Q2 2020 Earnings Call
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Good morning, My name is still the and I will be a conference operator today.
Hi, I would like to welcome everyone to see Wbz Q2 earnings conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad and if you.
I'd like to withdraw your question. Please press star followed by two thank you.
Mr., Matt right do you May now begin your conference Sir.
Silvia and good morning, everyone welcome to our second quarter Twentytwenty financial results Conference call.
My name is not right and on the senior Vice President, leading our finance and Investor Relations team.
Presenting to you today or Chris Fowler, our president and CEO and Carolyn Graham, our executive Vice President and CFO.
I'd like to remind listeners and webcast participants that statements about future events made on this call our forward looking in nature and based on certain assumptions and analysis made by management actual results could differ materially from expectations due to various risks and uncertainties associated with our business. Please refer to our forward looking statement advisory on site.
Slide 19.
The agenda for today's calls on the second slide and to take US figured out agenda I'll turn it over to Chris.
Thanks, Matt.
Clearly the topic of the Cobiz 19 pandemic is the key matter for this quarter.
I'll begin by sharing my thoughts on the strength CW derbies position going into this period of economic volatility and how we've used our proactive approach to assist our clients in these challenging times.
Carolyn will follow with detail on her second quarter financial results and then we'll open the lines for the question and answer session before I provide closing comments.
We've made significant progress over the last decade to strengthen our business, which is highlighted on slide three.
Actions taken by our dedicated team members to diversify your business and enhancer capabilities, while maintaining our strong capital and funding levels, but see W.P. financial group in a position of strength to navigate these challenging conditions and continue to support our clients.
Our disciplined unsecured lending model with no significant exposure to unsecured personal boring, including credit cards continues to support the resiliency of our business.
Our capital ratios remain strong and well above regulatory requirements and we hold ample liquidity to support our clients as we continue to invest in our strategic priorities.
Our strong position heading into this period of economic uncertainty has allowed us to be proactive in supporting our clients.
Slide four displays how we quickly quickly responded to this unprecedented situation, while keeping our people first core value firmly in focus.
Throughout the entire corridor, we provided the full range of personalized service our clients expect from us through digital remote and essential branch operations.
Our cost investments in technology infrastructure supported the rollout of our business continuity plan and enable us to smoothly transition over 85% ever team members to work remotely.
Our clients have leveraged our expanding digital capabilities and in or branches. We have implemented additional precautions to keep her team members and client safe.
Beginning this week our temporarily closed branches have reopened following provincial protocols and the implementation of a phase strategy that is focused on the continued wellbeing of our people and clients to support or teams as they gradually return so workplace.
Turning to slide five.
We quickly mobilized our teams to reach out to clients to provide advice support and offer the red solutions for those in need of financial assistance using our CW be has your back program.
Our teams were among the first in the industry to deliver long believed to business and in April Thirtyth, We had granted some form of payment relief on approximately 20% of our loans to hope to the initial volatility of this challenging situation.
Our process was to treat each loan for deferral and for those accepted primarily grant a three month term.
We saw the volume of deferral requests have slowed down considerably as the quarter close and the government sponsored loan programs rolled out.
As we work with our clients to find the right solutions for them in this challenging environment, whether that be payment relief or use for government sponsored lending program. We continue to tree ours, our loan book to assess evolving risk profiles with a focus on portfolios, particularly affected by the economic slowdown.
We're also paying close attention to our Alberta exposures given the current downward pressure on oil prices, but so far have not seen trends that are any more concerning in granting premier relief use of the government sponsored programs or migration in risk ratings inner Alberta exposures compared to the remains.
Provinces.
Alberta is a market, we know well and we have developed deeper relationships and with their entire footprint.
Although our prudent.
As we do with her <unk> entire footprint, we follow prudent secured lending structures when granting credit.
We're on top of our exposures and are more focused than ever to be ahead of anticipated challenges arising from the economic disruption.
As you'll hear from care than later in our discussion of the second quarter financial results. We've recorded elevated levels of provisions for credit losses on are performing loans. This quarter as a result of an adverse shift in forecast for the Canadian economy.
We believe the prudent actions, we've taken to diversify our portfolio over the last number of years are secured imprudent lending approach with no significant exposures to unsecured personal lending our credit cards and are low historical credit losses realized through economic cycles support the overall resiliency.
Her loans to this period of volatility.
I still see on slide six the current operating environment has not stopped us from continue to execute against our strategic priorities on all fronts. In fact, we remain extremely active preparing for the opportunities up tomorrow.
Our people have worked tirelessly to enhance the agility upper teens with remote worker range fans and has kept our teams informed to virtual communication channels.
I'm extremely proud of our teams have adopted and collaborated to ensure we support each other continue to have our clients backs when they need us the most.
With so much change asked ever team members. This quarter. It is especially rewarding the confidential employee survey results supported our recognition as one of the 50 best workplaces in Canada for 2020 and that CW. The upswing mortgages was named one of the top mortgage workplaces.
This recognition reinforces that are actions to evolve or culture, and our employee experience continue to create value for our people and ensure we are career destination for top talent.
During the quarter, we announced our strategic acquisition of GE Wells and Lee on Fraser Associates.
Which will enhance our ability to provide broader and deeper investment counseling and planning capabilities within extended geographic footprint.
[laughter].
Good day, and will increase our total wealth assets under management administration, and advisement to approximately $8 billion.
This acquisition accelerates our strategy to be a leading provider of wealth management services to successful business families across Canada and increase our addressable market support further growth a full service client relationships.
We also made strong progress on the improvement in or digital capabilities and remain committed to achievement of key milestones. Despite the impacts of quoted 19.
Digital onboarding capability for motive financials personal clients will go live in the third quarter and support our strategy for continued growth of branches deposits.
This will be followed by digital Onboarding of the remainder of her personal banking clients in Q4 and will expand to our business clients next year.
Despite this period of economic volatility our strategy and focus remains unchanged.
We're continuing our plan to transformer business to become a disruptive force in Canadian financial services, and a clear full service alternative for business owners I.
Im confident that are ongoing initiatives will position us to deliver breakout growth and maximize value creation for upcoming transition to the advanced internal ratings based approach for regulatory capital and risk management.
With their formal application submitted early this quarter I'm pleased to confirm we continue to expect approval in fiscal Twentytwenty.
I'll now turn the call over to Carolyn will provide more detail on our second quarter financial performance.
Thank you, Chris and good morning, everyone.
Our second quarter performance highlights on slide eight and you'll see that the economic and financial market volatility has negatively impacted our financial performance.
Compared to the second quarter last year, our pretax pre provision income was up 1%, while our common shareholders net income and diluted earnings per common share were down 17%.
Adjusted common shareholders net income and adjusted cash earnings per common share declined 20, and 19% respectively.
Common shareholders net income was lower compared to last year as a 2% increase in total revenue. This is more than offset by an elevated performing loan provision for credit losses, which I'll discuss in more detail shortly.
Interest net interest income was stable and noninterest income increased 25%, primarily due to net gains on securities.
Net interest expenses were up 3% compared to last year as continued investment in our teams and technology to support overall business growth and execution of strategic priorities, which partially offset by lower spending this quarter on certain expenses in light of the current operating environment.
Our efficiency ratio of 47.1% compares to 46.8% last year and 45.5% in the previous quarter. The increased from last year and last quarter, primarily reflects constrained revenue growth in the current low interest rate environment and sequentially two fewer interest earning days this quarter.
Operating leverage this quarter was negative 0.8% improved from negative, 3.1% last year and negative 2.6% last quarter.
On a year to date basis on slide nine pretax pre provision income was up 1%.
Common shareholders net income and diluted earnings per common share were down four and 3% respectively.
Adjusted common shareholders net income and adjusted cash earnings per common share were down 8%.
The year to date decline in common shareholders net income was driven by the same factors as the quarterly year over year comparison.
Well as higher noninterest expenses as we continue to invest in people and technology to support ongoing strategic execution.
Turning to slide 10.
Cumulative reductions in the bank of Canada policy rate of 150 basis points in March negatively affected our net interest margin as our loans repriced more quickly than our deposits and deposit cost have reached a notional floor due to very low interest rates.
Our other funding costs were also slower to decline in comparison to the drop in the prime interest rate this quarter due to higher market demand for liquidity. This impact was partially offset by a favorable shift in our funding mix due to ongoing strong branch race deposit growth and our resulting decline in brokered deposits.
Our quarterly net interest margin of 2.40% does not reflect a full quarter impact of the cumulative bank of Canada rate cuts.
Our net interest margin for the month of April of 2.30 does reflect that full impact and we consider it a reasonable expectation for the remainder of the year.
There is potential upside if conditions are appropriate prudently manage liquidity lower or funding costs continue to trend out to further reflect the market interest rate declines.
Of course net interest margin will also be impacted by any further bank of Canada policy interest rate changes competitive deposit pricing factors changes to the cost effectiveness or accessibility of funding channels loan growth adjustments to loan pricing and our clients abilities to recommence contractual payments following the completion of payment deferrable periods.
In assessing deposit rate pricing benefits to net interest margin will continues to be balanced against maintenance and brand trace deposit balances to support appropriate levels and liquidity considering the market conditions.
Slide 11 demonstrates our success in executing on key strategic objective to grow and diversify funding sources. This quarter remarks, our fifth consecutive quarter with a strong sequential increase in batteries deposit.
Compared to last year demanded notice deposits increased 31% just surpassed 10 billion and now account for 35% of total funding compared to 29% last year. This robust performance drove branch race deposit growth of 20% and contributed to a 17% reduction in the total balance of broker deposits, which now.
Present, 26% of total funding compared to 34% last year.
The reduction in our reliance on the deposit broker network is another with our key strategic priorities, while the cost effectiveness of the broker deposit market was adversely impacted by the economic impacts of Cobot 19. This quarter I do want to note that this funding source remains a reliable and effective way to raise insured fixed term retail deposits over a wide geographic.
Base and remains a deep and liquid funding source.
You'll see on slide 12, the total loans were up 7% over the past year with positive contributions from our strategically targeted areas of general commercial ended Ontario on a sequential basis total outstanding loans were up 2% primarily related to strong growth, 5% in Ontario, given my general coming.
All lines as well as 1% growth in both Alberta and British Columbia.
Draws on lines of credit, we're not a contributor to loan growth this quarter as the average utilization of outstanding commercial and personal lines of credit remained stable compared to both last quarter and last year. The impact of loan deferrals also did not significantly contribute to loan growth this quarter looking forward, while our original forecast anticipated.
Double digit loan growth always were prudent we now expect mid single digit loan growth for fiscal 2020 based on current conditions.
Turning to slide 13.
The credit.
Our portfolio and our tradition for compared and performing loans under our first nine continues to reflect our secured lending business model disciplined underwriting practices and proactive loan management.
All hallmarks of our historic success.
Gross impaired loans totaled 271 million at April Thirtyth, compared to 243 million last quarter, and we recognize the provision for credit losses of 22 basis points unimpaired lungs.
The increase in gross impaired loans compared to last quarter, primarily related to two Alberta based oilfield service providers and our general commercial exposures that experienced financial difficulty prior to this period of disruption.
These accounts were partially offset by the resolution with no loss of a portion of a significant Alberta based commercial mortgage connection that we reported as impaired last quarter.
As Chris noted, we continued to treat our loan portfolio, just assess evolving risk profiles with a focus on portfolios, particularly affected by the economic shutdown.
As we've highlighted many times before our exposure to oil and gas production and oilfield service portfolios represent under one and 2% respectively of our total loans.
We've also done an in depth review of other portfolios, we believe present, a higher risk in the current operating environment.
Our exposure to the hospitality and leisure sectors are just under 5% of total loans, well office and retail real estate sector represents another 4% and we have insignificant exposure to air travel.
Our exposure within these industries is well diversified across the country and represent high quality resilient borrowers that we have handpicked, we deeply understand their businesses and the individual exposures, we remain comfortable with our exposures in these areas.
The second quarter I afresh nine provision for credit losses on performing loans calculated using our past performance as well as a forward looking view of macroeconomic factors totaled 27 basis points I.
A significant increase compared to one basis point last year and three basis points last quarter.
As a result, our allowance for credit losses on performing loans was 111 million this quarter, an increase of 20 million or 22% compared to the previous quarter.
The increase in the provision nonperforming loans was driven by a material adverse shift in forward looking economic conditions.
Forecast calibrated to the average at the six large Canadian banks assumes a significant deterioration in GDP and unemployment to the ended the third quarter fiscal 2020.
Followed by a recovery fueled by the reopening of the economy and the impact of various government and central banks stimulus programs.
Housing price growth typically lags behind other economic factors with the low point in housing prices forecast for the latter half of 2021.
Followed by a gradual recovery.
The oil price forecast begins at the April Thirtyth price with the gradual recovery following increased energy demand as the economy reopens.
The impact of Coven 19 on the economy and the timing of recovery continue to evolve.
As our performing loan allowance is estimated considering expectations for future macroeconomic factors portfolio defaults or increases in the risk ratings of are performing loans shift in these factors will impact the allowance balanced in future quarters.
As you can see on slide 14, our realized write offs have been low over the last several years with the exception of a unique situation in 2016, where we were prevented by provincial regulators from realizing our security rights in our oil and gas portfolio.
While the current economic volatility and challenges are unprecedented our solid credit performance in the past in both healthy and challenged economic times reflects our prudent underwriting unsecured credit model. While there is uncertainty and what lies ahead. We're confident that are secured and high quality credit portfolio provides a solid foundation as we navigate.
At this period of economic volatility.
Our strong capital ratios at April Thirtyth appear on slide 15.
Related using a standardized approach our common equity tier one ratio was 9.1% tier one ratio was 10.5 and our total capital ratio was 11.9%.
At 8.3%, our Basel three leverage ratio remains very strong with these strong capital ratios and very low leverage we're well positioned to create increased value for shareholders, while ensuring we remain conservatively capitalized through the current economic challenges, we will invest approximately 30 basis points of capital in the wealth management acquisition.
Set to close on Monday.
As Chris mentioned, we have submitted our formal AI RB application.
He has publicly confirmed that our application review is not impacted by the various regulatory actions taken in response to covert 19.
Approval of our application expected by the end of this fiscal year will boost our already strong capital ratios as risk weighted assets will be calculated using more risk sensitive models.
Yesterday, our board declared a common share dividend up 29 cents per share up two cents or 7% from the common share dividend declared one year ago and consistent with the prior quarter, we're comfortable that our current dividend level remains appropriate given our conservative strong capital position and the results of ongoing stress testing.
And speaking of stress testing I will turn now to slide 16.
To satisfy ourselves that our allowance for credit losses nonperforming loans is adequate given the uncertainty of the economic outlook.
To confirm the resiliency of our capital levels and earnings we utilized our ERP and I afresh nine capabilities to perform additional stress testing to stimulate the impact of a more severe and prolonged period of challenging economic conditions throughout our geographic footprint.
As you can see relative to the forward looking macroeconomic stared scenario used to estimate our April thirtyth allowance for credit losses, I stress test assumed a deeper initial decline and GDP lower oil prices and significant high significantly higher levels of unemployment that recover at a much slower pace.
Remaining worse than pre recession levels to the duration of 2021.
The allowance for credit losses produced under the stress scenario confirmed the resilience of our secured and diversified portfolio to economic volatility for the supported by our historical experience of low write off.
Considering the broader financial results of the stress test we remain confident in our ability to deliver positive earnings for shareholders, while we maintain financial stability, our current dividend level and a strong capital position as we manage through the uncertain economic outlook, while continuing to have our clients back.
With that Sylvia, let's open the lines for acuity. Thank you Ms. Graham.
Ladies and gentlemen, if you do have a question at this time. Please press star followed by one.
Home phone you will hear Athree, Tom prompts acknowledging your request should you decide to withdraw your question. Please press star followed by too and if you're using a speaker phone. We ask that you. Please lift the handset before pressing any keith.
And your first question will be from Sumit Malhotra.
Scotia. Please go ahead.
Thanks, Good morning, let's start with a question on on loan growth.
Thank you mentioned in your comments, perhaps given your business mix is skewed more to the commercial borrowers and corporate.
Line Drawdowns, we're not a significant part of the growth just kind of curious from a from a business perspective.
Particularly following the month of March.
How the.
Activity levels from your client base of have trended is there enough going on that.
They are still.
Coming to the bank and looking for.
Financing for project activity or has it slowed significantly and than this.
In this environment that we're in right now.
Assuming we actually have had.
I've talked to all our main branch managers in business leaders and there's still being continued activity and interest by clients of.
For different projects as they're evaluating the future. So we have seen.
A continued pipeline of business both on the project Lance loan side, but also in general commercial too, which is our key target area for growth.
And one on the other credits that Chris I'll come back to you I think you've given us some some good detail here on how you thought about.
The the provisioning trend.
And more so the the factors go into building allowance I'll make a two parter number one we've been through a few of these cycles in the past, where the bank and you've talked a lot about the secured nature reserve based nature of your lending.
That said when when we look at your coverage ratios today they're.
Materially lower than even the levels you've had in the past.
And obviously under I have for US nine you do have more management overlay in terms of how aggressive you built you build reserves given your capital strength why did you opt not to go for a bigger move and strength in some of that allowance base and then secondly, if you do feel what you've done in performing is adequate how should we think about the.
Trend line in provisioning for the rest of 2020.
So as soon as we as we thought about the performing loan allowance and as you can imagine we spent a lot of time over the last.
Two or three months thinking very very carefully about that.
You know it came back to thinking carefully about what were the macroeconomic assumptions that we built into our forecast as well as the appropriateness of the numerous management overlays that we have in place that supplement the estimate that comes through from our risk based models.
And again looked at a stress test to try to determine potential additional.
Provisioning that maybe that may be required.
If the reopening doesn't.
Come to pass the way that we all hope that it does.
And determined that this was the right level thinking about our portfolio thinking about our past experience in history.
And the exposures that we have today.
Looking ahead and thinking about provisioning going forward.
I think that we like.
Like everyone believes that we are in for some challenging time. So we do think that there may be more.
Impaired provisioning as our clients work through.
The economic recovery.
I think on me performing loan allowance side.
Yes.
If the economic forecast.
Cheerier eight lead provided what we would we believe would be the estimate for additional provisioning related to those macro forecasts.
The other factors are our individual clients just in risk rating shifts in default rates, which could have a temporary impact on our performing provisions as well.
So all else equal and then thanks, you gave me give me a lot to think about there it sounds like you're of the view that the impaired or obviously going to increase but the the performing given you've made this move in indicators unless there is.
Something that causes it to go back.
To your models, the performing piece well, it's not going to zero it should be lower in your expectation from what we saw today.
Thanks, Thats fair, assuming the forecast don't materially deteriorate.
Alright, Thank you for your time.
Thanks.
Thank you.
Thank you next question will be from Scott Chan of Canaccord. Please go ahead.
Good morning, Carolyn when you referenced on slide 14 on me.
Historical on the write offs.
Lets 16 can you remind us the experience during the GFC period in 2008 in 2009.
So.
You can see right at the very beginning of the of that chart on page 14 in the global financial crisis, our impaired loans peaked in the second quarter of 2010.
They peaked at 168 basis points of the total loan portfolio.
But we really didnt see material shift in the.
In a level of actual write offs coming out of that they remained at our at our historic levels.
Hi.
Okay, and and maybe just like a broader question on your on.
On your wealth acquisition of.
Okay tea and.
And then Fraser when you think about what you have out west and what you've purchase.
Which is predominantly on the side.
What are your intentions on the bigger picture in terms of.
This acquisition to your overall, while franchise our strategy.
Well, we're really we're really excited to close on this acquisition on Monday.
Print of GE wealth and land Freestor is Vancouver, Calgary, Toronto, Montreal, So it fits very well with our footprint.
Thank you for his new for US we've got our main acquisitions. The passing of engine has been in Alberta in Calgary and Edmonton. So this is a great addition for US and also as we really look at our growth in Ontario. The addition of the really strong teams of because of those two groups in Toronto RP, we see that is great opportunity for.
Yes, as we look to continue to build our franchise. There we have the opening of our Mississauga branch, which of course is being slowed because of the coated.
Situation with construction, but it will be opening in.
Late summer early fall in that in that time range. We see the teams that we will have on the commercial banking side. They work very collaboratively with the the wealth side. So we really are looking forward to that being a great opportunity for us to really continued to deliver full service banking and.
Big step forward for TWB.
And just last question why have you.
You talked about real estate project loans and called out.
On the developments or projects being delayed MPC.
What about Ontario, and kind of what in your sense.
You see where where it could resume and what factors might impact that.
Well, we've seen we see.
Continued paydown in our real estate project loan book, which means of course is that successful completion of the projects. So we're obviously very happy with the quality of that book and as being operated.
In terms of our our focus on tier one client is operating very well on Ontario, we participate there in syndicated port exposures as opposed to in BC and Alberta were part we have direct lending to clients. So Ontario is.
Being very positive and again, we participate there with typically at a large banks as the leader of those projects and we.
We've seen good quality projects that have come forward with well capitalized tier one borrowers there.
Great. Thank you very much.
Thank you ill just circle back on your first question. So just to confirm in 2010 gross impaired loans peaked at 168 basis points as I mentioned, our provision that year was about 22 basis points.
Okay got it thanks Harlan thanks.
Thank you next question will be from debit he ended Shine National Bank financial. Please go ahead.
Good morning.
Dumb question here, but.
All those loans that are on deferred payment program.
You're still accruing interest from them.
And.
With that.
Yes. So they are they remain performing only and we accrue interest on them.
So walk me through how this works from America.
Four to six month.
Lets say Oh, hi.
Whatever number if you want to.
Yes, I mean that way, but.
The customer the go back to paying your as the normally would.
There's no accounting noise, but then what would happen to the portion that don't because subsequently.
Impaired loans.
Paying your but there'll be a reversal.
So when loans when loans move to impaired.
The accounting that we use is that we knew reverse.
Interest that has been accrued but not collected so that happens in normal course today and is just part of their regular NIM that we see.
Everyday.
Our our prefer our deferrals were almost exclusively for a three month period. So we are coming up in the month of June we will be reconnecting with all of those clients too.
Get an update on their business talk more about their current ability to restart making payments on their loan. So that will be work that we are actively doing.
So we would anticipate that some will restart making payments on their loan we would expect that some may request, an additional three month deferral period, and we will assess those on an individual basis as we have done now.
You will notice in our financial statement note, where we provide the detail of our deferrals by portfolio you can see that about 15% of those loans are in stage two at the end of April.
So while they remain performing.
We did allow our models, where the conditional probability of default indicated they should move to stage. Two we did move them to stage, two and have estimated lifetime losses on them.
Okay.
All right so those.
World would be.
Performing provision this quarter.
Yep.
Yes.
Okay, and then the rest wouldn't but.
You have any indication because leader from some banks that.
They have this number out there.
For the percentage of customers not paying us right now, but some are already making minimum payments or.
How that works, but the the opening data or insight.
Sure.
Well, we have about 86% of the deferrals are full payment deferrals and about 40% or interest only and as as Carolyn said.
Our teams are treat causing these loans. So we're staying on top of the clients understanding what.
Their prospects are what does the relaunch the economy look like how does it impact their ability to.
Generate there.
So we're very much on top of this is a key focus.
No I don't doubt it.
Just one I understand that 14%.
Okay.
One of them a schedule are paying interest.
Interest only yes, maybe 600 opening anything.
There is their full payment deferrals, yes, okay.
And just.
[music].
The other one Peter.
The commute can you maybe describe the the base case, where scale economics are optimistic.
No.
When you set your performing provisions I assume you've heavily to the pessimistic case.
So yes, our process is that rather than three or four finite.
Individual.
Pieces that are then.
Weighted.
We start with our base case based on an average of the big six forecast.
We apply we look at we do a Monte Carlo analysis, which increased our.
And then we and then we potentially looked at other pessimistic scenarios like we've described in the in the stress test scenario to help us understand potential moves in the performing loan allowance moving forward.
So we've described on page 16 of the.
Of the deck sort of the broad comparison of the base case that weve used for Q2, and our stress test assumptions.
When we've got a lot of detail by quarter on the base case scenario in the financial statement note.
And my last one from me another maybe stupid question, but the average of the big six scenarios.
Q1 are you saw something through to the.
Aussie or something you're allowed to go.
So we use the publicly available as they evolve through the quarter.
Okay.
Yes.
Thank you and yes.
Thanks Keith.
Thank you next question will be from Steve Theriault eight capital. Please go ahead.
Thanks, very much just maybe one more to start on the deferrals. Chris you said you saw a deceleration of the frozen at quarter end.
There is a big focus here so could we get could you discuss a little more what you've seen through may and as I look at what you you've given us.
It was 6.5 billion of deferred loans at the end of the quarter I can you can you put some numbers around how much higher that's gotten over the last month or so.
Yes so.
As of last Friday were at about 7.1 billion of loans under differ also a difference of between 22% of the portfolio at April Thirtyth in about 24% at.
In may.
80% of the amounts that are deferred today were processed by April 16th So the last six weeks that has really slowed.
And that would be consistent with the timing of when the government loan programs started to roll out and started to be funded so clients may have taken requested the initial deferral and then as the various government programs have been put in place have been thinking about what makes sense for them over the.
The next say three to six to 12 months.
Okay.
That's super helpful. Thanks Carolyn.
And then just a question on credit I was hoping we could take a couple of minutes and you could.
Refresh us a little bit on the franchise finance business can you give some color on what level of deferrals, you're seeing there maybe remind us of the business mix. So quick serve versus the rest of the book and how you're feeling on credit for that portfolio in particular.
So Steve we've obviously, we have a very strong team that runs that group that.
We acquired in 2016 they've.
Then a very detailed review of their portfolio. So they've got about 75% of that is hotels, 25% is restaurants on the hotel side, they've got very conservative loan to values in the 50% loan to value Res restaurant side based on leverage very conservative leverage ratios.
They do specialize in this area. So they really looked at picking the borrowers that.
As they look at think of credit risk they've got good diversification. So that book, we are obviously working hard with its got the highest level deferrals in our.
In our overall portfolio, which makes sense given that it's the most impacted by the.
By this economic shutdown that we've had but we've got a team there that's on top of that we've got.
Very strong borrowers there that have properties that would not just be necessarily located in one city they'd have multiple locations in a number of cities.
Not focus at all in sort of the vacation parts, where you'd have more.
Sort of less chance of business travel so they're in more of that limited serve.
Hotel space, where it's not dependent on a ton of services and conventions in that to generate revenue.
And on the rest inside there is a balance there between a quick service and four restaurants. So there is it's a good well balanced book, where and we're obviously working closely with team there as they stay on top of their clients.
Would you when we think about your performing allowances is there any numbers you'd be comfortable giving us in terms of.
Some of that causes.
As reporting season, we've gotten.
Energy allowances stage, one stage two could you would you have you I guess, maybe if I haven't seen it or could you split that for.
Like the hotel in hospitality or franchise finance or.
Of any numbers along those lines.
Yes.
Yeah that level granularity no.
Yes, we are sitting with.
From an from an outcome perspective, so manner, our oil and gas production Park I mean, we have one impaired loan and saying when we had last quarter and you noticed it went down $1 million because we actually wrote off 1 million because the court approved sale of the company's occurred in the close at June Thirtyth. So we're comfortable with our oil and.
Production loans.
I think or no.
And it was really more just on the on the franchise finance up yes.
Yes.
In terms of having a detailed number.
We have segregated that out we've we're comfortable with the with the structure of the finance we have in place the loan to values the leverage ratios on the restaurants.
Okay then.
Just if I could finish up.
When.
It's great to see the air be conversions happening on schedule.
And that AOS fees.
Theres no delay there I just did want to ask though is there is there any material change in how we should think about the conversion of risk weighted assets either given the credit migration that.
It would be would be structured a little bit different under events, they are be or or just the overall recession that sensitivity to RW way under air be versus standardized.
Yeah. That's a good question, Steve as a standardized bank.
Your risk rates went along goes impaired it depends on the level of specific allowance that you record against them. So for example, a commercial loan that is 100% risk rated.
When it is performing if it goes impaired.
If you have a 20% or higher specific allowance recorded against it it remains at the 100% risk weight.
No provision or less than 20%. It goes to 150%. So there is a cliff effect under the standardized approach that is already factored into.
The results that we continue to disclose.
So that's a little bit different than any IR be where you would expect a gradual increase in their risk weighted asset density as loans deteriorating credit quality.
So there is a component of that in our in the standardize calculations already.
Okay. That's helpful. I May circle back on that thanks, So much you bet Steve.
Thank you next question will be from Sahab Mohawk Movado at BMO capital markets. Please go ahead.
Just a quick one carolyn in their commentary offerings around.
For net interest margins, where are you contemplating any shifts in your funding mix.
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I think.
I think what we what we know we expect to continue to focus on brand trust deposits.
We did bring down the the rate on our motive savvy savings accounts in both April.
And again small decrease in early May.
We saw very strong growth in our CTV Trust services deposits notice deposits. This quarter that is a portfolio that we expect to flex.
Portfolio, where when equity markets are volatile and investors.
Turning to cash those balances increase.
So we do expect them to remain strong.
Until equity market settle and so that that gives us a bit of a bit of a natural hedge if we have other deposits where clients are using their their cash balances so that has.
That has been positive for us this quarter and those portfolios and I'd say all of our deposit balances have performed as we would expect them to in the quarter.
We continue to.
We continue to access the broker deposit market.
As required as our as our marginal source of funding to balance off other things. So it remains deepened liquid but it did become more expensive and so the fact that or other deposit sources have been stronger and we've reduced our reliance on the broker market has supported net interest margin.
And in the third quarter, we drew 350 or the second quarter, sorry, We grew 350 million from the bank of Canada's new standing term liquidity facility.
Whenever whenever your liquidity manager and there's a new potential channel available to you you want to put in place and try it on and see how it works. So we drew March 31st.
It rolled over on April Thirtyth for 90 days.
Perfect and just.
Maybe just to follow up I think on Steve's question.
Are you like I assume spilled standardize so youre risk weightings and everything currency being calculated on that basis, but and you have a sense of what.
Our quarter over quarter R.W.A. inflation would have been.
The or be approach.
I don't have that handy sareb.
Thank you.
Thank you.
Next question will be from Darko Mihelic at RBC capital markets. Please go ahead.
Hi, Thank you good morning warnings to.
Just a few questions here I think I may have missed urge you Karen so just want to and I apologize, if we're sort of going over something again, but.
Did I hear you say that the stage two.
Loans that you've included all of the deferred in stage two is that why theres a big increase.
No.
Not not quite right Darko. So we allowed the we allowed the models to move loans with deferrals inter stage. Two is the conditional probability of default for those portfolios based on what industry segment, there in where they're located in the country. If those conditional probabilities moves the loans we left.
The move so about 15% of our deferred loan our loans with deferred payments are in stage two.
The other reason for the increase in stage two allowances in the second quarter is just the impact of the deterioration in the macroeconomic forecasts. So our stage two in total our stage two loans.
For the second quarter, 20% of them are in stage two because of individual client characteristics. So they were past do they were there I watch list.
The 80% of the loans in stage two are in there because our models shifted them over there so not because of any client behavior, but just the way the models work.
With our conditional PD estimates.
And just to add to that the any client that was past due or in that wants it wasn't eligible for deferral.
Okay.
It's just that the number.
That are in stage two is relatively high that's why.
I mean.
Our calculations at 17% of the portfolio is known stage II, and that's yes significantly higher quarter over quarter and significantly different from peers and and this brings me really to my question, which is.
And if you mentioned this if you tend to refer to as a few times in your remarks, which is you can't use your secured lending model is what gives you a lot.
A comfort.
And the model can stay a whole bunch of these are in a tough spot, but not to worry we have.
Secured lending and so what I'm getting at is I wonder if you'd be able to you'd be willing to share.
Something for me to help sort of formalized something in my mind and maybe the easiest way to do this is to look at age 16 of your presentation.
And.
Right when I look at this and I say okay.
There's a stress test and it's 19% higher year Hcl versus versus the one you've you've just.
Built.
The question is if I look at the existing.
Forming loan allowance of 111, I Wonder if you can.
Provide just a rough guide of the probability of default and then the loss given default and then what would that look like on new year's stress than what I'm driving that currently.
At kind of steel like.
You're relying on on the asset value.
And Thats why you simply just don't get a lot of loss.
Wondering.
No I don't want to get that what your house price number is the value of the equipment falling or whatever but I'm just really curious if under this extreme stress Pat.
We have a significant reduction in the assets that are backing the loans and therefore, a significant increase in the loss given default.
Great question.
I think we're gonna have to come back to you Darko I don't have the I don't have that information.
Right at my Fingertips, I think one of the other things that weve.
Realized this quarter as we as we work through this process from multiple directions.
Is that.
A couple of things. The first is is that our portfolio has a relatively short life.
So and a number of our portfolio's amortized materially and quite quickly. So the borrower has equity in the Oh any asset and what that means what that means for us is that if you look at the loss rates between stage one stage two on average for US there is a boat.
I'm going off my memory here, but about 115 basis point increase in the expected loss rate for us. It belongs in stage, one versus stage too and that differential for our peer group.
It's more like 400 basis points.
So that characteristics of.
No our secured lending model the duration of our loan portfolio. All of these things that impact that historic differential between stage one in stage two.
Yes, I think I guess thats what.
We meaning the general fear in the general sense I'm getting from many people that I'm speaking to today is.
Just a kind of scary reliance on models and.
That's why we thought maybe the overlay.
Would be bigger this quarter.
Expert credit judgment, just to say look on the other side of this at this gets really ugly.
Assets will fall tremendously house prices will fall significantly equipment and in particular in your case, just getting back to franchise finance, I mean hotels and restaurants.
This is kind of new I don't think it was really around it and during the financial crisis. So hes history doesn't really help us.
Too much I don't think and that's why I was really curious you had some sort of statistic around.
The asset prices.
That are backing your loss given default numbers. So is buying I don't mind coming back afterwards that would be great to get comfort on that.
If at all possible.
Yes, we do that Darko.
In speaking of franchise finance, yes, that's a group, we bought but actually our percentage of.
Hotel loans in our portfolio is actually lower today than it was.
And.
To be just to be clear.
Yes, Okay. That's it.
Thank you very much.
Thanks.
Thank you.
Next question will be from Nigel Desousa Varcos invest with research. Please go ahead.
Good morning.
Morning.
So I had a quick question and I wanted to circle back.
A follow up on the stress test assumptions that you've outlined and I was hoping you could perhaps maybe quantify some of the assumptions just so we would help.
Hi doesn't kind of contextualizing.
You expect an increase in provision. So for example, you stress test.
What is the.
Percentage decline you expect for GDP, where do you see unemployment.
King and what's the floor for oil prices in your Skus dust assumptions and I think that will really help us put the increase in your pcls relative to the base case in perspective.
Okay. I can give you I can give you a little bit of a bit perspective on that Nigel.
Our stress scenario.
I assumed in the second quarter of 2020 of 45% decline in GDP.
With a 20% recovery in the third quarter.
Unemployment peaks that 14%.
Stays low double digits.
Through the first half of 2021.
Oil price Q2 of 2020 of $16.
I am recovering to just over 30 in the end of 2020.
Remaining below 50.
Out through the end of 2021.
Okay. That's that's really helpful commentary appreciate it thanks.
Hi, Jeff.
Thank you.
Ladies and gentlemen. This concludes the question and answer period, we will now turn the call back to Chris for his closing comments.
Thank you Sylvie.
And thank you everyone for your continued interest in TWB. There's no question that the current economic outlook will continue to challenge every Canadian.
Actions, we've taken over the last decade to strengthen and diversify our business enable us to faces challenges from a position stability and confidence.
We have a history of emerging from difficult economic periods with robust growth because of our approach with current and potential quality clients. We chose our small and busy medium sized business owner kinds carefully and we stick within through tough economic cycles, taking proactive and long term approach.
We're not the same bank we were in prior deterrent downturns were stronger we're more diversified and we better tools I'm confident that are sound business model, including are unchanged approach to strong underwriting will service well in this challenging environment as it has many times before.
We have a tremendous opportunity in front of us and a solid plan to transform our bank to increase value for our people our clients and our investors.
We have a big year ahead, with our transition to a or B approach the launch of digital banking leveraging our wealth management acquisition into more full service client relationships and opening of our first Ontario brands in Mississauga.
Thank you and I look forward to speaking with you when we report our third quarter financial results on August 27, with that we wish you all good morning.
Thank you, Sir ladies and gentlemen, this does indeed concludes your conference call for today once again, thank for attending and at this time, we do have such a please disconnect your lines have a good weekend.
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