Q2 2020 Earnings Call

[music].

Please standby on eating is supposed to begin good morning, welcome to the CDC quarterly financial results call. Please be advised that this call is being recorded.

I would like to turn the meeting over to Jeff White Senior Vice President Investor Relations. Please go ahead Jeff.

Thank you and good morning.

Will begin this mornings presentation with opening remarks from Victor Dodig, our President and Chief Executive Officer, Following Victor Crotch, Panosian, Our Chief Financial Officer will review, our operating results, Sean Bieber, our chief risk Officer will close out the prepared remarks with the risk management update.

We're also joined in the room by Sea Ibcs business leaders, including Harry Culham, Laura Dottori at the Mascio and John and Talus as well as much appetite is who is joined us remotely from the U.S.

They will be available to take questions. Following the prepared remarks.

As noted on slide two of our Investor presentation. Our comments may contain forward looking statements, which involve assumptions that have inherent risks and uncertainties actual results may differ materially with that I will now turn the meeting over to Victor.

Thank you, Jeff and good morning.

I hope everyone joining us on the call, including your families and colleagues are well.

And to those in the front lines, providing essential services for health care and economic recovery, we'd like to thank you for your courage and for your dedication.

I'd like to begin the call by underscoring three essential factors the guide or thinking about our bank in the current environment and as we look to the future.

First.

We're well positioned to balance the balance the short term actions necessary to successfully navigate the current challenges.

As well as advance or long term strategy.

We continue to make strategic investments now to position us for success as we enter the recovery period and beyond.

Second.

Our investments are the over the past several years to modernize and simplify our bank have allowed us to mobilize early and to respond quickly to the pandemic in support of our clients are team members and the communities we serve.

Third whether you're building client relationships or managing a public health crisis. Your success often rests on your people and their leadership.

Our CBC team has stepped up a remarkable ways over the past several months and it is reinforced that we have a singularly connected team that is bringing a relentless focus on our clients.

For our bank, we are leaning into support our clients at a time when they need our help more than ever while also ensuring the well being of our team.

Since mid March we've enabled over 75% of our T. employees to work remotely tripling the number from a few months ago.

We've also taken significant actions to ensure the well being of our team members required to work on site as they support our clients.

Keep our operations running smoothly.

For our clients, we have helped over half a million personal business in corporate clients facing financial hardships.

With including payment deferrals on loans mortgages, another credit products as well as reduced interest rates on credit cards.

And were directly supporting government stimulus programs that have been launched for individuals and businesses in both Canada and the United States.

In addition, our industry, leading mobile banking platform and online capabilities of served us well as more of our clients adopt digital channels to perform their day to day banking.

This level of digital engagement will become and trench behavior and the new normal in a post cobot world, we're well positioned for that new normal and we'll continue to invest in digital to advance our lead.

That's important to provide some context on why these numbers in these measures are important.

We've consistently acted with the long term in mind when it comes to client relationships. That's been a driver of our strategy and our investments in recent years.

As I've said before this is our moment of truth on that journey, we've executed decisively on our long term vision in the midst of a crisis.

When we needed to be reactive to meet the urgent need for financial relief among clients, we needed as easy as possible for them to get help such as creating a simple online form to request a payment deferral and building a seamless application process for the Canada emergency business account loans in Canada, and the paycheck to Paycheck protection program and the United States.

Yes.

We've also taken every opportunity to be proactive, particularly in light of the sharp increase in the need for advice.

Our team has called hundreds and thousands of clients offering advice or just checking into ensure their banking is in order.

We were the first banked Institute a your next policy to serve seniors in prisons with disabilities, and our banking centers.

We also proactively extended payment relief to clients, who we identified as meeting short term support.

And we've been highly visible with curve with our commercial and corporate clients, helping them navigate these challenging markets.

These are investments in the bank, we're building as one connected team.

BC.

It's a long term effort, but we're seeing continued signs of progress earlier. This month JD power released or 2020 Canadian retail banking satisfaction study for the big five banks and CNBC moved up another rank to third this year that has been a consistent trend for us.

We knew when we set out to improve our client experience scores that it would take time, but our progress has been steady and our unwavering commitment to our clients is being recognized.

In addition to helping our clients through this crisis, we continue to support the communities, where we live and work.

We have increased donations to charity that directly support those most at risk and more recently, we announced a burst refund to support the education of the next generation of healthcare workers.

Now with that context I'll review the results are a second highlights of our second quarter results.

While our results for the quarter was stable on a pre provision basis. The changes in economic backdrop that began in March had a material impact on our provision for credit losses.

Pre provision earnings of $1.9 billion reflect the resilience of our core business. Despite these challenging times.

Including the impact of the 1.4 billion dollar provision for credit losses, adjusted earnings were $441 million, resulting in earnings per share of 94 cents.

Our balance sheet remains strong and its underpinned by solid capital position with the Cetone ratio of 11.3%.

Looking at our business units covert nineteena significantly impacted consumer behavior, which has materially affected our results.

In personal and business banking transaction volumes across payment products have declined significantly since social distancing protocols were implemented.

These trends negatively impacted fee revenue this quarter.

Notwithstanding the macro challenges, we continue to see improving trends and volume growth across our core products, including mortgages in deposits.

Our north American commercial and corporate banking businesses saw credit utilization increase early in the quarter as clients secured liquidity for their businesses with a large portion of these draws retained both loan and deposit volume growth accelerated during the quarter.

In wealth management market deterioration is that occurred largely in March reduced fees as well as retail mutual fund net sales.

And in capital markets market volatility drove higher trading activity as we supported our core clients.

And while new equity issuance slowed we had a quote a record quarter and debt issuance and there continues to be a strong pipeline for both government municipal paper.

In closing before I hand, it over to horizon, Sean for their remarks, I want to leave you with a few key messages.

Our core franchise is strong.

And while economic headwinds are likely to be here for the near term our client focus and are well diversified business will allow us to get back to pre coated levels of profitability as the recovery takes hold.

In addition, while there are many unknowns related to the pandemic its effect on the economy and the path to recovery. What is certain is that our strong capital liquidity will allow us to withstand ongoing stress while continue to support our clients and protect our dividend for our shareholders.

And finally disruption creates opportunity we're continuing we're continuing to invest for the long term with an eye towards strengths in technology and innovation as well as in building relationships. So that we emerge on the other side as a stronger bank, we've already fast track Cimarron investments in technology to support digital engagement as.

Well as working remotely and we will continue to review other areas of our business to adapt and develop competitive advantages in this new normal environment.

We have a talented leadership team will long with their entire CNBC team has stepped up to the challenge and with that I'll turn the call over the horizon for a detailed review our financial results over the of Raj.

Thank you Victor good morning, everyone and hope you all doing well.

Starting on slide nine for the second quarter of Twentytwenty, We reported earnings of 392 million and diluted earnings per share of 83 cents.

Adjusting for the 49 million after tax item of note reflected in the appendix, we delivered net earnings of 441 million and earnings per share of 94 cents.

Results this quarter, our net of the $1.4 billion provision for credit losses, which captures the full impact of the economic circumstances, we anticipated as of the ended the quarter provisions were primarily driven by a substantially increasing our allowance for performing loans, reflecting potential credit losses as the economic impact of coated 19 countries.

In use to unfold, Sean will speak to credit provisions in more detail in his remarks momentarily.

Pre provision earnings of $1.9 billion were relatively stable from the prior year, while covert 19 impacts presented headwind during the quarter, our core underlying business performance remains solid reflecting the resilience of our diversified franchise and continued progress against our strategy over the last year.

Revenues of 4.6 billion were up 1% year over year, driven by a 13% increase in net interest income as continued growth in client balances and stable margin across our bank more than offset to covert related headwinds.

In contrast, noninterest income was down 13% as a result of reduce transactional activity by our clients and disruption in capital markets due to cultivate 19.

Adjusted expenses of 2.6 billion.

Sure.

Okay.

Adjusted expenses of $2.6 billion were down 2% sequentially and reflect the actions we have taken to contain expense growth, while accelerating some investments to respond to code at 19 and modernize our bank.

We will continue to prioritize selective investments to address the challenges presented during this crisis and to position our bank for growth in the post crisis period.

Overall net of our ongoing efficiency initiatives, we continue to expect more moderate expense growth in the second half of the year as compared to the first.

This quarter highlighted the strength and resilience of our balance sheet as shown on slide 10, we entered this crisis in a strong position and have maintained that strength.

During the quarter, we support our clients with our balance sheet absorbing material increase in credit allowance and maintained our dividend, while continuing to build our book value capital and liquidity position.

Our cetone ratio remained stable at 11.3%, excluding performing provisions internal capital generation and implementation of the internal model method for counterparty credit risk benefited capital. This quarter. These items were largely offset by an increasing R.W.A. deployed in support of our clients.

The impact of provisions on performing loans was mostly offset by associated changes in capital deductions and the C. One add back for us These transitional arrangements.

Ending capital position provides us with a buffer approximately $6 billion in capital or over $65 billion in our Wu way relative to the 9% regulatory minimum. This represents a 30% increase from current credit R.W.A. levels, which is significantly beyond internal credit migration estimate even in severe downturn.

Scenarios.

Our liquidity ratios were also strong improving throughout the quarter as we preemptively built up our liquidity reserves, our average liquidity coverage ratio for the quarter improved to 131% as a result of strong deposit growth and our continued access to funding markets throughout the quarter.

Going forward, our resilient balance sheet positions us well to absorb any future stress or market disruption, while continuing to support our clients and our dividend as they impact of code at 19 unfolds.

Slide 11 reflects our personal and business banking results net income for the quarter was 204 million down 64% from last year due to a higher provision for credit losses and revenue headwinds related to coded 19.

Revenues of $2.1 billion decreased 2% year over year due to pressure on fee income in the current environment net interest income was stable year over year as growth in client balances was offset by the impact of lending accommodations to support clients experiencing financial hardship.

Noninterest income for the quarter was down 9% due to significantly lower transaction activity, particularly in payments and deposits due to the ongoing social distancing measures across Canada.

Net interest margin of 244 basis points for the quarter was down three bips from last year and seven basis points sequentially largely due to the impact of the prime be a compression and cobot related interests release this quarter going forward. If rates are unchanged from current levels, we expect names to experienced gradual pressure as we.

Continue to absorb the impact of the recent changes in the yield curve.

Expenses of $1.1 billion were up 2% year over year, but down sequentially as we reallocated resources through the quarter do react to covert 19, while optimizing our cost base.

We are continuing investments to further advance, our leading mobile and digital capabilities, but have reduced investments in our physical footprint and other initiatives from the prior year, we will balance our level of investment through the back half of the year guided by changes in market conditions as they evolve.

Slide 12 shows the results of our Canadian commercial banking and wealth management business, where our core business performed well driven by continued growth and client balances net income for the quarter with 206 million down 37% from a year ago due to the higher provision for credit losses pre provision earnings were stable with underlying.

Revenue growth at 3% and a 5% increase in non interest expenses.

Commercial banking revenues were up 3% from a year ago benefiting from continued volume growth and favorable rates offset impart by lower advisory fees deposit in lending balances were up 13% and 9% respectively. As we saw a balanced portfolio growth throughout the year and continued supporting our clients with incremental credit needs.

In the quarter.

Wealth management revenues were up 3%, primarily driven by higher fee based assets and trading volumes in our full service brokerage business due to the market volatility in the quarter.

The 5% increasing expenses reflect higher revenue base variable compensation and hiring of client facing rolls over the course of 2019, we are continuing to invest in our digital capabilities to support our clients and our team over the remainder of 2020, but expect expense growth to moderate.

Turning to slide 13, us commercial banking and wealth management results reflect continued growth in our us client franchise and market share gains.

Net income for the quarter was 35 million down 80% from the prior year due to the higher credit provisions pre provision earnings growth continued to be strong at 16% year over year in Canadian dollars or 12% in local currency.

Revenues were up 11% or 7% in us dollar terms over the last year double digit volume growth and higher asset management fees more than offset headwinds related to the significant decline in rates over the last year and a mark to market loss and the discontinued CMBS business due to the market disruption this quarter.

Average loans grew 22% from a year ago in us dollars, reflecting continued momentum in client development and our advancement of loans as part of the Paycheck protection program later in the quarter deposits outpaced loans growing 24% from a year ago, as new and existing clients continue to entrust us with their cash management.

And investment needs.

Net interest margin was 305 basis points up three basis points sequentially and down 27 basis points from a year ago.

The modest NIM improvement this quarter was helped by reductions in deposit pricing that followed the federal reserve rate cuts, while LIBOR declines lags through the end of the corridor.

While there can be some quarterly volatility a prolonged low rate environment and in particular, the recent downward trend in LIBOR will pressure core margins downwards going forward.

Non interest expense growth of 6% from the prior year was impacted by FX translation. The constant dollar increase of 2% reflect our continued growth investments in this business net of the impact of our efficiency initiatives and a significant reduction in travel and business development expenses.

Slide 14 covers capital markets results. This quarter, we stood by our corporate and institutional clients through the market disruption generating strong revenues. Despite the impact of significant dislocation in some markets net income of 137 million was down 52% from a year ago, driven by higher provision for credit losses.

Pre provision earnings were up 6% over the years due to the continued growth of core revenues offset by expense growth related to the strategic investments to expand our platform.

Revenues of 824 million were up 9% from a year ago, mainly due to the higher client trading activity and interest rates and foreign exchange growth in corporate banking and higher debt underwriting the performance of these businesses more than offset lower equity derivatives revenues valuation adjustments driven by a wider funding and credit spreads.

In reduced market activity and advisory and equity underwriting.

Average loans were up 21% as we support to our clients through this crisis, providing incremental access to funding and financial flexibility as part of our lending accommodation.

Noninterest expenses were up 12% from a year ago, primarily driven by higher spend on ongoing growth initiatives, particularly in the U.S. and expenses associated with higher trading volumes.

Finally, slide 15 reflects the results of the corporate and other business unit net loss for the quarter was 141 million compared with net income of 5 million for the prior year, driven by lower revenues and higher Pcls, while strong expense management provided an offset.

Lower FC IB revenues were impacted by write downs in debt securities and declines in rates as a result of the co that 19 pandemic flu.

Treasury revenues were also lower this quarter, primarily due to the impact of the increased level and cost of our liquidity reserve.

As mentioned previously we anticipate completing the sale of our controlling interest in FCB subject to regulatory approval and we will provide updated guidance for this segment at that time.

And with that I will turn the call over to Sean.

Thank you congrats and good morning.

Before turning to our provisions I'd like to provide a few high level thoughts on our credit portfolios in the context of the current economic situation.

First our portfolio also performed well heading into this crisis nearly two thirds of our outstanding loans are to consumers. The majority of which are mortgages with our uninsured mortgages, having an average loan to value of 53%.

The balance of our portfolio is in business and government lending with an average risk rating for the portfolio equivalent to a triple B plus.

Second given the unprecedented dislocation that has occurred since we last reported our results too we have performed various analysis and exercise judgment to determine our provision for credit losses, this quarter, particularly with respect to the provision for performing loans.

And third we have also provided incremental disclosure this quarter to help you better understand select industry exposures.

While acknowledging the uncertainty in the path forward for the global economy, if our current economic estimates materialize close to forecast, we would not expect to see notable increases in performing allowances from here.

With that context, turning to slide 18, the total provision for credit losses of 1.4 billion were higher quarter over quarter, mainly due to performing loan loss provisions driven by unfavorable changes to the macroeconomic outlook that informs our forward looking indicators, reflecting the impact of the covidien.

19 pandemic.

For impaired loans. The provision this quarter was 343 million up 99 million from the prior quarter, mainly due to a few impairments in Canadian commercial banking and the oil and gas sector within our capital markets business.

Given the current environment, we have provided additional information this quarter on the composition of allowance of and our provision on the following slide.

Turning to slide 19 allowance for credit losses grew by 59% to 3.3 billion this quarter with our coverage ratio to gross loans, increasing from 51 basis points to 78 basis points.

On our performing provision of 1.1 billion. This quarter, we have provided more details on the bottom left of the slide.

The first column represents our modeled provisions, which incorporates revisions to the forward looking indicators along with changes to the case weightings based on input from our Economics Division.

We made a number of further adjustments to reflect the circumstances this quarter that netted to a reduction of 122 million, which I'll now described.

We adjust in certain forward looking indicators youth in the model to reflect the benefits of government relief programs on our consumer and business and government portfolios that we do not believe our models would have otherwise captured.

The outcome of these adjustments materially reduced our modeled provision.

In addition, we performed a bottom up review on select segments of our portfolios. We applied qualitative factors to these portfolios for the impacts we believe we're not captured in our model driven provisions, including additional future credit migrations.

This bottom up review resulted in our recognizing additional performing provisions, which offset a majority of the adjustments we had made to reflect the benefits of the government support.

As I mentioned the net result of these adjustments is a reduction of our model provision by 122 million, which is reflected in the second bar in the chart.

Lastly, we had other portfolio movements, including credit migrations and parameter updates that added 136 million to the provision.

All in this resulted in a total provision on performing loans of just under 1.1 billion for the quarter.

On slide 20, we've provided incremental disclosure on our wholesale exposure to oil and gas, which represents 2.5% of our total loan portfolio with 54% indexed exploration and production sub sector.

Our total allowance for credit loss coverage for this segment was four times, our current impairments this quarter.

Looking at the oil provinces from a retail perspective.

With 78% of our retail loans being secured and our uninsured mortgage portfolio in these provinces, having a loan to value of 67% we remain comfortable with our overall exposure.

Slide 21, and 22 provide details on select industries in vulnerable sectors that has been particularly impacted by the various protection measures put in place as a result at the pandemic.

These include industries, and leisure and entertainment retail as well as certain asset classes within our commercial real estate portfolio.

38% of leisure and entertainment exposure and 50% of retail exposure, we are investment grade at the end of this quarter.

For commercial real estate, 71% of our Canadian portfolio and 42% of US portfolio, we are investment grade.

We have introduced relief programs for our corporate and commercial clients experiencing hardship. In addition to support programs offered by governments to provide assistance as they navigate through this difficult time.

The next slide provides an overview of our gross impaired loans.

Gross impaired dollars were up in both consumer loans and business and government loans, mainly due to covert 19 and continued pressure on oil prices.

The increase in consumer loans was mainly driven by marginally higher impairments in our Canadian mortgage portfolio.

Even the moderate average loan to value ratio of this portfolio. We do not expect this increase in gross impaired balances to translate into material losses.

In addition, the increase in formations. This quarter was mainly driven by loans in our Canadian commercial banking segment, along with higher impairments in the oil and gas sector.

Slide 24 shows the net write offs and 90 plus days delinquency rates of our Canadian consumer portfolios.

This stage our write offs continue to remain relatively stable other than seasonal trends within our credit card portfolio.

We do expect consumer write offs to increase late in the second half of 2020.

Once deferral programs that were put in place in Q2 end at which point, we will likely see a resumption of delinquency and write off trends.

The overall Canadian consumer late stage delinquency rate was up this quarter with a higher rate in residential mortgages and the lower rate in credit cards as I mentioned earlier, we do not expect the increase in mortgage delinquencies to translate into material losses.

The decrease in credit cards was mainly due to the client relief programs instituted in Q2, which prevented certain clients from becoming increasingly delinquent during the quarter, resulting in fewer accounts flowing to late stage delinquency.

Excluding the benefit of payment deferrals, the delinquency rate on credit cards would have been 115 basis points versus 66 basis points shown in the chart.

We have included this adjustment in our provisions for performing loans to account for the anticipated increase in delinquencies and potential write offs in future quarters.

On slide 25, Weve shown our trading revenue and var distribution throughout the quarter.

Given market volatility in Q2 var increase throughout March and April, peaking at 22 million near the end of March.

We also experienced 14 negative trading days in March and April.

These were mainly driven by losses in equity derivatives precious metals and the impact of negative oil pricing.

This is in the context of volatility this quarter that in many respects was more significant than during the 2008 2009 financial crisis.

I would also note that much of these mark to market losses were recouped in April as markets rebounded.

In closing I'd like to remediate reiterate the extraordinary economic backdrop this quarter.

As I noted in my opening remarks, assuming our forecasts remain unchanged, we would not expect to see further material increases in performing allowances this year.

Having said that none of us know how long this crisis will last or how effective the government support and relief programs will be in acting as a mitigant to potential losses.

We remain comfortable that are prudent underwriting approach has positioned us well to manage through this period, while continuing to support our clients.

Operator, I'll now turn the call back to you for questions.

Thank you if you have a question at this time, please press star one on your telephone keypad.

And the first question is from John Aiken from Barclays. Please go ahead.

Good morning, Scratch, you mentioned in terms of the sale of first quarter getting that youre expecting it goes forward my understanding though is that there's potential price adjustments based on book value do you see any any impact on all the pricing in this deal because of what happened in prescription this quarter or Alternatively is there any impact on the time.

You expected to close.

Sure. Thank you John and good morning.

I would say on the price adjustment side, we have made references before too on the way. The agreement is structured so any changes in book value is as mentioned in our disclosures would flow through to that but that doesn't mean, there is a price adjustments of the agreement is as it is it just reflects changes in and the book value between agreement in club.

Yes.

And so that would happen as normal course, however, I'll say on the economics that structure actually guarantees us that the economics, we're not respect stay the same so we've looked at and we calculated the impact of the clothes and you'll see as disclosed in our capital side, we still anticipate 40 basis points roughly benefit when.

When we close that transaction and in terms of timing as we've disclosed again, we are working through regulatory approval processes and that's that's what is between now and close and so obviously the code 19 situation and shut down a certain government bodies, including regulators and the workload can impact that but we still around.

Anticipating later this calendar year.

Thanks for color I'll requeue.

Thank you.

Next question is from Ebrahim Poonawala from Bank of America Securities. Please go ahead.

Good morning.

I guess just a question following up all showed on your comments at all.

TCOS.

If you can you just give us some clarity at all my senses, Apollo TCOS and the modernization sticking with the unemployment outlook you can do just in what you're baking in.

Okay got you unemployment as we look all I guess first tackle 51, and the housing market that could be helpful.

Sure Ebrahim, so we've used working with our economics Department.

Weve taken the various scenarios weighted them or and then a run our modeling exercise. So I'd say our base case is more reflective of a U shaped pattern. So big contraction in GDP and rising unemployment fairly quickly then as the economy reopens.

A recovering big win begins and it's sort of quickly at first but then we're sort of forecasting a more gradual emergence from there where GDP doesn't get back to see end of 2019 levels until late 2021 early 2022 with unemployment coming back.

After that.

From a house price perspective.

We've modeled in.

I think about it its sort as a little more than 6%, 6% to 7% of price drops over the next two years and then some recovery in the in the following year.

Got it and just on that so you mentioned that this will slowly to high watermark apps into macro changes following pcls.

Do you feel the same thing about just talk of Pcls or do you think the input impairment and credit migration could actually was absolutely you see a levels higher than a consulting to Q.

We mitigated India.

Yes, so so as I said, we based on our view of the forecast and the various analyses that we've done which includes bottom up analysis on impacted sectors, if things play out the way we've.

Modeled them and based on the risks as we understand them today, we wouldn't expect to add any material amount to allowances now in terms of the the the impaired provisions.

What we would expect to see again as things play out is some level of credit migration and ultimately, perhaps some cycling of those performing provisions into impaired provisions, but net not having that'll allowance number.

Move up materially.

Got it thank you.

Thank you.

Your next question if some Gabriel Duchaine from National Bank Financial. Please go ahead, hi, good morning.

I just want to ask about the deferrals and Ah interesting you put the.

Proactive and.

Let me reactive descriptions of the card portfolio.

Excuse me.

Handset.

Needs versus.

Accommodation or or tactical.

Referral program with some borrowers I'm wondering if you've talked to talk about it the across the whole book, especially on the tactical because.

Those numbers are quite high income.

Comfort and how these deferral numbers are going to decline over the next few quarters and resulting in a much lower compared.

Impaired loan number.

Hi, Good morning, Gabriel's Victor here I wanted to just comment on that and I got a handed off to Laura we're the largest number of deferrals occurred in our Canadian personal and business Bank.

The outset as the as this pandemic it was clear to us based on the inbound calls.

Economics that we saw out there that clients are feeling anxiety and hardship some was real financial hardship somewhat perceive financial hardship and we wanted to deal with them as expeditiously as possible.

So we dealt with that on mortgages, we set up a digital form and made a very easy we on credit cards decided that there was a group of clients that we wanted to offer relief to on a proactive basis based on their real hard ship because alleviation of hardship means alleviation of hardship and that's what we set us to do for those clients while at the same time recognizing that there were.

Clients that we needed to open the lines for for a request for alleviation and that was the reactive group.

In our commercial bank and our corporate Bank. We also worked with our clients on the deferral basis and or to negotiate new lines of business. So we're highly and actively engaged I think your question specifically relates to the proactive piece all handed off to lower to speak to that.

Sure Good morning, Gabriel and thanks Victor.

So as Victor said really our number one priority during the crisis was to help our clients.

So you would have likely seen if you're following the news that we were actually first under the gate with all the announcement at the various deferral programs, including dropping interest rates and I do want to point out that during the pandemic. There is a national pull the Canadian that ranked US number one among the big six banks for our handling of coal.

And so that that I'd point out because it was really important for us because we pride ourselves on doing the right thing. So it was a deliberate decision that we made at the beginning of the crisis and as an actor pointed out what we wanted to do here was really find a way to provide cash flow relief to the clients that we thought.

Might need at the most so those are there were those that came in and asked as Victor point out and the ones. We felt might also need it where we had seen see they had missed a payment or been late with the payment. So it was really trying to help these clients because that's what we're supposed to do during these times during their period of I would say very high stress it avoid.

Good.

Lot of delays with calls into our call centers.

And most importantly, we knew these folks would benefit so just just some.

Stats flurry, which I know, we had a slide that showed them, but on mortgages was 108000 deferrals. We did that represented 18% of overall mortgage.

Standing on the cars side.

It was about 7% for.

Those who asked for it and 9% for the proactive one so totaling.

16% and what I think I should point out to you.

Is what we're seeing with our clients.

They've been acting incredibly responsibly.

During this time, so we've seen them cutback on purchasing we haven't increased their debt levels actually in fact utilization rate both on secured and unsecured line for trended downward Sen of the folks that we offered proactive relief to.

I would tell you that just under 60% to them still chose to make a voluntary payment on their card. So I think that just speaks to the respond to lead our sorry, how Canadians are acting responsibly during these times.

That answer your question Gabriel I.

Its a.

If I can if you could tell me like 80% of a these deferrals or people that are just picking up payment holidays.

Sort or situation.

I would expect those to get back to performing and paying by one of the six month period alone.

Kind of whatever.

Okay.

Yes, well for mortgages most of our client we offer six month deferrals too on the card side. It was a two to three months of if you will deferral and lower interest rates that are that they received so I think your.

Comfort comes from of that Ive that segment of population, where we proactively deferred as I said just under 60% of those.

Made voluntary payments on their card.

Okay. My next question on our capital and.

Thank you were talking about the.

You know your Ah you mentioned credit migration of bank yesterday gave some sensitivity on migration that if everything were bound relative and absolute.

100 basis point or whatever.

Operation just to kind of give a stress scenarios wondering if you have anything about nature.

Yes, I'll take that Gabriel's morning, its raich. So yes, I can give you a little bit more more color on that so as I mentioned, our account flows resilience than we expected to remain resilient to cover migration. So we've got a you know this quarter you will see if you go into sub par.

We only had about five basis points to see town, one worth of migration, but we do expect that to come over time.

When I look at our portfolios if I look at.

Let's say the wholesale and I'll give you a similar to numbers to what was discussed yesterday for our wholesale book, which is not just a corporate it sort of overall wholesale book.

We anticipate that we would have approximately if you just look at the R.W.A. impact from migrations. It would be about 80 basis points is 81, but you've got a you've got to keep in mind that there was also on top of that potentially increases in the Seattle, which would come through and so you put that all in about 100 basis points over several.

Quarters now that I should point out is a very very significant scenario to see the whole book downgrade one notch and we are starting from a very strong place with a portfolio that is that that is very strongly positioned.

Just to give you some numbers on our corporate sort of sovereign book as of Q2 of our exposures, 82% almost where how to PD is under half a percent I think thats, a great snogging points and we can absorb from there in terms of what we actually expect we've done a number of forecasts and you know what I'll leave you with his absence.

Credit migration, we think our capital is stable at this point in time, you know hard to tell what's going to happen, but we do expect some credit migration.

But we think that level its credit migration will be sort of a in our expected case within that sort of 40 basis points. In you know outside cases that were seeing still well into the 10% I would say about potentially sooner that 10, a half level and then in and very very severe stress see basin numbers I do.

Gave you see that we still have as I mentioned in my remarks significant buffer to that regulatory minimum.

Thank you for the.

Hello.

Hello, everyone.

Thank you.

Your next question is from Scott Chen from Canaccord Genuity. Please go ahead.

Good morning, Laura I was wondering if you could.

Offer any update on client behavior trends post quarter.

In terms of what you're seeing on the mortgage origination side or per stall or hard side would be helpful. Thanks.

Sure Good morning, Scott.

Well I tell you post a corridor.

I just feel better than what we went through a during the quarter that said I'd still expect to see I'd say slower demand for credit, let's just reflecting the new reality.

That were in.

Let's see we're seeing I'd say deposits balances those continue to increase.

That feels good on the mortgage side pre crisis or I'd say, we were feeling good in that as you've probably seen we reversed that declining growth trend and are now in a positive trajectory that said still not good enough in terms of where we'd like to be but we were trending in the Wright direct.

And I tell you sort of post quarter end.

We are seeing.

Some of those applications drop off which I think is normal given the circumstances, but on the credit card side for as much as we saw did drop off particularly in April in terms of purchase volumes.

A new applications, we're actually seeing a much improved pipeline as it relates to number of applications coming in including purchase volumes that have come up and so feels a lot better.

That said I think we're going to see slower demand if you will for credits.

On a go forward basis.

Does that answer your question, yes. It does thanks, and just first on just a follow up on your scenario analysis.

I guess response on performing non performing loans on the allowances.

For the housing prices when you say, 6% to 7% over two years is that over two years is that 6% to 7% each year.

Over the two years over the two years and when you find the weight to the different scenarios can you quantify the waits for us.

I don't think we've historically disclose that we didnt move up a bit towards a our upside case, but that was more of a reflection relative to prior quarters, but that was more reflection of the fact that our base case now reflects a more of a recessionary environment.

Okay got it thank you very much.

Thank you. Your next question is from Steve Carryover from eight capital. Please go ahead.

Thanks very much.

Victor in her opening remarks, you talked about looking forward to getting back to pre covert levels of profitability.

Thats been a big question it hasn't always been the case, obviously last cycle.

No pressure on on our always can you just maybe elaborate a bit on your confidence there and talk about some other risks that outcome.

Hi, Good morning, Steve I think we all.

Generally nowhere we are today in the economy I think the stimulus just to provide a broader macro context my views and our collective use your a CNBC or that the stimulus.

From the various government programs in both Canada, the United States are helping.

And we'll help demand to recover as we come out of this.

Clearly some sectors will perform better than others, the discretionary economy travel entertainment leisure the ones that you constantly here about are the ones that are gonna have a longer period of recovery.

Our economists tell us that GDP will contract.

Hi single digits. This year in both Canada, United States and will likely rebound next year.

Various letters of they also that are used to describe your coverage I always say, there's no letter in the off a bit that will describe it oh, let's just kind of take it quarter by quarter end.

In terms of my comments that were returned to pre cobot levels. There's a number of things that we're going to have to do we're gonna have to continue to win market share and develop deeper client relationships with their clients across all of our businesses and I think you're seeing not in our businesses. There's obviously pockets of improvements that we have in our portfolio that we need to work on.

We need to continue to transform our cost base, and we announced that last quarter and we will continue with that program to transform our bank and to try and get our efficiency ratio toward normal level.

If we do what we can do to improve the performance of our portfolio and economic recovery does take root, which I believe ultimately it will there's a tremendous amount of stimulus in the market globally that's happening.

We will see that growth come back and make take the 21. It may take the early 22 before you see a robustness back in the banking sector again.

Assuming that you know the healthcare crisis is behind us So I I I know that we have a good plan.

You are going to continue to execute against that plan I think quarter. After quarter, you will see the resilience in our business results.

That on a relative basis, we will hold our own and try to improve versus our competitors as best as possible.

Okay. Thanks, a lot better second question for Raich I think the margin was up three basis points in the U.S. you talked about a decline going forward. Roger can you put some numbers around that.

Either you know either some numbers around that or the timing with which it will take so from our just to kind of settle out all else equal pulse rate cuts.

Sure. Thank you so it's a little tough right now to put numbers around it because as I mentioned in my remarks, there. We do expect some volatility over the next few quarters and so if you look at for example, the Paycheck protection program and how that plays out and they're seeing.

To be potentially extensions to that so that will when it's on balance sheet skew things to some extent in the short term, but and to give you the longer term trends as we've spoken about before.

We do anticipate that business to be more stable now that it's been before because we have hedge that balance sheet fairly significantly.

But directionally I would say live are going down you would see some modest pressure over the long term and.

I think once the noise of the Triple T program clears out you'll see the impact fairly quickly come in for the library changes that we've seen now and then stabilized from there.

If I, if we don't see any changes going forward. So what you see in a disclosure is a give you maybe a bit of extra color you see that 25 basis point disclosure to rates. We have now which is a lot more than a than what we had before because in some of the deposit floors I would say within that number there is probably.

Lee a sort of somewhere in the neighborhood of 15 million for the U.S. until you can go back and see how much rates have moved by it was substantially less than that what we had said before right for shocks and I think with that you can triangulate to a number that's still stands.

Great Thanks for that.

Thank you.

The next question is from many grounding from Cormark Securities. Please go ahead.

Hi, Good morning follow up thing following up on Steve's question victory in terms of.

Thinking about the future I'm wondering you reference a lot to digital investments and taking advantage of the current opportunities to do that but I'm wondering what about potentially the golden opportunity of more dramatically, reducing the branch footprint.

Is this something that's considered should should be considered in your view.

Okay.

Are you doing many nice to hear your voice.

So a couple of things I'd say about our physical footprint, we've kind of gone in a period.

A journey of transformation in terms of modernizing the footprint, where we're moving transactions other of our banking centers and moving advice into our banking centers and that's a trend that I think you'll continue to see I believe that now our transaction levels 91, or 92% of transactions are conducted either via an ATM your tablet or your online.

Banking bar online banking platform, which is all encouraging we see that going to 95%, but our belief overtime is that people and people interaction whether it's you know through some sort of safer distance measures are not are going to be an important part of the banking equation. So while banking centers may drop.

In terms of overall numbers and they become smarter on lighter.

In terms of footprint I think there'll be an important part of our value proposition, particularly in the Canadian marketplace over time, you'll see some shrinkage, but they'll play an important role and building those client relationships.

The other thing I'd add is that shrinking the number of banking centers doesn't necessarily improve your profitability that dramatically with improves your profitability dramatically as your ability to attract.

The client relationships, we wish to attract and make sure that deep and meaningful relationships. So that you can see those numbers flow through both our our away and our OE and that we can generate the healthy capital that we believe we will generate through our business model going forward.

Thanks for that and while we're talking about the future I thought I'd ask about taxes and.

A question of inevitability of tax increases as research to pay for all of this government spending and and maybe even further than that at what point should we get or at what point do you get concerned that the government is government debt public debt is just getting out of control.

Well look as citizens, we should always be concerned about what is the right level of debt to.

Share the burden and making sure that our countries are strong will the Canada, United States and other countries we operate in.

I'm not going to talk about whether tax increases our goal our taxes increased tax increases will happen or not.

What I will say is that what matters, most is economic growth and policies that stimulate growth. So that the economy can slowly retire the debt. That's been encouraged from this we have the benefit of low interest rates that help but all policies need to point to growth as we move into the recovery period, There's a there's obviously recovery period.

There's going to be a reconstruction period, both for our bank as we continue to accelerate our transformation and our country as we move to a more modern economy and I think this pandemic has opened our rise to the ability to move swiftly in that regard and the only thing I would continue to advocate all our government leaders to focus on his growth because that'll that'll raise the snow.

Ended of living for everybody involved and that's a that's what we continue to advocate for we continue to.

Engage with policymakers to make sure that our GDP can get up to a robust enough level. So that our standard of living continues to improve for all Canadians and Americans.

Thanks for that Victor.

Thank you.

Next question is from Sumit Malhotra from Scotiabank. Please go ahead.

Thank you. Good morning first question is for her Raj and that's going to go to your capital Slide on page 10.

So the.

Lower capital deduction that Tcl transition.

From from what I've seen the transition piece was 10 basis points.

On the capital deduction.

I I was looking at the looking at the disclosure in the supplement and that it looks like it's the.

Removal of the the shortfall that had previously been running in the 500 600 million dollar.

Range, that's provided that goes to capital.

Just thinking about this technically Raj you are the bank booked.

2.2 billion in performing provisions this quarter Simplistically does that give you a buffer in the neighborhood of one and a half billion now on this line that would.

I have to be.

Work through in the model before this deduction could reemerge.

I don't have them phrasing this as well as I as I want to but hopefully you know what I'm getting other just kind of curious as to whether this deduction could reemerge because clearly it was a benefit the capital this quarter.

Yes, good Guy good morning, Sieminski I hope, you're well, let me give you some color on that and maybe I'll tie MTCL transition pieces, while just to give you a sensor now this is likely to move going forward. So.

As I'm sure you're aware that that's the capital shortfall or the capital deduction that was there for the shortfall in any differences between what's in our allowance as an expected loss and what's in our regulatory capital model doesn't expected loss and and it was there to just ensure that you're holding either allowance or capital for the full spectrum.

Of losses right between expected on unexpected losses part of the capital framework. So we at the time go before going to this crisis had about a 550 million dollar and kinda Delta there, which was a deduction and so what you saw it as we increase the performing provision and this is mostly the stage one and two as we've talked about the one point.

One ish billion.

That does not have an impact on the regulatory expected loss, which only moves as kind of that the ratings move and downgrade. So we went through actually when you have to go after tax and there is some more complicated math there on what qualifies and doesn't but net net we actually went from a shortfall to a surplus and then would also.

We did with the easy I'll transition framework essentially is made to some extent that sort of a that dynamic symmetric. So when you're in a surplus now you also get to add it back to see T. One, which you didn't get to before so where that sort of land. You now is going forward, what you'll see that will impact capital, mostly there might be some.

Noise still because it's not 100% offset right as you a stage, one and two moves up or down so what will really impact capital is how your regulatory expected loss changes and that will be driven by migrations and so that's why in the comments, we talked about migration. So I would and I would at this point say, we I would now.

You are looking at the shortfall, but I would be looking at the migrations forward.

And that is more a reflection of what we've been discussing for a lot of this call the trends in the underlying portfolio effectively the the higher.

Expected loss provision you took this quarter is was the.

The trigger that moved you from this this deduction to now being.

No not being flat it from a capital perspective at least as far as outlined is concerned threat you can almost think of assuming it does that said the impact of what flew through PR now this quarter right that was what was basically already taken in capital and reserved for.

Got you I might follow up with you on that to make sure I'm thinking about this what we'll do that does that later hopefully a more to the point question for Laura and it has to do with credit cards JBC I think this is applicable both to your current role and your previous one we all know that.

Credit cards are a smaller portion of the loan portfolio for commerce and they were.

12 years ago, when we were going for the last downturn, but the composition of that book has changed as well with with some of their ships you've made over that time, specifically moving to us.

Single product customers, when I look back and the archives loss rate on the card portfolio or at least the provisioning rate got up to seven 8%.

That the worst employment levels in 2009 or do you think the composition of the book has changed.

Such that you do you expect loss rates will be lower for the banking that product than was the case in the previous downturns.

Well.

The composition has changed in that we have spent time over the years at really deepening our client relationships. So they're not a sort of single product clients and history has shown us that we always do better from a loss perspective, when we have a deeper relationship.

And we've also done a great job over the years with our risk team in terms of being much better from a credit adjudication perspective.

So all of that I would tell you is contributed to our loss rate coming down as much as it has.

That said I don't want to call things, we're in unprecedented times, who knows how bad and how ugly things can continue to yet.

That said.

I I again, because in a a stable environment, we've managed to really bring down the loss rate I.

Would hope and would expect it wouldn't go up to that to that same rate just based upon all of a good work that was done as I said in risk management in terms of how we educate and with the teams over the years, how they've really deep and those client relationships. So we should do much better I'm sorry.

This round then we would have years ago.

I appreciate that yeah, that's very good I appreciate your time and thanks again.

Thank you.

The next question is how much sohrab movahedi from BMO capital markets. Please go ahead.

Thank you actually if I can just a follow up on that Laura one other things you said was that the demand for credit is going to be a little bit slower certain mortgages, maybe just to change the mix question on its head instead or risk that to you may have to get back into single product relationship in cards as you push for growth in Canadian.

Small business personal in small business banking.

Oh, Hey, sorry, well I wouldn't I wouldn't call that a risk in that you know a natural part of growth you have to start somewhere with someone and so that can be you know entry level relationship you start with a credit card.

We do see some stuff in the industry that shows that clients might also be migrating to a bit of single product, but that said regardless of the product we start with whether that you know a transactional accounts that we opened a credit card or a mortgage.

I would tell you our goal is full client service. So how do we franchise that client. So that we have are real and deeper relationship with them. So I wouldn't say that we don't want to have a if you will just a credit card that might well be how we started off our relationship but do know that the goal will always be to.

Deepen their relationships so that we have.

Deeper client relationships with just goes to not only help us on the revenue generation front, but it does it helps us a lot from a risk mitigation.

Front as well and it allows us to offer even better service to our clients because we just know them that much better so all around win win but it's okay to start with just one product.

Okay, and if I yeah. That's helpful. That's helpful and if I can just quick asked Sean.

Maybe a bit up another question, Sean I don't know, but when you have arrived at the allowances and they've acquired provisions.

Are you in a position to comment on on kind of vintage analysis would you know is there any reason to believe many maybe some up the outsized growth in mortgages in prior years may have kinda yield the tire allowance requirements now or.

The growth in private Bancorp.

Since the private Bancorp acquisition here is there any reason have you done any vintage walk to suggest there's anything peculiar about vintages.

That may have driven.

Hi reserve requirements credit reserve requirements.

No sort of I don't.

I wouldn't attributed to vintage as an issue I mean, the our credit adjudication.

Standards have not been relaxed since I'll speak first to the private bank acquisition, we haven't relax that we've been growing and I'll turn it over to Mike shortly.

Take a few comments about that business and on the mortgage side as well I don't think we've been a changing our standards there in terms of our growth, but I'll pass it to make and then maybe Laura can speak to the mortgage fees.

Sure. Thanks, Sean well sort of all you know I'll remind everybody sort of the comments we made before at the time of the acquisition of the private bank is that one of the yeah incredible positives.

We found that that back was the credit culture.

And so it was it was seamless in terms of a vintage analysis in terms of the loans in the clients that were brought on the books and and how we are and how we will we moved forward. So I would say pretty emphatically that or you're just not.

Going to see or any type of.

A negative vintage.

Analysis in terms of load that we inherited.

For the merger lows that we put on the books. The last couple years and in fact going forward. It's a very consistent credit quality, having said all that you know we are.

Yesterday utilize some of our clients and and areas and for example, our specialty lending areas are doing well for the time being you know that's health care construction engineering insurance some are more channels like retail hospitality, where we have a relatively limited.

Exposure.

But for the most part D sentiments are reflected for the time and being in a relatively normal course provision along impaired loans and I'll just stand by staying in this.

Consistent with the the credit discussion. We just had we are actually seen a fair bit of Oh, good gross or even in the midst of what we're going through over the course of the last couple of months, maybe last a couple weeks as us deals in our pipeline Oh, Rob.

Our closing and.

Our investments in additional people are capabilities are continuing to bring us clients. So hopefully that gives you a little bit color I'll I'll hand, it over to lots of war.

Yes, thanks cap.

Let's just having sat in the risk chair for so long I did want to add and that that's a vintage of client that you were referring to earlier with regards to mortgages again, having been in the risk share when a lot of that origination happened I can tell you is that I did follow all.

The vintages very closely and are still continue to.

Ah given I sat in the chair when we did those adjudications and maybe it's just to reiterate what test Sean was alluding to that when we look at that vintage relative to the others are most important takeaway for you is that a there aren't any differences in performance and in fact for some of the special.

Programs that we did during that time like our foreign income programs.

Not only did they track I would say in line with that overall delinquency profile, but they have.

Somewhat of a lower loan to value so nothing to be concerned about.

The last thing.

Just mention is we're not seeing a impaired you know impairments coming through you would've seen.

In the numbers very small uptick in the U.S. commercial portfolio. So we're not seeing goes issues now at this point in the yet.

At this point of the cycle.

Okay. Thank you congrats on getting that capital ratio back to top of the class.

Thank you Stephanie next question if some Doug young from did you all the capital markets. Please go ahead.

Good morning, Sean just back on Slide 19 bottom left when you talked about just the progression of the performing loan PCL.

You know the 122 in the 136 to 136 looks like it does include credit migration and I'm, hoping you can just maybe break that out how much is about 136 relates to credit migration and then talk about just the methodology that and that thought process and if you can't quantify that that credit migration that youre assuming in that.

Number.

Okay. So in terms of Oh, we saw some credit migration over the the the course of the corridor or most of that would've been in the oil and gas sector. Obviously, it's a.

It's been under some stress in that period in fact from an impairment perspective, that's where essentially all of the capital markets. A impairments came from this quarter I in terms of the the composition of 136 it'd be less than 100 million.

I would be a function of credit migration, it's still early in the cycle for a really.

Since the pandemic onset to see that migration coming through obviously, our provisions are reflecting our views about that but we would expect that migration atrophy realized in coming quarters. So hopefully that answers your question.

So that's just that's just just yeah. Sorry. This is a many banks in many days, but that that migration that you're baking in here that is just what you're seeing so far in the quarter or are you anticipating some further migration in that number.

Yes that was this quarters.

And so we would expect to see further credit migration for a over the coming quarters, which is reflected that to some degree as you look at our provision build and what we're sort of looking forward.

Oh, we expect things to sort of materialize over coming quarters.

And then that minus 122 in positive 136, that's just essentially got some management overlay to some degree is that the way to think or is there or can you spike out how much of this oh, please not that one has been overly.

Sorry, not the 130 61, 36 is parameters and and actual experience migration. The 122 is the net of.

All of the various adjustments that we made to reflect government support.

Bottom up analysis across various portfolios that we think are particularly impacted by a covert 19, so that method to that 122 million dollar number but there was a.

Decent amount of travel positive and negative to ultimately get to that number relative to sort of the original billion 55 on the left side.

And then just second harass the ability to add back the excess allowance over regulatory you see elements that one.

That is new I. I take it.

Because I didn't think you were able to do it before so correct me if I'm wrong and is that something that's temporary or is that something that will will it go away at some point in time in the future or is that something that is permanent.

Yeah. So it is a it is knew it was one of the when are they changes announced by a biopsy as we were sort of going through this Sunday I can't speak to a it's due to its permanent but a it was introduced at this point in time.

As a as it was sort of the drop in the and the buffer the countercyclical buffer to enable banks to support clients and so that's the that's its purpose as stated at this point it but I can't tell you can speak to what happens in the future and with the regulators may deal with that what I will speak to is from from our perspective.

We are continuing to watch the portfolio migrations and as I said, we do feel pretty strongly with that would not trajectory forward. So that for us represented that sort of at 10 basis points. Now if you will until we do see as we see those migration numbers that I referenced with portfolio deterioration.

Part of it is that I'm not going away and then going back to see makes question right, you're starting to get into territory of taking a deduction again, but as I kind of sad to Sumit <unk> <unk>, you know I wouldn't focus on all the noise on which of the driver that is underneath it is just as downgrades happen.

Ladies will go up and the easy hours will go up in both of those items. Together are included in 100 basis points dish number for the wholesale book I gave you when it is significantly lower than that if you did a one band on our entire retail portfolio on top of that so even with all of that combined which I'm sure. You can appreciate is a very significant threat and.

At that point, we would not be relying on any had I sort of add backs here I think you would you would see on capital ratio well above that regulatory minimum.

Perfect and so just the benefit from that add back the 10 basis points is that.

That's correct.

Okay perfect. Thank you very much.

Thank you.

Your next question is from Mario Mendonca from TD Securities. Please go ahead.

Good morning, Sean your answer your opening comments sounded a little different too from the answer.

Maybe just help me understand what you're doing that.

Opening comments that you expected the no change or no material change in that performing loan allowance going forward and then in response to one of the questions. I think you said you expect no change in the total allowance going forward can you can you be more specific what's funny Rick.

So we don't expect to add to our performing allowance going forward.

Like if if if things play out the way we anticipate them to then this would be where the <unk>, where the allowance level would be and then you would migrate from stage one stage two into a stage three impaired overtime as things play out so we wouldn't expect forensic.

Since to take significant incremental provisions in coming quarters as a function of increasing our USIO. We believe we've reflected at least our current view in our 3.3 billion.

When says.

Yes, Sir.

One level one other thing I've struggled during this reporting season to understand the extensive which.

Banks take into account migration or.

Anticipated migration in establishing their pcls, but the formula on T cells, and what I'm getting at is.

When a bank revises the unemployment number materially higher.

By definition they have to assume there's migration into like there's there's got to be downgrades and theres got to be defaults. So it just seems logical to me that migration has already contemplated when you change your forward looking.

I am I not thinking about this correctly.

Yes, so the way or I think you should be thinking about it is I talked about in my in my prepared remarks about the a judgment we exercised in looking at a bottom up analysis across various sectors in the portfolio.

The analysis that was done their use a number of different tools stress testing et cetera to get a view as too because we can't rewrite the book all real time at the end of the quarter to get a view around well what would migration potentially look like.

And come up with a view around that to then determine some level of judgment.

Overlay to add to the provision so we've we've done that in the best way we can.

Based on the the understanding of the risks as we.

As we understand them today, so that's where you would see that anticipatory.

Migration.

Analysis come from at least the way we've done it.

The other element of the adjustments was all the government support which goes the other way.

And we've we've including a you know in that bottom up analysis as we thought about it. We also considered at least how that government support would play in that more bought him up type analysis, but that's how we've we've come to our number but where you don't see like there's no there isn't that you'll see it from a capital model perspective.

Other than the impact of the PCL the migration in terms of R.W. way will happen over time in the future is based on the experience.

Yeah, So maybe Mario jump in with the accounting side, a little bit so you're right in that <unk> airports nine basically requires us to determine right how much of the portfolio stage. One how much has had significant credit deterioration. So its stage two and then hold one year in or lifetime as appropriate for each of those so to do that.

You have to have a good view Watson stage, one and whats in stage two today and that's where Sean described all the analysis that we did to do that because we couldn't take for example, the larger portfolios like commercial and so forth in one by one related every client in the quarter, but the analysis. The team did a on the risk side really estimated that four.

What we think would have been migrated and that's captured a in in our overlays.

Then in the models capture some of that future migration, particularly on the retail side driven by asked the lies but on the commercial corporate side I really captures where we think the book would have been as of this quarter.

I think I'm not took me a long way toward I understand you're thinking.

Yeah.

Thank you.

Next question, if something Garko.

You can each kind of RBC capital markets. Please go ahead.

Hi, Thank you. Thank you for extending the call to actually get to my question I promised it's an easy one or.

Quarter over quarter.

It looks like your credit risk.

Our WH increased the least of the big six banks.

And our juxtaposed against TD, which reported today as well Youre credit risk our to do is up 4% quarter over quarter and cheeses up Tan.

Now what are the things that I know in your crap capital supplemental this is on page five.

As you guys used some sort of client relief and government support programs.

To mitigate the increasing R.W. weight and TD makes no mention of that so I wonder how much did that help you contain the R.W. way this quarter, if you can quantify that.

I don't go through such a good morning, and that you're welcome on extending would call. So I think you're referring to the capital capital page as he said page five into pillar three pack, yeah, I want to make it very clear that we did not get any capital benefit from the program.

So whether it's the deferrals that we provided or the government programs.

We did not Oh, we followed the guidance on both of those and so whether you look at our provision that Sean spoke about or you look at the capital or the way sort of impact to that.

We did not take any benefit from that and so what you're seeing if you're referring to some of the changes here. There was some changes that went to the negative side on credit quality as some of the migrations happened that Sean mentioned and you see that that 95 number there on asset quality that's now.

No the off against that a there is a number of but.

There's a number of sort of improvements on the retail side, mainly due to ization. So what you actually saw its utilization rates dropped as lower I referenced earlier, just the way the capital models work as that provide some credit benefit which netted off against the corporate commercial that went the other way.

But what are what we what you see here is that migrations that may have happened in terms of the delinquency buckets were sort of frozen as was the guidance provided by LSV on this but that doesn't necessarily mean that there was capital benefits derived from that and as Laurent mentioned a lot of those clients, particularly on the retail.

Right I still making payments in our Delevering late Delevering, which is providing a bit of a positive from a capital calculation perspective.

But as that portfolio comes out and starts add so either.

Back to payment or if it does deteriorate and we expect there'll be some of both right as there is for the portfolio that hasn't gotten any commendation. Some people will these challenges through this crisis in some won't but all of that will get reflected as we experienced.

I guess I guess, one I'm confused by that says here in Q2 20 credit mitigation is.

Credit migrations were mitigated by sea IVC client relief and government support programs.

So I I don't understand it.

I mean, the verbiage seems to suggest that there was mitigation.

But you're suggesting that there wasn't as oh.

I should read into that.

Yeah. So darko <unk> that would've done is that refers to you know how do we not provided that the leaf maybe some folks would have had some cash flow trouble and they would have moved down delinquency buckets and then similar with some businesses.

But what we've done is we have frozen the status and again. This was the guidance provide affiliate sort of largely frozen the status of folks where they were and we have not as human just speak essentially what we've done right. It's not assume just because they have elected to take the payment holiday that that means that they cannot make payments in their credit has deteriorated.

Good though we have looked at all of the other factors a that would have potentially driven a deterioration. So on the retail side credit scores Utilizations you know all of that stuff that service. So goes into the models and it gets calculated.

And so both on the provision again I'll state that because it is important so thank you for bringing it up.

Provisions and capital we were very deliberate as per the guidance, if a company or an individual would have deteriorated regardless of deferral or no deferral.

We would have reflected that and if they took it deferral alone we're not going to assume they deteriorated. We're gonna look at the underlying credit quality.

Okay alright. Thank you. So so it's possible that other banks are also doing it. They just haven't explicitly printed that into their engine. There. So I guess is is another way to think of this as well but.

I I just I'm just trying you know the answer to that Darko.

Yeah, I, just I'm, just trying to understand why your credit risk.

Our WH simply it I mean, it's an understatement to say that quarter over quarter. The world changed and you know, we're seeing significant credit risk R.W. way inflation.

Like yours is just so small relative to everybody else. That's why I was curious yeah again, I don't want to speak to the other banks Darko, but from what I remember glancing through some of the sub packs. There was if you look at the credit quality. Some folks actually saw net credit quality improvement and they see T. One ratios and arguably a reduction we saw we saw in that deterioration I set out.

The five basis point drag to see two one and that that 95 do you see here on a net basis.

Yeah, Okay. Thanks, very much rail.

Thank you.

Fair enough questions at this time I'll turn the call back over Q2.

Thank you operator, and thank you all of your for your very detailed questions.

Before we end this call I wanted to thank are incredible C.I.B.C. team. Thank you for your dedication and relentless focus on helping our clients achieve their ambitions. During these very difficult times.

Our immediate focus has been from on providing our clients with a relief they need to deal with the short term and talk to the pandemic and I think we made that very clear both in the remarks as well as the answers to your questions.

We're committed to standing with their clients into communities, we serve throughout this recovery phase.

We know will take time and resolve to get our economy and our clients back on their feet. We as a bank have risen to the challenge and we're going to continue to do so as we fully support our clients and what I know will be an economic recovery ahead of us. So thank you and take care everyone.

Thank you.

The conference has now ended please disconnect your lines at this time and thank you for your participation.

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