Q2 2020 Earnings Call
All participants please standby your meeting is ready to begin good afternoon, ladies and gentlemen, and welcome to International Bank. It's kinda that second quarter results conference call I'm not like any meeting over to Miss isn't endocrinology Vice President of investors Relations. Please go ahead Mr. lousy.
Thank you operator, good afternoon, everyone and thank you for joining us so they didn't to date exceptionally this quarter.
Presenting to you this afternoon or do we buy Shaw, President and CEO, Bill Bonello, Chief risk Officer, and just stay Baja Chief Financial Officer.
Following our presentation, we will open the call for questions.
Oh for joining us when did you any session or they find a shocking to see bloodshed co head of fiancee banking Mustang <unk> head of wealth management.
Hey, how and then use your <unk> co head of financial markets, and John <unk> Senior VP finance.
In order to respect physical distancing, we're hosting the call it in a different than usual, which may impact some quality. We apologize in advance of this result in any technical difficulties and we thank you for your patience.
Please also note that the presentation is slightly longer this quarter as we wanted to address a few key topics.
Again this environment.
So before we begin I refer you decide to have our presentation, providing our disclaimer regarding forward looking statements with that let me now turn to call over it should we have actual [noise].
Excellent thank everyone for joining us this afternoon.
Well there is going through extremely challenging times bolt on the health and financial perspective.
Our thoughts or would those suffering loss or hardship due to covert 19.
Since the beginning of the current crisis as for our focus has been and continues to be onto well being of our employees our clients and are committed east.
Our mission of putting people first truly resonates with what we are experience today and discounting yasir not decision making.
I am extremely proud of how fast we adapted to this unusual and difficult environment.
This will not have been possible without the profound cultural and digital transformation that the back over the past few years and the strong engagement of our employees.
I wish to sincerely, thank all our people, but the way we have matters. This crisis today and also our clients for navigating with us through the situation.
Governments regulatory bodies and banks have collaboratively I've collaborated sufficiently to rapidly implement extraordinary relief measures to out Canadians navigate through their current uncertainty.
We are deploying exceptional efforts to help our retail and business clients.
We have been providing financial release measures were most needed we have been extending our balance sheet and we continue to support capital markets I mid volatility.
Now, let me say a few words on the province of Qubec, while the lock down restrictions have been more severe since the beginning of the covert 19 crisis situation is stabilizing and the economy is gradually reopening.
Okay forward outlook in our whole province remains favorable based on structural strength, including sound public finance and well diversified economy, a lesson data consumer and the well developed financial support system for local businesses.
We entered the crisis on a solid footing with strong capital and liquidity positions strong credit quality and a defensive positioning.
Our businesses I've shown the resilience and are performing well and extremely challenging times when revenue growth across all segments led by financial markets and wealth management.
In the second quarter pretax pre provision earnings were up 20% from last year, demonstrating the banks earnings power.
Well, our underlying pretax pre provision results were strong we have adopted a prudent approach to provisioning considering the uncertain macroeconomic outlook.
As a result, we significantly increased our provision for credit losses, and recorded 504 million for the second quarter more than five times recent levels.
Nevertheless, we are maintaining strong capital and liquidity levels, we did see tier one ratio of 11.4% at the end of the second quarter.
Last March Osprey announced a number of actions to support these ships and supply and credit to the economy during a period of disruption.
Banks are expected to use this additional lending capacity to support can in businesses and household not to increase dividends and or buy back shares.
Consistent with this expectation the bank pause buyback activity after having repurchased 525000 common shares during the first half of their fiscal year.
Earlier today, we announced a quarterly dividend of 71 cents per share on change from the previous quarter.
Turning now to quarterly performance by business segment.
Our PNC segment delivered pretax pre provision earnings of 389 million up 3% year on year.
We must look at the second quarter in two parts before and after the beginning of depend demick.
We were after a very good start through the first half.
As of mid March our business was impacted by lower client activity in the context of the increasing strict locked down measures encouraging Canadians to stay at home.
These measures had a significant impact on the momentum of several businesses.
Since the very beginning of the lock down we have been supporting our retail clients with more than 110000 deferrals today, including on mortgages loans and credit cards.
We have been able to offer clients uninterrupted service, thanks to strong employee mobilization as well as talent mobility between branches call centers.
And operations teams.
The new reality I was also acted as a catalyst sparing increase its digital adoption and effectively accelerating our digital transformation.
We National Bank is also committed to supporting its business clients.
We have been prudently extending our balance sheet. So our commercial in corporate clients with 3.8 billion drawn into existing facilities during Q2, and 1.8 billion in new lending.
In addition, we have provided principal payment deferrals for over 3000 business clients and we are participating and all applicable government programs to illustrate we have now provided an excess of a billion dollars to over 20000 Smedes just through the C by program.
I'm proud that National Bank has been ranked as number one in client satisfaction across Canada for small and medium size businesses since the crisis, but yes.
Our wealth management segment delivered is robust quarter pretax pre provision earnings up 23% year on year.
Our business mix and client facing strategy proves successful under current environment.
Transaction volumes were particularly high a national Bank independent network and National Bank direct brokerage and solid inflows into a full service brokerage and private banking businesses more than upset market declines.
We are pleased with the strategic and technology choices, we have made in the past.
Which are giving us the resilience Rick required to be there for our clients through the uncertain times.
Our financial market segment continued to delivered strong performance with pretax pre provision earnings up 70% year on year.
Our global markets franchise was well positioned going through the crisis and delivered particularly strong results market volatility observe in the second half of the quarter translated into a significant increase in volumes across all businesses.
We also delivered a solid performance in corporate and investment banking, driven by M&A and government debt underwriting.
Overall, I'm very pleased by our ability to support our corporate and institutional clients and very challenging times.
Turning to our international segment credit <unk>, our resilient operation well positioned to perform well throughout the crisis.
Credigy reported the decline in revenues, primarily due to mark to market adjustments to the fourth this sort of fair value of certain assets.
The underlying collateral on those investments remained strong at fair market value fair value should increase when markets stabilize.
In Q2 increased provisions reflect changes in the macroeconomic environment.
We remain very comfortable we creditors book, which is well diversified to limit the downside impact of covert 19 stress specifically credigy has limited exposure to unsecured assets significant exposure to asset classes less correlated to consumer economy.
And investments with structural enhancements that provide further downside protection.
In the current environment credit G.'s earnings will likely be flat. This year. We are looking forward. We continue to emphasize disciplined growth and we are confident in credit visibility to generate growth.
And revenues and earnings in the medium term.
It'd be a bank continues to grow, albeit at a slower pace.
The coven 19 health situation in Cambodia stable, it's stabilizing but some sectors of the economy I've been it's hard such as manufacturing and tourism.
Slower economic growth in the country has led to slower revenue growth at <unk>.
It'd be a entered a crisis was strong capital and liquidity position.
In terms of credit it'd be is benefiting from what has been historically, a prudent provisioning approach and the vast majority of its portfolio is secured.
Financial release measures have been offered to customers and 6% of clients I've taken advantage of those programs with 95% of those that a that shows that program continued to pay interest on their loans.
We expect aviate to generate slight earnings growth for the current fiscal year and I'm confident that they'd be able to return to above growth above average growth once decline the global health.
And economic situation stabilize.
Overall, we are very satisfied with the performance and positioning of our international activities.
To conclude there remains significant uncertainties regarding the severity and the duration of the current crisis.
At this time it is impossible to predict its full impact on the economy and under banks futures performance, but they are clear signs that the economy is rebounding from April lows.
Our primary focus will remain on supporting our clients in our employees and under well being of all our stakeholders, while managing the business with our usual prudence.
And these uncertain times I am confident.
Confident and the resiliency of the bank and the agility of our teams across all business segments.
The strength of our balance sheet, the quality of our credit portfolios and our defensive positioning also provide us with comfort as we navigate those difficult waters.
Based on everything we see today.
And the earnings power the bank I'm also confident in our ability to maintain their current level of dividends to our shareholders.
With that I will now turn to call over.
I mean, it may see Louis and good afternoon, everyone.
In the Investor deck, we provided additional insights this quarter on our credit provisions and allowances as well as lending exposures and a few sectors most directly impacted by the code at 19 crisis.
Before I begin to review the slides I'd like to repeat some key messages that we've discussed in the past as we approach. The later stages of the credit cycle.
We maintained and underweight position and unsecured consumer lending.
We maintained an overweight position and our own province of Quebec, because we believed to Quebec economy would be resilient to stress given lower home prices and consumer Doug.
Greater share of two worker households, and the government with a strong fiscal position that would be able to provide support during an eventual downturn.
We maintain discipline in our commercial lending activities keeping growth rates to below peer average, particularly in certain sectors, such as commercial real estate.
We reduced the size and rebalance the composition of our oil and gas portfolio.
And since I have for US nine was implemented we tried to be consistent and prudent in building allowances on performing or [noise].
The Cobiz 19 crisis I began earlier this year is much more complex and for reaching than previous downturns, we've seen.
However, we feel that the decisions we've taken over the past years like a defensive portfolio mix prudent underwriting and disciplined growth rates have provided us with resiliency needed to support our clients in the domestic economy through this downturn.
Please turn to slide eight.
We continued our prudent approach to provisioning this quarter in the context of the uncertain macroeconomic environment.
Total provisions for credit losses increased to 504 million in the second quarter or than five times that pcls registered last quarter caused primarily by a large increase in provisions on performing loans.
The most significant driver was the revision to our forward looking macro economic scenarios, which generated more than three quarters of the 391 million or 99 basis points a provisions on performing loans.
[noise] retail performing provisions were $111 million, driven primarily by revisions to our look for unemployment.
Non retail performing provisions were $254 million driven by a broad based deterioration in outlook for a number of economic factors.
In the international sector, performing provisions increased to $26 million.
Compared to Pcls increased to $120 million in the quarter as specific provisions were taken in a number of non retail files across several several industries and provinces.
Given the significant increase this quarter, we provided a more detailed summary of our allowance for credit losses on slide nine.
As a reminder, under I for US nine the way, we calculate AC Els is as follows.
We start by developing Threed forward looking economic scenarios and assessor probability for each.
We run our portfolios through arrive for US nine models to compute Hcl based on those scenarios.
Yes, the adequacy ever imagined overlays, which can reflect additional factors are uncertainties.
Then arrive at the total AK steels for performing loan portfolios.
The result of this rigorous process was an increase in are performing loan allowances to $978 million, including impaired and P.O. <unk> total allowances for credit losses reached 1.2 billion.
57% increase from last quarter.
Breaking down this total Hcl portfolio type you can see the increasing allowances for retail portfolio was 30%, reflecting the underweight position and unsecured consumer lending.
In the non retail portfolios totally sales increased by 90%, reflecting both the sudden change from benign too severe economic conditions as well as prudent provisioning and highly uncertain environment.
Looking at totally sales by stages performing loan allowances increased by 67% from last quarter, representing about three times coverage of the last 12 months impaired provisions.
Nonperforming allowances increased to $302 million, representing a 39% coverage of gross impaired loans.
All told with these significant increases this quarter, we're confident that are allowances prudently reflect the potential impacts on our portfolios of deterioration and uncertainty in the outlook for the economy.
In trying to assess the adequacy of allowances for credit losses, it's important to do so in relation to the size mix and risk profile of the portfolios being assessed.
On slide 10, we provided a few metrics to help investors in that assessment.
The ratio of total allowances to total loans increased to 77 basis points out the total bank level.
One should remember that this ratio uses notional loan balances and is not risk based.
Comparing this ratio across banks and banking systems, it's important to consider portfolio composition and risk profiles, such as the nature and weight of residential mortgages and credit cards.
A more risk based approach that we've talked about on previous calls is the ratio of performing AC else to last 12 month provisions on impaired loans, which reached about 2.8 times at the total bank level and about three times, excluding the international segment.
We've provided to break down excluding the international segment, given the impact on the ratios from the amortization of Credigy is unsecured consumer portfolio that occurred over that period.
Since the beginning of I press nine we've tried to be consistent and building prudent allowances and think that this is reflected well in these ratios.
Turning to slide 11.
Our gross impaired loans increased to 780 million or 48 basis points in the second quarter.
Formations were pretty stable in the retail and international sectors. However for commercial and corporate in addition to normal course formations. We revised our view of the likelihood of full loan repayments and a number of files managed by a worker group moved them to impaired status and took specific provisions.
Details of our loans and sectors most directly impacted by coated are provided on slide 12.
Exposures in most of these sectors are quite limited and we're working closely with impacted clients as they navigate through this difficult time.
Slide 13 shows details of our portfolio in the oil and gas sector, which has been impacted both by the code at 19 crisis and the recent price war between major international producers.
Hello oil prices have seen a significant recovery from recent historic lows. It remains a challenging environment for producers and services.
As you know over the past five years, we've significantly reduced the size of our lending to producers and services and rebalance the mix in our portfolio towards larger cap clients and investment grade pipelines.
Some data on payment deferrals provided to clients is on slide 14.
Our employees had been intensively working with our customers to provide relief measures to help them face this unprecedented situation.
Our data it looks in line with industry data published by the CBVA when accounting for our market share for portions.
Details of our market risk exposures are provided in the appendices.
Trading for increased through the quarter, averaging about $9.5 million and we experienced nine days with trading losses.
In an extremely volatile markets and where the majority of staff working from home. The team performed remarkably well and was able to provide market, making and transactional support to clients throughout the quarter.
In closing.
The economy has changed from benign too severe conditions in a remarkably short period.
And the monetary and fiscal policy responses have been unprecedented in size and speed.
These changes will generate volatility in provisions on performing loans has that we've seen this quarter.
In the end performance of our credit portfolios will I think be evaluated by the amount of provisions on impaired loans that will occur we'll incur over the next couple of years.
Those are surely be higher and lumpier from quarter to quarter and what we've enjoyed over the past few years.
However, we believe that having maintained a defensive posture in product and geographic mix.
<unk> lending portfolio growth and having prudently built allowances to help offset those future credit losses.
Have a resilient position that will enable us to continue supporting our clients through these challenging times.
I'm not I will turn the call over to just left.
Thank you Bill and good afternoon, everyone.
Life of the current environment will focus my remarks today on capital and liquidity beginning on page 17.
We entered the crisis with a robust capital and liquidity levels, allowing us to support our clients in DC challenging times.
Net income generation net of dividends, but excluding provision for credit losses was strong.
Across all business segments in the second quarter and added 52 basis points to our Stevie Wonder issue.
This was offset by the provision for credit losses, mostly on performing loans, which deducted 41 basis points of CD.
Risk weighted assets grow, which I will come as an amendment was primarily driven by credit risk and reduce our CD one ratio by 70 171 basis points.
During the quarter pension plan at a positive in the back on capital and we also benefited from a regulatory measure on Tcl amounting to 23 basis points share buybacks were minimal this quarter. We ended the quarter with a solid CD one ratio of 11.4%.
Now turning to risk weighted asset growth on page 18.
Excluding foreign exchange or risk weighted assets increased by approximately $5.5 billion during the quarter with the largest increase coming from additional lending and drawings on committed credit lines as we support our business lines through the crashes.
Our to believe they also increased following our decision not to renew a serious securitized credit card portfolios.
Churn during the second quarter since market conditions are not favorable at this time.
Do you want impact was 12 basis points, which we expect to recover when market conditions stabilize.
Now turning to page 19, our total capital ratio stood at 15.5% at the end of the second quarter. At this time. Our goal is to continue investing organically in our different business activities.
Just five deals for 10 T., we are facing we are confident that even older deteriorating economic conditions, we can maintain capital levels well in excess of regulatory minimum requirements for the rest of fiscal 2020.
All liquidity, though.
Our liquidity coverage ratio stayed strong during the quarter at 149%.
Total deposits continued growing healthily during the quarter with strong inflows of stable customer deposits essentially matching to draws from our corporate and commercial clients.
In spite of the uncertainty surrounding the economy conditions for the rest of the year. We currently anticipate LCR to remain high on till the end of fiscal 2020.
In conclusion, while much uncertainty remains to bank has strong only lying business fundamentals and has performed well to the onset of depend dimmick adapting to a new reality, we have a solid balance sheet strong capital and liquidity levels and we have back we are back to buy the earnings power of all or.
Business lines. This puts us on a solid footing to support our clients through these uncertain times on death, I'll turn the call back to do operator for acuity.
[noise] operator, we're ready for questions.
Thank you, we'll now take questions from the telephone lines.
So the question and you using his speakerphone, please lift your handset before making a selection.
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It's been start one at this time for any question there would be brief pause other participants register and thank you for your patience.
We had its first question from Scott Chen from Canaccord. Please go ahead. Your line is open.
Good.
Let me just on the.
International.
And the mark to market.
Assets can you give us examples on on some of those assets that were marked down and that you expect that that could recover the market recovery.
Sure John do you remember, which show which portfolio was had the fair value adjustment reverse reverse it was I reverse mortgage portfolio Scott.
Okay, and just just briefly on the capital market side.
Were very strong was underwriting.
Government.
Underwriting and maybe kind of talk but the pipeline you're seeing post quarter.
Those.
Sure I'll, let Howard any answer that.
This year the question today I Didnt think.
So yes, mainly that's for sure. Although we did get some some new equity issued during the quarter, but the growth mainly came from a from the debt side and going forward. I think we are seeing a pretty good pipeline on that front I don't know Denise you want to know exactly I will continue to see it.
Big issuances schedule, Florida provinces, obviously because of all those probably under the put in place well also on the corporate sector. We're seeing a us no since the middle of March up to now very very big calendar of a new issuance coming to the market.
And the last thing is you know, we've we've been saying that publicly we feel that theres a need for equity into system.
Two to got to navigate a to their crisis. So we feel that at some point, we've started to see a little bit more equity issuance.
But we you know over the next few quarters I think there's a scenario that I think it's increasingly probable that we'll see a you know hopefully a revival of the of the equity capital markets business as.
We see more and more equity a being issued either to proper balance sheets or to finance acquisitions.
Got it thank you very much.
Thank you next question is from Devon, They sign from National Bank Financial. Please go ahead. Your line is open.
Hi, good morning.
First question for either live or do see it's still early but the Qubec is one of the provinces, but the open reopened.
There's more ambitious will you than some of the others and wondering if you're seeing any any trends in your business. There can you could talk about whether it's a customer behavior in terms of.
Spending on borrowing habits or any shifts in the deferral numbers, but the everybody's going to be looking at this this quarter.
Thank you.
Yes, good bad its Lucy so again, I would say that our assumptions evolve on the weekly basis with the pace of the reopening measures implemented into different markets. So let's see we my answer.
Making three components of customer behavior. This is one would be loan activity and then the could it be easier and also the customers liquidity position.
So in the past week, we've seen positive signs of recovery known as activities.
Where we see a slow down not collapses, so and to give you some colors and the week of April six we face rock bottom in terms of activity. So mortgage originations were down 50% year over year that tweet auto lending was down 80% year over year as well the credit.
<unk> and purchase volume were down 35% month over month compared to February.
And we have seen significant improvements since then and as of last week. For example, mortgage originations are down 5% year over year and other loans are down 35% and it's also interesting to see that the number of transactions improve quicker than the volumes going south and do not follow competing answer.
Same trend, so that implies and to me that growth activities coming back, but evolving lower amounts so willing to those behaviors from consumers.
And on the credit card purchase volume and we are down 3% compared to the pre convened week. So clearly we ran from pessimistic two more optimistic in terms of loans activity, but although it's encouraging we don't expect loan originations to come back to that even precluded before the end of the year.
Behavior on credit I would say overall, and we see prudence usage of unsecured credit.
I think weve people in roaming Prudence, and then Enbridge Wendy Ken sometimes using some of the deferral.
And also reevaluating their willingness to take more financial risks. So I think we will keep continuing to see that prudent behaviors.
And to be honest, there isn't deposit than money into cash accounts, so liquidities there.
And all you know I think it sounds like you said, we've been stickiness cellphones deposit so it's very encouraging.
Thank you for that very thorough.
I think that's a good morning good afternoon.
[laughter], we're glad you noticed [laughter].
All day.
My question then for Bill, it's a when I asked him another bank.
It's all of them this quarter.
We were kind of saw what we expected to see this quarter big Spike in provisions or can you give a glide path for what what you see this over the next few quarters or as far as you can you can tell him and what the thought process is behind the look and I'm thinking specifically of the other presented the.
Rule.
What was the deferral so very high.
You are the relatively lower but there are so high.
Some of that might be toxic old people just taken on payment holiday and how you see that evolving over the next few months as it relates to your critical.
Thanks, Gabrielle break down the question in a few parts.
First in terms of the path on on provisions.
With the information we have now we would expect to performing provisions to be much lower in the coming quarter.
We aren't giving a targeted range for pcls, because there's so much uncertainty in the path of reopening and the and the.
Following the effectiveness of Oh, the fiscal and and government programs has put in place.
However in the next quarter. If there is no significant change in our and our outlook for that macro economic scenarios and performing provision should get back to being driven by portfolio growth and and migration.
To give you a idea without giving any any target ranges or anything but if you look at the M. DNA and page 74, we gave a disclosure on our.
Sensitivity in the to the different scenarios.
And you'll see that even if we waited pessimistic case, 100%.
The increase in the Hcl would be less and much less than it was this quarter. So we're ROE are performing allowances will be driven by our view of the information that we have at the end of next quarter and our outlook for the for the future, but we would expect them to be lower than certainly than what we saw this quarter.
For the for that.
Hurls maybe.
I'll quickly.
It's a it is uncertain, we haven't had and we haven't seen such a level of deferrals before we definitely have experienced with smaller deferrals with think floods in fires and our experience in those smaller cases has been very very positive. However, this is a this is.
Significantly different one in though in that although unemployment has has.
Increased dramatically.
There is an expectation that it may be temporary in many cases, there certainly is going to be some some more permanent damage to some sectors and some areas of the economy, but a lot of it could be temporary the amount of cash that was put into the system as Lucy commented on we're seeing good behavior.
The usage of lines of credits are going down credit card. So utilization is going down. So the prudency that Lucy described is one data point that we're looking to try to assess what will happen. After the end of the moratorium and when we see lines of credit being paid down theres cash coming from somewhere.
There is that from a jobs are there continue to receive.
Their income or they are receiving the cash from the government programs.
Was there some that were using the deferral requests more tactically given the uncertainty that everyone is facing in March it was a good idea and I think and giving advice to clients to take some perhaps a little bit more flexibility and for the most major cash flow.
Mortgage payment to give yourself, some optionality and it looks like some of the usage of those deferrals was really tactical and given the uncertainty and and we have had many cases, where clients now that they're wanting to not run significant that are asking to reverse the themart coriums and come back to their regular.
Payments so the it's all its data it's early I'm. We're following it extremely closely as Lucy mentioned.
And and will develop a our view more over the next quarters, we see continued to where the economy and where the consumer behavior goes to answer your question Gabriel.
Yes. It does it could go a long more along with more on that but.
Other people with you so thanks.
Thank you next question is from Meny Grauman from Cormark Securities. Please go ahead.
Hi, good afternoon.
Just wondering about.
Changing outlook.
On your real estate footprint as a result.
The co. This situation so the stats in terms of work from home.
Also we know about.
An increase in digital adoption, so kind of in two parts have you changed your view you see any potential for more significant savings from a reduced no state footprint and maybe digging in more specifically in terms of implications for the branch footprint as a result of.
This.
As big an experiment.
And it seems you I'll start with then maybe to branch footprint and we could come in some more broadly so on the brands I would say we were already working two things in paring down before cold and so we were transforming the in brands experience and we add that to adapt it to some colgate on that Sun lets me. We're also working on.
Anything on physical networks, and we already and its we you plan on this.
So we were active on dance funds and our plans I mean unchanged. So we have been rightsizing, some urban markets, where we might on signs redundant locations. So we consolidated a couple of sites and you see dancing on brands phones in the something and so but that doesn't affect our friendship. So could we change our plan now.
Presents Columbian or should we change it and so I think we will pursue once we had planned for 2020 and we will see later in 2021 and beyond.
But for me one important assumptions for the future will meet and when the consumer keeping under their new banking behavior poets company.
And then and I think when their digital Adamson movement.
It's very positive, but when it accelerate when stabilized since we've heard back I think thats at this point, it's too soon to confront.
I don't actually one and we comment more broadly and on terms of that office, a I think we have flexibility around the new head office for a working remotely and where that's why we sold our old building last summer and not to be two overweight to and all real estate portfolio and around the new tower, we have.
Depending of how much a working remotely or we will employees will be doing going forward, we have flexibility around some of the space in the new tower.
Thank you.
Thank you. The next question is from Sumit Malhotra from Scotiabank. Please go ahead. Your line is open.
Thanks, guys good evening.
I wanted to start with bill maybe or for Louis and then when we compare the increase that you've been acted on the performing portfolio. Today I think it was exactly four years ago. This quarter that you have the.
The increase in this or the enactment of the sectorial provision that was taken for energy and after you to that one the provisions required for that portfolio going forward, we're quite small actually I think you ended up.
Being able to reverse or move some of it later so when you tell us that the the management overlay was sounds like a decent chunk of the remaining performing portfolio. After the change in scenarios. Just curious how would you compare these these two different models. The sectoral four years ago, which allows you to deal with energy in one shot.
And what we'll see in the performing book going forward is it really that management overlay piece that you think is the the one that gives you flexibility to bring this down now that the scenarios have been changed.
Hi, some at all it's it's Larry I'll start with a non technical answer and Bill will give you the more technical one.
As you know as a team a once we identify an issue.
We are we tend to move very proactively to address it.
That's why we did four years ago and thanks for reminding me of the of the anniversary.
[laughter], we've been doing this alone.
[laughter], but I think we.
Going back further when we had the BCP issue in 2007.
We went after that also quite aggressively if you recall.
In terms of provisioning.
So I think thats.
Our style of management to try to identify an issue and a and address it aggressively.
Now suffice it to say that this one is a is more complex.
Quite a bit more complex than a than the oil and gas situation for years ago or even DPCP.
You know in 2007 2008, so you know.
Hopefully, where a were oh, well well ahead of it but it's it's too early to say that where we stand exactly on it bill anything you want to.
Finally on the issue of management overlay isn't I think let me answer the question very well I'd just remind you that there there is many pieces of the process around I have for US nine there's the scenarios themselves, which are an important aspect of a of driving the AC else, there's a probability attached to that theres the models them.
Sounds, but are important and the magnitude of the pcls that are taking them performing loans and there's the management overlay. So I don't want to give you the impression that any specific whether it's her severity of our hours scenarios or is the models themselves for or what but.
When you add them all up a and the scale is calculated I think you can look at the area. Our slide 10 to related to the risk positions and see why we're comfortable that weve been prudent in developing those those allowances.
And that's true, but yeah. That's very good and then I think gave reference that we could probably go into these a lot more but we've got a few more calls this week that we can we can we can try or like with a one more on the other obviously important issue is capital I would say for national the.
The increase in the Seattle and the the transitional arrangement, obviously helped I want to get to the next piece that we're going to focus on which is going to be the R.W.A. migration. It doesn't look like to me at least in some of the credit density calculations that we do that you actually had much of anything at all and obviously this quarter was the one that focused on.
The drawdowns of corporate and commercial lines. So maybe this is for just <unk>.
I'm just curious as to what what type of speed you expect.
That R.W.A. increase to take as a result of credit migration do you feel that the R.W.A. growth you saw this quarter.
Is something that can be replicated by migration or is it likely to be at a more.
Reduce pace than that.
Like you said this but Ah well I will then left a bill answered. The question. Okay. Yes, just in terms of migration of and thinking about the pass.
Through the downturn I.
I would expect migration to two or to happen over several quarters.
I'd like to performing Pcls with a significant change where they're performing PCL says more front loaded. So I I think what you saw in terms of our WH growth on the credit side. This quarter a lot of it was because of the draw downs is the magnitude of the draw downs and a new facilities provided to clients here.
Beyond.
They tended to be a larger corporates that were had been issuing NCP markets and others that that couldn't any longer and use these facilities. So the quality of the draw downs were very very high.
And ER and some of those Dropdowns were paid back during the quarter. After the markets. So opened up so for the for the migration I think over the next few quarters it will be different than this quarter. It would be more on it'll be more based on how the economy progress is the speed at the reopening the success of.
Fiscal programs to stimulate the economy and support certain sectors.
And it won't be a won't be a one quarter story.
When you mentioned you.
Yes, when you mentioned you expect to say above regulatory minimums on CD one.
What were you thinking is up 10% as before.
[laughter] wells is saying.
So I don't want to give you a number essentially because we need to be prudent with all those scenarios. There so emotional uncertainty right now that.
We don't want to provide a specific number but a of course, we you know with the scenario is that that we around where credit assured that would be able to too.
[laughter] maintain or capital level, well in excess of regulatory minimum.
And.
So it's it's for capital, but also for liquidity.
Thanks for your time goes and appreciate your flexibility on a on the reporting time Tonight.
Thank you.
Thank you. The next question is from Doug Young from Chardan capital markets. Please go ahead.
Hi, good evening.
Maybe sticking with regulatory capital one thing that just caught my eye was the decline in our WH related to market risk, which just surprised me in light of the environment that we're in I would have expected to have gone. The other ways. So I'm just curious as to what what happened there and then you know on the market risk component of it the credit you talked a bit about the mark.
At risk component of how should we think of that evolving over the next few quarters.
Yes.
Hi, Doug It's Bill I'll start off and then maybe long haul or or is this line can that can comment. So you will have seen the with the volatility in the markets and those volatile days entering our historical harp area that var increased during the quarter and we would expect that far will remain hello.
Got it and little volatiles for a period of time.
As part of of.
Some of the regulatory measures that were given to take this end to end into account. The current situation. Some measures gave some benefit to the capital treatment.
A and B. So we would expect vars to stay high and we wouldn't expect to see a reduction in the same magnitude and risk weighted assets for Mark address going every quarter for sure.
[noise] I guess, it's the regulatory changes weren't in place can you quantify what the impact would have been for market risk in the quarter.
[noise] decision Snine so.
18 basis points.
I call Kevin.
You know our own descending is that the attended the temporary merger will be removed when market conditions have returned to normal so at that moment of course, we will lose their measure.
But remark interest with good when go back to normal as well so it would be positive on the CD one.
But the NPAC, Florida quarter was.
18 basis points as Kevin.
And Doug just one more thing down there the I'm that measure the.
With with our and stress for our there was some measures put in place after the last crisis, which made sense.
As far was a very good one as part of Basel 2.5. It wasn't designed in the intent wasn't two or two I'd be attached to it since a situation where you're currently in the stress scenario.
So the the appropriateness to remain aligned with fee you know what the tool was used for is more questionable. Let me in this environment. So I think the other measures were quite appropriate.
[noise] understandable. The second question Dick you mentioned somewhere in the release that on some of the deferrals, you're not actually charging interest on interest which is the first time that I've I've seen that and it's only for a certain clients that you're not doing that for is that isn't a material amount of clients in which clients would.
With that apply to.
And did that resulting you having to kind of as well build performing loan pcls.
At all this quarter.
Its new C., so on the fruits and on the deferrals you know the yen.
And he tried to entranced obviously, so it's just from that period of the deferral, we gave a release to our to our customers. So to all on mortgage customers. So it's not the question of applying or not.
And maybe a small amount but in principle I think it is it is fair.
The measures we put in place, but do you guys know linked with the dealing with any of the.
Yeah and then.
And the provision.
So just I understand that so that it so that should you not you're not charge. So if you've given interest to for all that interest doesn't accumulate onto the balance in these cases is that correct.
Yes, so I didnt throughout the interest is actually anything to the balance and it is reset.
And as the state of the maturity of the term. So it is not freeze the changing in payment that you me give is not affected when the deferral starting again, it's really at the end of the time that there isn't an adjustment to the payment it sounds.
I may come back on that one off line and then just lastly on it.
Yeah, and then just lastly on 80, a you indicated that earnings will be up modestly in fiscal 2000, even if I look at year to date or anything there were 95 million.
This year and then last year was 118. So it implies the next few quarters, you're in that $10 million to $15 million range for it'd be a and.
Just curious if I'm in the ballpark again, well what would be the big headwind is this more because it's a credit issue that you foresee is this just loan growth going the other direction, just hoping to get some color because that's been a decent growth driver has been a stable part of the business, hoping just give some color on what you're seeing in Cambodia business.
The loan growth to slow we the loan growth has really slowed down. So we don't expect it to go negative.
But it's kind of be you know a low single digit girls probably on the loan side.
And centering on deposits and deposits will continue to grow but not at 30, 40% because as you know there's a smaller a social safety net in these countries. So with a a with the slowdown in the tourist industry in the manufacturing industry people have to use a part of their a part of their savings to.
ER to get through the crisis. So that's the main driver a of as you know it's their current economic conditions that slowing down significantly the growth in deposits and loans.
And why would that cause it like a sequential decent sequential decline because youve aviate put up 54 million just in this quarter and I get there was 20 million of tax item, but if I'm thinking right at 10 to 15 million just looks like it's like the decline would be quite material year over year and I get the slowdown in growth, but it looks like it's actually.
Yeah, I mean, it's going to be negative year over year, not negative earnings but negative growth.
No I don't think so so.
Maybe we were prudent and I want to.
[laughter] fair enough. Thank you very much.
Thank you next question is from Sohrab Movahedi from BMO capital markets. Please go ahead.
Thank you very much and I apologize that to drop off products. It. So if it's good questions have been answered I'll go back at that at the transcript, but I just wanted to start off with.
With with Bill.
Bill lots of talk obviously that that.
The bank had exercise quite a bit of coming into this obviously not expecting this but I think over the last number of cautiously we had said you've seen very selective with.
Especially commercial loan growth for example.
[noise] it is a little bit surprising that you had to increase to reserves so much quite old <unk>.
Can you did you find that a surprise yourself when you were sitting on doing it and what are some of the businesses that we have surprised.
I'm sorry, if you asked that question was answered so.
Okay, Okay, I'm kidding, [laughter] I think I'll start I think.
I think I may have a I think we answered it earlier it was a it was a twofold. It was me and bill so.
Going back to your point.
The agenda today, you know never mind stage, one in stage two losses.
I think the real criteria of outperformance going forward will be stage three losses.
And on that I think you know.
I think as a team we're still confident that we've gotta look pretty good on a relative and absolute basis.
The other things you know survived from experience is why do we identify an issue.
We tend to go at a pretty very proactively.
So started as what we've done with oil and gas that's what we've done we de BCP.
So in this I think it's more the prudent said you see is more.
Our our corporate culture, and the way we've been managing to bank for the ex many last years and we wanted we feel that's the right way to manage the business and that's more a continuation of that.
Way of managing the business then.
You know us being wrong in our forecast or positioning in terms of risks.
Bill.
Yes, I'm, maybe just to add on a technical I think the do we weren't surprised that's the non retail increase was larger than the retail increase I think and.
Taking a about the theory of Iverson I think that's so what was expected I'd point you to a bank account of the S. S FSR, which gave us stress test and that's exactly what they are at forecast as well I think the surprising things. If you think about during the quarter syrup. The the views on.
The severity of the Oh, the economic inputs to the model certainly evolved during that quarter.
So unemployment and GDP or perhaps.
Most importantly, but for the the fact that the non retail portfolio of performing loans increased as a bigger percentage no I think that's just the that's just how it works.
Okay and that I'd appreciate it Satan today I can just ask one other question I mean, maybe outside of new easily the or or as you sound for that matter I mean, I think you've highlighted how much.
A yield will be increase you had in the quarter end.
Pre provision.
So.
Huguely reflective of the underlying earnings drivers away from that reserve building.
I mean you.
Do you care to provide some thoughts as to how you see that trending Poland.
Well, yes.
As you know, it's a pretty a pretty.
We would describe their current environments are up as a going where no one else gone before so this is star Trek finance, that's what we call that a the current environment.
You are doing really well in this one.
You know the episode is not over so oh, so watching for to cling on and [laughter].
So oh listen I think.
First of all the let's let's go back in time, a little bit. We're certainly I think you know a without getting arrogant or cocky I think were digit admittedly pleased with the performance of the business lines during Q2 all of them.
And I think it shows that I think we're we're pretty good at managing crisis, but also I think it's suggest that we made some write strategic choices now I understand that we're not out of this crisis yet so.
We are we're not going to have the Stanley Cup grade on St. Catherines tweets, while the games a sell going on at the Bell Center.
But I think you know I think some of the choices we made the positioning.
So.
In terms of PNC.
I think that some of the stats that.
That Ah you see as stated earlier encouraging in terms of signs of recovery that being said, we know that a net interest income a low interest rates is a you know as a reality we have to deal with.
And that does that is more of a negative for the next few quarters.
Capital markets or as you know on the permanent Bull on capital markets I think that as a business has been grossly understated and underestimated by by a you know many stakeholders and I think that that was demonstrated again and a high fashion and.
In Q2.
I think I look at the fundamentals.
Have a of public finance debt the need to recapitalize managing risks managing portfolios I think the fundamentals of that business.
No, we then normal quarter to quarter volatility.
It remains very good and also I think our wealth management business is is extremely well positioned to take as evidence last quarter and.
We still see volume of transaction.
Quarter is still very early but the volume transaction remains to be a remains still strong.
And I think I've addressed our international I think you know I think we're doing fine. This year in 2020 on a on a relative basis in our international and we feel that our growth growth strategy. There post Cove. It is basically intact once were out of the crisis and no. We don't expect a catastrophe in the meantime.
So that's where we stand I think we'll we'll take it a court at a time.
We're not going to take undue risk are stupid risk to to inflate the topline that's not where we we've tried to avoid to do at least in last three years and don't expect us to do that in the current quarter or the path and the next few quarters. So I think we'll try to generate revenues, but and girls but.
Without losing sight of risk.
Thank you very much.
Thank you. The next question is from Nigel just since that some very tough. Please go ahead.
Thank you good afternoon so.
So I had a two part question for you and I wanted to kind of reference the a macroeconomic assumptions that are built into your Ah. That's the kind of lost falling under our first nine. So this is laid out in page 73 of your shareholders report.
I was hoping you could provide some color on the economic conditions Youre expecting based on these assumptions because when I look at your.
Next 12 months forecast, you're still expecting positive GDP growth and most of these scenarios are still forecasting unemployment or to be below 10%.
If you could touch on doesn't just you know kind of looks like you're expecting a pretty strong V shaped recovery, but if you could just expand on that and the second part when I look at your downside scenario.
Like the your expectations for house prices haven't really moved since the October assumptions.
And the GDP growth forecasts actually.
Kind of went up a bit of when you're predicting down 2% in October and now you're predicting but down 1.7% or where GDP. So can you just expand on whats feeding into these economic assumptions.
Sure Nigel it's Phil I, Oh, I'll take that question I can understand your question the shape of the a of the than to pass on some of those variables. It's very unusual it is not a is not to normal.
Forecast going forward Star Trek finance, it's and and when we Oh on Earth economists team was building. This scenario intra quarter. There is significant changes in shocks.
I've got the way that its sliced and diced and presented in that table I can understand it's hard to get to get a feel for the severity of I think in the language on the next Fey actually it's on the same page 73. So if you look a little down further because it's hard to see from those are those forecasts.
Yes.
There's a little more color given about some of the magnitude of changes of you know GDP more than 30% down the unemployment around 12% and tanks, which don't don't stand out, but that's really because of the unusual nature. That's why a as I mentioned earlier.
There are a different parts of the IRS nine Hcl.
The economic scenarios one of them.
Are you really need to look at what the results are and compared to the rest. So just in the magnitude as a as I as I mentioned earlier in the scenarios.
HM all three scenarios or a recession scenarios.
Okay and the next page Nigel.
100% upside scenario, so our most optimistic scenario this quarter generates an ace yeah that is pretty darn close a number to what we showed in Q4 as our 100% pessimistic case scenario.
So its the a that did impact the impact on the sales is what I think should guide you and assessing the.
The the scenarios, just because slicing and dicing with next 12 months and a future periods just doesn't doesn't capture well the.
The significant downturn in the variables.
Is that help you answered the question help you with the the answer Nigel well yet that's very helpful. So would it be fair to say that as we get a better sense of the economic impact.
Assumptions that are going I'm going to form up a bit and are going to be less volatile or.
Going forward well, even I think.
If you looked at the base case, you can't see the severity within the next 12 months, but one important factor is that a the shape of the path or that we have in the base case leads to still significantly higher unemployment and the remaining forecast period. So it's a sharp impact and the fiscal.
Oh and reopening the economy does have a significant improvement in a short period to period of time, but we get back to US a place where we're a 200 basis points higher unemployment then why we're where we started so it's not a the scenario isn't day Ivy and we go back to where we started it's a 200 basis points higher.
Unemployment and it persists for a long time in this scenario.
So the the way that you can see that is by the size of the seals that it generates more than by what does the way it sliced and diced and time periods in the table and it's fluid the thing that makes it even more difficult in terms of scenarios and I know you know that because you've done your own modeling, it's the public health.
And on the different path of how this thing would evolve. This crisis would have all from the public health standpoint is something that no none of us CR.
Our you know qualified really to a two or you know to predict so and the path or are there many of them and they have a direct impact on the locked down and under recovery. So that makes all the scenario analysis, even more completed.
Got it that's that's really helpful. Appreciate the color. Thanks.
Thank you next question is from Mario Mendonca from TD Securities. Please go ahead.
Good afternoon, I kind of want to go along the same direction here Phil.
Well I'd be right in saying that the reason why the next 12 months shows GDP growth of 1.4% is simply because.
Once were out a year well be comparing it to a very negative.
Call It Q2.
So.
The math, just sort of mathematically will not that way because you're very bad Q2 is that the right way to Frank I think that is part of it in and married with the given what we saw in the in the scenarios. When it was first sliced and diced in this format tough next 12 months and the remaining.
We were surprised by how we looked given our understanding of the severity. So if there are a technical aspects like that there's also the fact that the economist that's kind of from the end of Q1, which was already included March was it was a significant decline and indeed calendar Q1, I'm. So the starting part was lower there's lots of tech.
The last specs that don't show up here, but the the when I'm in previous quarters, when our scenarios. It looked a very severe I think I pointed out it don't don't look only at the scenarios. It's a each of the pieces of the the process, which is important and probabilities, which is very important.
And the modeling and such so here I would direct you as well to be cautious about just comparing a this table and thinking that you get the a real visibility on the severity of the shock you really have to look at the skills.
I think from a from a compare ability perspective, what might be helpful. If there's if you showed 2020 full year 2021 full year that might make it easier to compare to.
What maybe the I'm not sure what the bank the other banks going to report, but that's what I thought we might see but that's just that's an aside.
Yeah, so sort of related question is.
The timing of the recovery might be just as important if not as if not more important as the severity.
What I wanted to what would be helpful. Here is when you think about your scenarios when does when do you figure unemployment. The turn you to levels, we saw before coal that or the level of GDP returns the level before coal, but is that like a late 2022 scenario when do you see that.
Essentially the return trip back to where we were before this Matt.
In and our base case I think it is at a it would be if it's in the in that time period. It would be at the end at that time period.
Our base case is the unemployment rate stays high its persistently higher than where it was pretty Gulf It and it's a long time before it gets back so towards the end of period.
And just sort there you're saying the end of 2022.
More than two remaining figured goes up to a 24 25.
So even beyond the end 2000 before what normal again could you see it remaining forgot snuff <unk> the same for all the portfolios, but there's some of its three years on it for years.
I see where.
I don't have the exact a quarter that it is but I know from memory is seeing the shape. It's still late in our in our scenario the actual what happens in reality, maybe very different than that and we hope that it's a you know maybe next quarter, we'll be talking about the green shoots and the positive signs there that Uh huh.
Seeing maybe we'll be more rapid but it is impossible to know.
But I wouldn't be wrong in saying, it's beyond 2022.
Yep Yep correct.
Thanks.
Thank you. The next question is from Darko Mihelic from RBC capital markets. Please go ahead. Your line is open.
Hi, Thank you good evening and thanks for taking my question here so late.
I just wanted to revisit risk weighted assets, where time fill and maybe [noise].
Maybe just give us an idea of what it is we should be looking forward to watch for migration.
When I look at what's happened in the environment I see credit spread that really blew out they come back in a bit but there's still high.
See rating agencies, making all sorts of downgrades across all sorts of industries investment grade non investment grade and yet when I compare your last quarter. This quarter I look at the PD bands that there's very little migration happening in the quarter. So what is that what are your team to migrate.
And caused an increase in risk weighted assets that I can see from the outside looking in.
Thanks for the question Darko I'd say, there's some did occur this quarter and particularly in some of the most immediately impacted sectors. So oil and gas you can think of ER and others. So the more directly impacted the sector would be that I think the faster.
You would see that a pad happening.
So it is related a bit to the mix in the book and are not not not related to [noise].
Not all downgrades externally or air heavy at portfolios that wherein you look at the corporate book.
There's a lot better in utilities and Thats, good utilities pipelines and such and I think the a that migration would be much slower or in some of those not much migration some of those.
I think in real estate or retail sector of real estate would be fast I think office it probably will be a it's it's more of a question Mark about what what will happen with office real estate I can tell you we're sitting in a room darko that is significantly larger than the room that we typically take.
These calls from and we're all six or seven feet apart.
B, what we all the new office space reality, BB and out that will play through a in an office sector. Other real estate I think it'll be a it'll be a little bit longer so.
I don't know if that answers your question, but based on history. It's over a few quarters, it's not a all at once.
Okay, primarily driven by what happens with the economy and I think the way, it's Darko Snowy I think that we were looking at the scenarios going forward is that.
The discretionary economy is the part of the economy, that's kind of be feeling the effect.
Of the Coven 19 for the next few quarters, a lot more than the general the rest of the economy.
So that's why in our in our present Taishan.
We you know we highlighted the sectors we felt.
Were the most exposed within the discretionary economy.
Restaurants hotels.
Retail because we feel that the risk of migration.
It's going to be significantly either we've taken it already as bill mentioned on the oil and gas and some other related sectors and they've got to be much more concentrated on ddos, whereas the Dod discretionary part of the economy.
And manufacturing is how many others I think is it's going through there is going through the crisis.
On a more stable basis or well rebound very very quickly outside of the a once were out of the locked down. So that's what we're trying to differentiate and real condos and as Bill said, we feel that generally on the elements of the discretionary economy, where there could be a risk.
Migration and losses.
We are under index to to their general economy, and maybe some of our peers.
And maybe just a follow up to that when I look at the deferral information you provided on page 14 of your presentation and I look at the what you guys are referring to is non retail.
6% of the loan balances have.
Having some sort of getting some sort of a combination I'm curious.
The 4.4 billion of loans that had been deferred and the non retail how many of those are like small business kind of longer.
Is the larger more commercial art or do you have that needed that breakdown by how many of them are actually part of the government program and how many of them are our our deferred.
You know without the need for government program.
Yeah. Thanks, a dark I'll start off when there is tough and can add in but similar to what we described in the retail we think that early on in the in the crisis. There was a lot of uncertainty of if you remember back very early on us if and when the government programs would come in the speed.
And I think proactively a number of customers really wanted to have some flexibility until they got a sense of of what what the future would be and I think that was Oh wise and proactive thing to do.
In terms of the split between the corporate and commercial there's very little in corporate but or smaller amounts in corporate and commercial that stuff and you.
Yeah, and well just some anecdotes of ER and the reality is by quarter by the end of Q2. The only program that was really out complete and operational was a seaborne program.
And they were hardly any programs or on the co lending with BDC any DC. So the vast majority other clients because is right vast majority are clients of all sizes went a win for the.
The federal programs, if you want that we offered.
And we most of them at not other than C., but small business has not tapped into the federal programs at that time.
I see okay. Thanks, very much as helpful.
Thank you as a reminder, please press star one other question.
And the next question is from seems to have you from a capital. Please go ahead.
Hi, Let me first apologize if this is it all repetitive I did drop off the drop off for a little bit but.
I did on RW, a inflation I heard your response to Darko, but early did you give.
Any sense of what you expect here in terms of a base case Ardebili place you know I appreciate it lags and a little bit overtime here, but is there any any numbers that you can put around oh.
Well, we didn't give a number.
[noise] and you say, it's not reasonable too.
I think is it.
<unk> repeat the I think it'll happen over quarters, I think it'll be driven driven by what through reality of the economic path will be.
It's less model based with their scenarios in terms of ER Ace Yeltsin High first nine is gonna be based on reality of the Oh the economy in of the corporates and that kind of their clients performance.
She is and I did you want to I think we sorry, Steve its Louis I think I'm not sure where do you where when you were offline, but we answered with Ah think whatsoever Darko.
We we mentioned that you know the reason we feel that you know RW inflation is going to be.
Manageable notwithstanding the fact that we're starting.
This quarter at 11.4 after after having taken what we feel is a very prudent to.
Provisioning on the loans.
That when you look at the sectors of the economy and that's why we.
We when we look at where there's more vulnerability for either losses are or our devaluate migration over next few quarters, it's still a sector is related to discretionary economy.
And that's why we Oh, we describe our exposure to that sector.
And in our presentation.
On oil and gas as Bill as mentioned, we've taken some RGB away inflation already and on the other sectors. You can see that it's relatively small and in terms of percentage of our portfolio.
That's why we feel it's a it's manageable has got to be done over the next few quarters.
Okay, and just the other thing I had and feel free to say. So this is repetitive I was hoping to hear from maybe you see.
In terms of you know in PNC consumer activity levels would have dropped off you know very dramatically at the start of the shutdown.
Can we get a little color just around to what extent that has started to come back how much closer to normal any any numbers around activity levels I'd be interested.
And yeah, I think I I gave a lot of.
What I would urge into conducted the transcript because you see gave a very lengthy answer to that very question early enough in the presenting option.
Okay, that's great I'll leave it there and circle back and Christie.
Thank you and you have the next question from Mario Mendonca from TD Securities. Please go ahead.
Started to this again just if we could go back to this R.W.A. inflation I think it's obviously a area of interest to everyone.
In your in your regulatory supplement you talked at this page 30, the regulatory capital supplement.
You talk about how our credit risk are to be a increased meaningfully as much as $3.7 billion ready to book sizable book quality.
Was actually every doctor and that's in the there was an improvement in the book quality.
Now I think really some of your team has helped me understand that part of the negative migration actually fits inside of book size and it can be.
Easily disaggregated.
But perhaps you could help me understand how book quality can actually appear as an improvement in the quarter given everything that we saw.
This is John <unk>. The question you decide what we report as book quality is a improvement to our parameters into models. So it could have that we have improved model dependent meters. He data that we used to create those model and that created a an improvement into the de risk weight Tonight.
So in a quarter like when we get lived through.
You found it appropriate to adjust the parameters to reflect a better outlook then that's it.
The methodology, none of the portfolio as such and don't forget that for risk weighted asset we're talking about over an economic cycle in I have highest nine were talking about point in time. So it's not exactly the same thing.
So would it be fair to.
Say that in subsequent quarters, we might see the book size impact decline as they draw downs are reverse than perhaps commercial loan growth slows, but the quality could actually.
Jerry is that because that's the right way to look at it.
The quality end to book size are reported in that table. This you refer to into the scene line books high. So you may not see anything different from a into future.
Let's see so then maybe you could just answer this inside the book size.
Presumably there was a portion of that that reflected negative.
Migration is there any way to disaggregate that or is that the my number you're telling me is too difficult to do well we can estimate it it's about four basis points in Q2 up to 20.
Okay.
Negative you mean.
<unk>.
Increased risk weighted asset I understand thanks.
Thank you.
There are no further questions registered at this time I'd like to take everything back to Mr. vessel.
Well, thank you everyone and.
We'll well talk to next quarter and a new meantime, stay a stay healthy and stay safe. Thank you very much.
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Office depot.
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The company.
She was pending.
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Uh huh.
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Thank you in line at this time thanks.