the government and implementing various federal programs.
And we provided access to $4.5 billion and available funding to over 115000 clients do I see the program.
And given kinda is 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 a funding.
Our clients to the paycheck.
Attraction program.
I'll now provide some highlights of our financial performance.
Today, we reported earnings of $1.5 billion.
In 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. It all time highs in late February.
However, as a cobot 19 pandemic spread expanding public health crisis led to increased concerns around the global economic outlook.
Culminating in elevated market uncertainty in March.
We supported our plans to these volatile markets as they drew down in 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.
Was partly offset by elevated client activity related to significant volatility across asset classes.
In contrast, macro and micro look 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 an April following a significant.
Intervention by Central banks, we saw significant uptick in investment grade debt issuance.
Since mid March capital markets, it's been a book going on over $150 billion global investment grade issuance and its lead over 80% of corporate debt transactions in the Canadian market.
Our source of strength and stability for clients is reflected in a significant growth of consumer and business deposits.
Strong volume growth in her 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.
Balance sheet remains strong, giving us a solid foundation to face these risks head on.
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 <unk>.
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 are 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 our 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% C. 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 tests suggests that even under severe pandemic scenario, our capital levels remain above current regulatory minimum levels and we remain well positioned to continue playing paying our dividend.
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 of 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 graduate 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 relief programs and the government led initiatives providing support to our clients.
Even though the Canadian retail mutual fund industry had its toughest 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.
In other parts of the bank activity levels have never been higher we're benefiting from our significant investments in technology over the last number of years to provide alternative ways to deliver products and services to clients.
You'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 transfers and digital sales.
And direct investing recorded all time high volumes during the quarter.
We're also proud to note that RBC has been a 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. It's also important to focus on what is remain the same.
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 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 positions.
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, David Good morning, everyone.
Starting on slide eight we reported earnings of $1.5 billion and EPS of one dollar would drill 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 and Treasury services and insurance a testament to the continued strength and success of our diversified business model.
Record pre provision pre tax earnings through the first half of the year allowed us to prudently absorb over $3 billion, a 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 cobot related costs, mainly in Canadian banking, our expenses would have been down 1%.
Given the current environment, we saw slowdown in cost 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 their costs based on your 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 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 C. One ratio by 41 basis points, both unprecedented levels of draws and credit downgrades.
Turning to slide 10, where we show our R.W. 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 and capital markets, where the loan utilization rate increased by nine percentage points from last quarter, the 38% on April Thirtyth.
This is down through March peak of above 40%.
Drawdowns from our Canadian banking and 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 coming quarters.
I wanted to spend some time on the downside risk 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 us GDP falling 18% to 20%. We also consider unemployment staying over 14% for a number of quarters and that return into 2019 levels for a number of years.
As.
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 device a 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.
Acting RCT, one 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. a buffer of approximately $165 billion or 30% increase above current RWD levels.
Furthermore, our consistently strong organic capital generation will continue to act as the primary absorber of any credit deterioration.
Also should credit spreads normalize 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.
Radian banking net income was $649 million with pre provision Pat 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.
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 account continued into may we would expect these trends to moderate from here.
Noninterest revenue was impacted by lower card services revenue as client purchase volumes declined as a result of the cobot 19 pandemic.
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.
80 in retail net sales recovered well in April, particularly in our money market and long term fixed income strategies.
Very strong double digit buying growth in city national and fee based asset growth in our US 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 cost begin to normalize.
Moving to insurance on slide 13, net income of $180 million increased 17% from 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 are 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 had 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 the 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 billion 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 Robert and good morning, everyone.
As Dave.
Excuse me.
As Dave noted earlier overnight team has had a significant impact on financial markets and the global economy.
Well significant progress has been made and slowing the players to managing economic followed.
The speed at which the economy recovers the efficacy of government support future potential ways of the virus and the availability of a treatment were vaccine all remain highly uncertain and we'll continue to affect our risk profile going forward.
In response to these events, we increased our allowance for credit losses by 2.4 billion since last quarter as you will 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 the result of higher provisions would 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. It 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 our retail exposure, which is predominately in commercial personal and commercial banking.
The other 10% of the increase allowances is due to higher peafiel impaired loans.
Turning to slide 18.
Do you feel 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.
At higher impairments or click will be assessed commercial portfolio.
Our impairments in her 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 in capital markets to the same two 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 and our Canadian banking commercial portfolio and high repayments or to the 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.
Well sort of capital markets. The current macroeconomic weakness was not a significant driver of new impaired loans this quarter.
Turning to slides 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 and media sectors.
Consistent with our broad and diversified portfolio. These sectors account for about 7% of RBC is total loans outstanding.
Let me start with the oil and gas sector.
About 90% of willing gas provisions this quarter alluded 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 is predominantly done through boarding based lending structure, whereby loans are 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 resale 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.
Because interval vulnerable sectors noted claims 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.
Pillars and restaurant owners with limited to new online presence, where that are independent businesses with or without access to broader corporate support are being negatively impacted.
Hills as he was substantial drop in occupancy rates and recreational and media related companies have also seen a substantial drop in demand we're been forced 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 that are 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 25.
As I noted earlier, we had higher impairments in her 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 I've been stable through the quarter.
4% of our clients have taken advantage of frequent really program, but the pace of quite it pick ups has decided over the past few weeks.
Clinton really programs 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 Olivia delinquencies and insolvencies given the significant impact Covidien 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 are forecasting a decline of host prices declining credit performance in our mortgage portfolio will be mitigated by the very strong critical for our clients as reflected in the cycle 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 sizable market movements over a few weeks and works that were equivalent to a greater them build experience over a number of months during the 2000 in the financial crisis.
This volatility led to 13 days of Mark to market losses.
Four of those days exceeded var projections in March two two markdowns with the loan underwriting portfolio, the counterparty to fold and significant market volatility.
In April trading businesses were able to capitalize on the reopening of primary markets and better secondary market activity as markets recovered and volatility subsided.
Average broker is var 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 get higher levels than it has been historically as the volatility experienced 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 I 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 in ratio 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 reflects protection.
We spread movements have all been reflected in the valuations Rod mentioned earlier and referenced on slide 12.
We ended Q2 with the committed loan underwriting book of 3.9 billion and market activity and May has allowed for the reductions subsequent to quarter end.
Overall approach to leverage lending, including the portion we retain continues to adhere to our disciplined risk management approach.
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 diversity Super wholesale portfolio service strong that against against a deteriorating macroeconomic conditions that have arisen as a result of the Kobe team pandemic.
We believe we have taken appropriate provisions to reflect these deteriorating external conditions.
Just 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, 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 run their course.
As a result, we anticipate our PCL impaired loans to trend higher to the letter portion of 2020 move into the sort of 2021.
We expect to able to draw down on the allowance of performing loans that we built this quarter such that our total ounces won't materially changes the ones become impaired.
Drilling down on our 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.
That's a question Andrew using his speakerphone, please mr. handsets before making your selection. If you have a question. Please press star one on your telephone keypad.
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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 told you mentioned that ongoing expenses and operating leverage.
Hi seems create opportunities.
And when you look at Royal means to talk to argue that you won't be better off competitively than you what even coming into the cases talk to US just in terms of how you're thinking about.
Putting back on discretionary expenses are investments.
Versus.
Any opportunities that are already beginning to emerge when either from a market share standpoint in detail capital markets that you could be looking.
To sort of capitalism.
Thanks, Ebrahim I'll start and Dave might chime in.
In terms of investments, we've been ramping up our investment spend on technology with the client focus and then obviously also in efficiency focused 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 the recession hit we can dial that back and still being a strong fuzzy.
Question and so that holds we will still continue to invest if it makes sense, but 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 you can 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 an investment in in future growth standpoint.
And then there's the other items, which kind of ratchet up and down with that 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 models not change.
I'll just add an example in city national where we've been investing and 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 on a gross story at the same time, we've been investing and digital capabilities. There were launching as we 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 platform. So those two.
Estimates, we use the tailwind of rates.
Now that you know that organization, obviously pretty nationals facing tougher revenue headwinds with the decline in rates and the rapid decline and rates. We've got a lot of that work behind us, we still want to invest where others growth and I think there's 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 will.
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.
Well thank you.
Thank you.
The following question is from Steve Stereo of capital. Please go ahead.
Thanks, very much Rob that was great color on how your some of your most adverse stress test would impact capital you said you to 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 was the sort of what would weigh on CD one off the 11.
Seven you're out this quarter just want to make sure what the messaging is there.
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 severe scenarios, we're still working through how the those might play out.
Whether it's a w. type recovery or others, we are fine tuning and Weve. 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.
Predominant number of cases, we are well above that 10%.
Okay, and then the 41 basis points of Drawdowns in downgrades, you mentioned MIT right to assume that the vast majority of that is the drawdowns we saw this quarter.
No. It's approximately a 50 50 split okay. So 41 basis points figure 24, drawdowns in 21 for downgrades.
Okay, and if I can sneak one more in for probably getting your question and Steve we're going from here.
We'll have could you re queue.
Sure enough on that.
Yes.
Thank you.
The following question is from Meny Grauman of Cormark Securities. Please go ahead.
Hi, Good morning, I know you mentioned, we expect to moderation mortgage growth with if I look at.
What we've seen through the quarter definitely very strong and I'm wondering how you reconcile that strength screen everything we know in terms of deferrals and markdowns and just.
The depression level economic indicators that recently in the short term so having hundreds that are all makes sense.
To you.
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 up.
So right through toll really.
The end of April we were at.
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 we are on an annual basis, we're probably looking at an outlook offer originations of about.
80% to 85% of last year and 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 that's.
That's how we had really bridge the too.
Strong start and then just a sudden breaking as.
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.
Okay.
I'll just Graham I'll answer the Basel 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 house prices.
Kind of recovery period picking over two years.
Because that would split by different geographies and different property types I just want help those numbers with me, but but the the national level of acquiring that were we're forecasting and modeling right now is a 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 effects of downgrades and your commentary Rod.
On one hand I guess.
You are 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 given it's a great my hope maybe picked out of the migrations a little bit. So just to think through August stopping sort Rod gave you a sensitivity that reflects if we did a one notch downgrade across the whole portfolio, which.
Would be very broaden pervasive, but just does give a good sensitivity against that in terms of what we've approached the so far.
We basically have gone through our corporate book and really taking the leading actions that we think are necessary in that space and we're very much able to do that in such a kind of a timely manner. There just because of the very public nature of those companies and we have a very visible data round down there.
All information in terms of markets and a very constant dialogue with the company's on that as we think we've taken the prudent leaving actions as necessary there across the piece.
There is more I would say so any reductions there I would say will come by company specific information or changes in the macroeconomic environment that might have as changer, our view on these companies.
On the commercial and retail side is is where there is more ratings actions to come given the leading information set that we get there are many of those are more model driven and as the model cut for more information on the client activity and we will do expect to see a further credit actually migrations through the latter half of this.
Year.
To give you some context, though on rides rods number you know so oil and gas is an example, we've talked about in her slides here would be one of that most highly impacted sectors.
In this environment and one of the sectors that we saw the most downgrades in the average downgrade there for a company that were downgraded was 1.8 notches. So that just given 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.
Have you Graham.
Before going to ask about your.
Ill expectation for Q3 in Q4 enough important but.
I'd like to know you alluded to with the outlook for peak gross impaired loans when do you expect.
Ladies and roughly what level because I felt from again a dictator.
The provisions are thinking now next quarter or are sufficient or more than sufficient.
Yeah sure Hero Oh, Okay, I'll walk you through how Youre thinking is on the PCR 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 that were translating that to stuck into provisions.
And so we we have a lot of very rich tools in our toolbox certainly we've built a lot of very very strong modeling capabilities for our first 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 it certainly the storyboard here is very unique unlike anything we've ever seen and so we really took those.
Those tools that we've kind of reset the storyboard really reset it to reflect the environment. We think we're facing.
We'll go to our base case started with a with the storyboard that talked about.
MS pandemic being a situation, where we're going to effectively be in an economic locked down for three months because the virus under control before the economy starts to reopen.
Following that.
And reopen 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 is only then what we've kind of just coming back to get the expected credit losses that we established our stage one and two provisions.
We talk about the severity of different scenarios. When we established a base case, we are really try to flex the real acute severity of the economic condition were facing and we've already mentioned some of the variables there and that's scenario, we're talking about each pie down 7% productively.
Employment 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 Thirtyth before recovering over the next two to five years just into the Fortys. We think we've reflected a very severe scenario in our base case that we used to project. These losses no. We did bring it because of the severity situation. We did bring in a lot of their tools here, we really.
Leveraged or portfolio management teams, our product specialists and really our credit experts that no other sectors inside out and we really have them kind of think through these scenarios and assess what they thought impairments a little losses could be there were really able to bring all these together to really projected and good confidence in kind of the impairments that we think we will face going forward and so.
The peak level of impairments I guess was original question really ties to kind of the guidance. It provided on provisioning, which has to say we do think in the near term will there be some suppression and impairments in speech 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 a hold back to good performing a puzzle.
Second we will have client facing hardship and then that's reflected in or are elevated levels of unemployment that we expect in the coming quarters in years, but we really expect to see that start to accumulate under the latter half of this year and really into early 2021 as those programs run their course.
Really.
Currently 2021.
Sure, let the short answer thanks, Thanks, Carol we should take another question.
Okay.
Can 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.
Yeah. Thanks, No we are talking about reserves in aggregate right. I mean, we have built up a very significant allowance in stage went into that is our expected credit losses and assuming.
The world plays out consistent with the forecast. We've made then we wouldn't expect to draw down on that and that would offset the.
Impaired loan losses that we would expect to increase over the coming.
Among 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 that I didn't so that will change obviously as the you know 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 it that will impact our reserves each of recall.
Order, but are baseline that is how we would expect us to play out and that's how it is.
Designs that up to offer one so said differently going forward for oil the provisions and and charge offs essentially that often in the assumptions that you've you've made going forward.
That is the assumption subject to all the uncertainty that we've put out there.
Last question is for Rod Bolger.
Thanks, I'll Echo the statements really appreciate your upgraded disclosure this quarter and specifically on capital looking at your waterfall chart. The comment about 23 basis points of I have for US nine capital modification does that only reference the expected credit loss transition or have you also.
So does that number also pick up the.
A reduction in the stress far multiplier.
That's just for the 70%.
Modification on stage, one stage to build.
And that falls to 50% next year, and then 25% year. After so it does not include distressed bar.
And is the stress for I think your methodology and policy line and market R.W.A. It was down.
And finally, I think it was for four to 5 billion.
You talked about the Vars scenario updating next quarter to include the volatility in Q2, just curious as to how you were expecting that market risk line to a trend from here given given the change in bar and.
Frankly, what are what is also you 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 that's offset by other model and methodology increases that were about five basis points.
We would actually expect as we roll through var, a 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 osby may change the model 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 when the bank.
At hosted and Investor day, a couple of years ago.
Thing one of that.
Benefits at the Tech and data infrastructure I think that you had was highlighted voice.
A better risk management.
I guess perspective, so anyway to quantify.
How much upside benefit.
That would have been reflected here or maybe put it differently, how much higher which you are provisions have been.
I do not had to benefit how stay investments you've made in technology and data into like previously.
Its grand maybe I'll start with it I don't know if there is a way to quantify what our provisions would have been if we didn't have the capabilities. We have today I like the capabilities. We have today, our thick or just inherent to how effective we are capable we are managing risk and was credit models can that we build and whatever.
It all the data infrastructure, we haven't really been offices in two ways.
Through a through a cycle. One is we can you get to mitigating and not originate risks that we otherwise might have originated or we can use those models to take on new revenues for for risk that we're quite comfortable with so you know so it's it's not as opposed to saying how do the trim one part of the other when I look at a this quarter in particular and how valuable those capabilities and not modeling was.
And we were really able to take that that infrastructure the data and really the people capabilities. We have there to really get down into account level bottling to understand income disruption with our clients to understand the impact of payment. The for all the account level that government programs and really really helps support low losses, we just to us.
Just here today I mean, likewise on the fraud side, which is such an acute risk in this environment, we've really been able to leverage Doug data to ensure a really strong performance on a fraud fronts cyber would be another example of that I mean, it would 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.
Well I would put a number.
The only data point I would add as you've heard me talk about our retail scoring systems and bring in an expensive 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 a more data the more insight your bring to decisioning and investments in in managing data, which allowed us to.
Oh really focus on core checking accounts as as I've told you before than 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 that's a graham's coined 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 but now it a few of the banks on or about I want to just take a.
Longer term perspective.
Coming out of the financial crisis every banks are already dropped pretty significantly and we had with 20% plus arteries 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 things that far out yet and look at what are we potential.
The Royal has when this is all sudden though.
Well, maybe I'll start and I'll hand, it turned to rod for more detailed the balance sheet comments, but if you look at our strategy.
Mario its strategy of driving a premium are a week and we've invested in businesses and in customer franchises and geographic expansion that allows us to to drive a premium are are we strategy or were not moving away from that we still think our collection of client franchises businesses, our scale a diversification technology investments and then comparative advantage.
Outage, there allows us to drive a premium or are we 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 about oh the business as it stands through a crisis, we'll look at our businesses going forward, we'll look at old customers have changed.
And we'll continue to invest in driving a client franchise.
Thats a that has a premium or are we to it and we'll have to exit businesses that we don't think.
Can drive that premium going forward and so weve 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.
How does liquidity perform so all of that will be taken into consideration, but we're starting from a position as you referenced.
Enormous strength and I don't see a significant change from you know a written premium retail franchise, we have a premium wealth and are focused on wealth growth in United States and kind of having said that as you said you know we are expecting that a medium term headwinds as a from a low rate environment in the U.S. that impacts are you.
Our U.S wealth franchise.
Significantly as you saw the results, but that will recover but volume growth is helping offset that and we continue to see enormous opportunities to drive good volume growth, but 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 the 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.
Just on two structural elements my or the I'm looking at the financial crisis versus now different Basel a mechanisms, but if you. If you do like for like in that kind of pro forma to 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 issue.
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 for more capital in the banking system. We think it's been elevate at the levels that needs to be which means that we should be able to return to pre co bid a pre.
I am 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 the denominated air doesn't change much because unlike the financial 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 we've got to be a little careful about the numerator over the ROI calculation that earnings could be somewhat depressed for some time is that fair.
Well, you're going to see earnings suppressed in the short term until the economy recovers.
Absolutely and then once once the economy gets back if you looked 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 our OE pick up again.
Thank you.
Thank you.
The following question is from Scott Chen of Canaccord Genuity. Please go ahead.
Good morning, broad you talked about.
And then.
CMB and is down another 20 bps quarter over quarter, and I think you talked about it.
The client 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 displaced some wholesale funding with with retail and core deposit funding.
But we would expect that to continue a 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.
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 would expect that 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 you.
Have you noticed.
Oh shifts with their clients in terms of.
Penetration into active.
Mutual funds versus each yes, I kind of pre covered in what you're seeing right now.
Yes, Doug I'll take a.
So I wouldn't say, there's been a real change because of koga of the shift from active to passive has been much slower in Canada then.
Yes, we've built a product shelf to address whatever the rate of.
Changes in that.
In that direction in terms of the lines that we've arranged the with Blackrock around.
Yes, what we have seen in disrupted markets is a higher than normal share of gathering assets and a lot of that ends up in cash deposits.
In the retail bank and slower mutual funds 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 remains.
Extremely healthy from our perspective.
Thank you.
Okay.
Thank you.
The following question is from Steve Theriault of any 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 prequalified levels, maybe that's temporary maybe not but can you give you that an update there on what you're seeing your card booking in particular for your Westjet portfolio, how much impact are you seeing there.
From where they are troubled being mostly on Pos.
Yes. Thanks, a question Yeah, I mean, the call. 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.
Is this just evaporated dining is down about 50% gas sort of these large category is down about 50%.
Its 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 categories swings that 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 covet measures.
In terms of splitting it between the Westjet Steve to 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 wouldn't say it is it.
We have bounced off the bottom, but we're nowhere near kinda back to normal.
And for that further west check card add that earns western dollars west said towards their ability to earn sort of regular RBC loyalty points.
No no so those they earn those dollars and we immediately.
Hey, Westjet for those and that liability is transferred over to Westjet.
And that 30% you mentioned for the loyalty type products like to west at sort of in line with that.
Yeah.
Okay. Thank you.
Thank you. The following question is five Nigel this is as their test investments. Please go ahead.
Oh, Thank you good morning.
So I wanted to tackle your commentary on non parents del look for impaired loans in delinquencies.
So as you into year end and a lot of that will depend on.
You know how 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.
We have which is pretty sizable sum mortgages wholesale for example.
Zones are currently classified as stage two or the majority of them still in stage.
That's great, but I'd have to go I don't have that that breakdown off the top of my head.
I would say again going back the commentary we had on the modeling we've done.
You know that's exactly what we've been putting or we go down to the.
The the account level and really trying to understand the income disruption there overlay our views on on on the unemployment situation that we talked about earlier and the government support ultimately to kind of low low what we think the delinquencies and impairments will be and thus 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 belts has come in the mortgage space a couple of pieces I would be just give you for context on that.
One is you know so wouldn't deferrals about 40% of our clients took 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 and into a payment status is just one point of contact so that's a bit of the earliest data we have to start to tick.
Holiday the assumptions, we've been making.
The other piece just in terms of kind of the higher risk piece. There. If you. If you take a kind of that again those claims that have opted for a deferral plan programs.
And you look at our mortgage book, the uninsured component of it and kind of the high LTV the over 80% you're talking about $900 million and balances right now that fit that kind of high risk out of category.
So those are just kinda sorta points, but I go to your modeling. We do is obviously much richer than just kind of capturing those points and certainly as we kind of see you or client behavior going forward. We will continue to reflect that into our modeling and any adjustments we need to making her provisions that right now that's very much the granular approach we've taken to it if you really want to get into the details.
Nice you can look at page 77 of the 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.
That's a really useful commentary appreciate it.
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Thank you operator.
Oh.
Dave.
Thanks, Dan and thanks, everyone for your calls I recognize how different difficult. The last two days have been for the analysts and particularly this morning with two banks reporting. It is really kind of three themes that I want to 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 are number one our strong financial position.
The diversification of our business model in the scale, we talk about on almost every call for us five or six years and I think it really showed again at a time of crisis and with the 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 buy back shares and therefore.
We started this crisis, which we did see with a very very strong 12% C. One ratio and you see after a crisis, where we took over $2.8 billion or charges, 11.7% TG. 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 in the discussion that we're taking a very conservative our base case as you heard Graham describe as wide as severe scenario and they should you should begin to that but we've we've approached this entire a crisis.
With a very conservative approach to protect our balance sheet to protect our shareholders.
A third is very strong earnings power, we exited Q1 2020 with a fantastic quarter carried that momentum and you saw very strong pre tax pre provision earnings and that that talks again to the diversification the quality of our client franchise, so conservatism, a strength that diversification and earnings capability position us well.
It will stand the uncertainty and turn around an 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 talking to you over the coming quarter.
Thank you.
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Okay. That's good for that.
If you tell me she prepare she was funding.
[noise] I Miss out on process FIFA.
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Okay, and you're not because it had been.
Okay, how close you must funding.
[noise] Oh.