Q2 2020 Earnings Call
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Twentytwenty second quarter results presentation. My name is filled Smith senior Vice president of Investor.
Yes.
Presenting to you. This morning is Brian quarter, Scotiabanks, President and Chief Executive Officer, Raj Viswanathan, Our Chief Financial Officer, and Daniel Moore, Our Chief Risk Officer. Following our comments, we'll be glad to take your questions.
Also present to take questions. This morning are the falling Scotia Bank executives, Dan reads from Canadian banking Nacho day shop from International banking, Jake Lawrence and James need from global making in markets and Glenn gallon from global wealth management.
Before we start and on behalf of those speaking today I will refer you to slide two of our presentation, which contains scotiabanks caution regarding forward looking statements.
With that ill now turn the call over to Brian quarter.
Thank you Phil and good morning, everyone I would like to begin my remarks today by discussing the Covis 19 pandemic and the impact it has had on our employees our customers in the communities we serve.
Firstly I would like to sincerely thank our customers further loyalty.
Patients and understanding.
As your bank, we are here to support view.
I would also like to recognize our employees for their dedication and commitment in support of our customers whether it is in our branches call centers were operation centers Scotiabank employees have gone above and beyond to provide service advice and release to millions of Lloyd.
Oil Scotia bank customers.
Half of the banks leadership team I would like to extend my sincere. Thanks to all our employees for providing customers with a critical banking services. They need we are proud and appreciative of their efforts.
I would also like to recognize the very strong policy response from the bank of Canada, and the government Canada. The response to the crisis has been swift and characterized by a high level of coordination and cooperation between policymakers and the banking sector.
Since the pandemic began the bank was quick to recognize the threat and adapt quickly we maintained a close to normal operations as possible to support our customers. While also ensuring the safety of our employees.
We have a business continuity planning beginning in late February as a threat as a pandemic became more apparent.
Our considerable technology investments in recent years.
He has played a key role in our response to the crisis and our operational resilience. It has allowed over 80% of our employees excluding branch staff to shift quickly and smoothly to remote work environments. While our technology teams have rapidly develop new online tools to assist customer.
Yes with relief programs. The net result is that digital banking has emerged as the most popular service channel for our customers during the pandemic.
We have also supported our customers by keeping approximately 90% of our global branch network open.
With appropriate safety measures and by adding capacity to our call centers.
I've often said the role of banking is to act as a shock absorber in times of crisis that was true in previous times, a difficulty and it is certainly true today to date, we have provided financial release over 300000 customers here in Canada on loans totaling over $40 billion in the puzzle.
Pick alliance, we have processed over 2 million customer assistance applications on loans totaling approximately $20 billion.
To support businesses, we have provided additional loans of over $45 billion to small businesses and a corporate and commercial clients across our footprint, but growth in loans represents an increase of 6% in our loan book in the quarter.
Our total lending support to customers totals over $100 billion. We have also facilitated access to capital markets financing for businesses totaling an additional 300 billion.
I'd like to point out that request for payment deferrals Pete in the first week of April here in Canada, and we are now tracking at significantly lower levels.
We have witnessed a similar pattern in Latin America, depending on the timing of different programs in each country consumer spending in Canada as measured by daily credit and debit card spending has also improved towards prepared them at club.
Drawdowns on business lending facilities peaked in late March and we are now back to normal pre pandemic levels.
A significant percentage of funds that were drawn down on business lending facilities have returned to the bank as wholesale deposits. We're also beginning to see repayments as debt capital markets remained very active.
We're also proud to support our team in these across our footprint by committing over $15 million to support people, who are most at risk during the pandemic, including our ongoing support of hospitals and health care professionals. They deserve our gratitude for their courage in the face of this unprecedented.
Public health crisis.
For the bank to support its customers and cumin lease it must be financially strong while our second quarter results were significantly impacted by cobot 19, the bank and all this operating divisions continue to be profitable, we are well positioned from a capital and liquidity perspective and we.
We are appropriately reserved for potential credit losses, our common equity tier one ratio was 10.9% in the quarter, which is comfortably in excess of the regulatory minimum and more than enough to accommodate expected customer demand.
And our WHA inflation.
With us the is 125 basis point reduction in the domestic stability buffer the 1.9% excess common equity tier one ratio represents over $8 billion of additional capital or 90 billion of additional R.W.A. growth from current levels.
The banks liquidity position is also strong with our liquidity coverage ratio at 132%, which is well above recent quarters.
Thanks pool of high quality liquid assets stands at $180 billion, which as well above the level of recent years and appropriate for the current market conditions.
We also carry high levels of liquidity across our Pacific Alliance countries with liquidity coverage ratios between a 150 and 200%.
The bank continues to be well funded with strong growth in deposits and with steady access to wholesale funding.
While funding markets were volatile at the outset of the pandemic, we've been able to maintain a robust funding program across multiple currencies in both secured and unsecured markets.
In addition, it is worth noting that funding spreads have been narrowing since the end of March has a pandemic has become better understood and policy actions by central banks and governments have begun to take effect.
In terms of credit the bank is appropriately reserved for potential credit losses, we have added over $1 billion or 19% to total allowances this quarter, which now stands at over $6 billion recall that we added a fourth more pessimistic scenario in Q1, which added.
At over 150 million to allowances.
We continue to provision early and conservatively our asset quality remained strong with high levels of secured and investment grade assets. We are also highly diversified by product by sector and by geography.
Our exposure to sectors, most impacted by Cobot 19 is limited at 4.7% of total loans, reflecting.
Substantial de risking efforts in prior years, Daniel will provide further details on our loan exposure.
Revenue growth in the quarter was slowed by lower retail customer activity due to the shutdowns related to the pandemic. However, strong results in GBM.
Very good results in wealth management helped to partially offset this weakness this highlights the benefits of our diversified business model.
<unk> expenses were higher as we made certain investments to support our employees with higher compensation enhance workplace safety measures and remote work environments, Roger will discuss our financial results in detail following my remarks.
I have commented many times on the positive qualities of our six core markets of Canada, the United States in the Pacific Alliance countries. The response to the pandemic has illustrated these positive qualities further as each country was quick to introduce similarly substantial fiscal and monetary Paul.
Let's see actions to mitigate the economic impact of the virus.
This came in the form of lower interest rates fiscal stimulus and other support measures critically these countries have the fiscal capacity and the institutional strength to respond quickly and effectively over.
Over the long term their resilience young populations and the increasing importance of diversified supply chains will prove to be beneficial for their future economic growth.
As we have strive to support our customers through our channels during that pandemic digital banking has emerged as the preferred channel for our customers.
Over 40% of payments deferral requests in Canada, and 80% of payment deferral requests and international have been processed online.
We've also seen strong growth at Tangerine Eni trade. This has also helped to drive an acceleration in digital adoption by our customers.
Well a current environment makes the outlook highly uncertain.
Our current expectation is for negative economic growth in our core markets for the balance of 2020, followed by.
A return to stronger levels of economic growth in 2021.
This reflects both the gradual abatement of the pandemic, an orderly reopening of economies and the positive impact of unprecedented.
Really programs across our core markets.
Although we expect revenue and PNC bank and to be lower in Q3.
And that loan loss provisions will be elevated from normal levels for the balance of the year. We also expect all four business lines to remain profitable.
Ill now pass the call to Rush, who will review our financial results and I will return with some closing remarks at the end of Q anyway. Thanks.
Thank you, Brian and good morning, everyone.
I'll start on slide nine.
The banks results this quarter were negatively impacted by cobot 19, given higher credit costs reduced consumer demand in the second half of the Florida and the impact of cost when deferral programs.
In addition, our previously closed divestitures impacted the period over period comparison off our results.
Adjusted net income was $1.4 billion and diluted EPS.
Was a dollar and four cents for the quarter down nearly 40% compared to last quarter and last year.
The results were significantly impacted by higher loan loss provision.
And charges related to our metals business.
Also on on adjusted basis total Pcls this quarter increased by $1.1 billion to 1.8 billion.
Mostly in performing Pcls loan provisions.
Adjusted PCL ratio increased 68 basis points to 119 basis points.
Pretax pre provision profit improved 1% on an adjusted basis, reflecting the good revenue growth and prudent expense management across the bank.
Excluding the metrics business charges pretax pre provision profit improve a strong 7%.
Revenue increased 4% from last year, driven by volume growth.
Joining from asset liability management activities and strong trading revenues.
The core banking margin of 2.5% was down 10 basis points from last year.
Business line margin compression was offset by benefits from the bank being positioned for declining rates reflected in the other segment.
The decline was primarily driven by increased growth in low margin treasury assets driven by significantly increased liquidity in the latter half with this quarter.
Expenses were up 8% year over year auto modest, 5%, excluding the metals business charges and divestitures.
The growth was primarily related to higher regulatory and technology costs.
Our Q2 earnings included a charge to collar expenses related to our metals business, both with respect to the wind down of this business and provisions.
As disclosed in our Q1 Twentytwenty mdna the provisions related to investigations by the commodities Futures trading Commission, all CFTC and the U.S. Department of Justice and related to legacy activities dating back in 2008.
Although settlement discussions are ongoing and the final amount is not expected to be material to the bank.
Year to date, adjusted operating leverage excluding the metals business charges and divestitures was a positive 3.5%.
Turning to slide 10, we provide an evolution of our cetone ratio over the quarter.
The bank reported a common equity tier one ratio of 10.9% down approximately 50 basis points quarter over quarter.
The 70% add back of IRS mind related expected credit loss provisions that Austria provided at OCC of temporary support to the banking sector benefited the CD ratio CD, one ratio by approximately 10 basis points.
Strong organic growth audibly growth was driven primarily by corporate draws and increased counterparty credit less capital requirements due to wider credit spreads.
More than offset.
The internal capital generation.
We expect some audibly inflation for the balance of the Europe. However, the banks developed position to absorb the audibly increase with the 190 basis point excess capital over the new regulatory minimum of 9%.
Turning now to the business line results beginning on slide 11.
Canadian banking unit reported net income of 481 million down over 40% year over year and quarter over quarter.
The business saw good momentum in February before the onset of Cobot 19 in March and the full impact in the month of April including customer leaf measures.
The results this quarter was primarily impacted by elevated performing loan provisions.
The PCL ratio of 77 basis points increased by over 40 basis points, yet, we are and quarter over quarter.
Total revenues were flat year over year with higher net interest income offset by lower non interest income.
Hi, mainly due to lower credit card revenue spending declined in the latter part of the quarter and lower insurance revenue due to high of credit claims.
Net interest income increased by 4% year over year, driven by strong growth in assets and deposits.
In retail lending residential mortgages grew a strong 6% and personal loans were up 3%.
Business ending continued to see strong growth.
Up 14%.
The net interest margin was down three basis points quarter over quarter.
And seven basis points year over year, driven by the rate environment competitive pressures and interest rate costs from the bank of Canada.
Noninterest income was down 11% year over year, driven by lower insurance revenues reduced credit card revenue and lower income from investments in associated corporations.
Year over year expense growth was a modest 4%.
Driven by personnel and technology investments over the last quarter four quarters to support business growth.
Turning to the next slide on International banking My comments that follow up based on results on an adjustment and constant dollar basis.
Earnings of 197 million was down approximately 70% year over year.
Driven primarily by higher provisions for credit losses on performing loans and the impact of divestitures.
Taken together pretax pre provision profit was up 1% year over year.
Total sales increased by 542 million from a year ago, and the PCL ratio increased by 147 basis points to 278 basis points.
Revenue declined 9% year over year due to the impact of divestitures and co at 19.
On a quarter over quarter basis, excluding the impact a one month reporting lag benefit in Mexico that caught up last quarter revenues were down a modest 2%.
Net interest margin declined 34 basis points year over year to 4.28%.
Given by higher growth in lower margin commotion loans compared to retail loans and the impact of central bank rate cuts across our footprint.
Expenses were down 3% year over year or up 2%, excluding divestitures, primarily due to personnel costs.
Auto a quarter, a reduction of 5% and expenses, excluding divestitures more than offset a decline in revenues of 2% generating a positive operating leverage for the quarter.
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Moving to slide 13, global banking and markets net income of 523 million was up a strong 25% year over year and up 16% on an adjusted basis quarter over quarter.
Higher income driven primarily by strong fixed income trading revenue more than offset elevated cold 19, and lower oil price related provisions for credit losses.
Corporate loans grew 20% year over year, reflecting continued support to our customers.
The utilization rate grew by approximately 6% of total committed facilities during the quarter.
More than 80% of that draws will from investment grade customers.
This is expected to contribute positively to high on net interest income in future quarters.
Significant boson data of these drawdowns will case as deposits with the bank, which contributed to this strong 33% growth year over year.
Strong income growth, coupled with prudent expense management resulted in a 20% year to date positive operating leverage in this business line.
Turning now to our global wealth management segment on slide 14.
Earnings of 314 million lit up 3% year over year on a strong 7% excluding the impact of divestitures.
The increase was primarily driven by higher retail brokerage fees, given elevated volatility in public markets and higher net interest income.
Assets under management decreased 6% year over year and assets under administration decreased by 3% deal with.
Largely reflecting the impact of divestitures.
Adjusted expenses continue to be prudently manage and were down 1% year over year, resulting in productivity ratio of 61.9%, which is down 90 basis points from last year.
We saw record results this quarter for both new client account openings and trading volumes and I trade.
Additionally, we saw positive fund flows in third party Mb financial and institutional channels, coupled with strong retention across Scotia, Mcleod private investment Council and the international Advisory business.
I'll now turn to the other segment on Slide 15, which incorporates that has also group treasury smaller operating units and certain corporate adjustments.
The results also include the gains and losses on divestitures and asset liability management activities My comments that follow on on adjusted basis.
The other segment continued to see higher contributions from asset liability management activities.
Benefits over the balance sheet being positioned to benefit from declining rates as reflected in this segment.
How are elevated expenses, primarily relating to the metals benefit charges.
Veterans business charges, my apologies throw a higher earnings loss of 166 million this quarter.
I'll now pass the follow up or down in Los Angeles.
Thank you Ross and I will begin my remarks on slide 17.
Holding 19 has led to significant provisions being recorded across the banking sector globally.
This morning, the bank reported provisions for credit losses of $1.8 billion.
Reflecting an increase of about 156% from a year ago and up 139% from last quarter.
We also saw significant increase in our PCL ratio to 119 basis points of 68 basis points from left from both last quarter and of the prior year, reflecting the current economic outlook.
While the economic environment remains uncertain. The bank has taken a sufficient level of provisions at this time and we are appropriately reserved.
This reflects our banks specific business mix.
Unique geographic footprint and conservative assumptions.
The provisioning process this quarter reflects multiple stress and recovering scenarios and significant extra credit judgment.
It also factored in the impact or many programs and our second specific guidance from regulators.
As expected the provision this quarter was heavily impacted by higher pcls on performing loans as a direct result of assumptions, reflecting cobot 19.
Specifically it was based on a more unfavorable economic outlook in our base case, including lower GDP lower oil prices and higher unemployment.
While generally part of our annual disclosure this quarter, we have provided our updated macroeconomic forecasts across various scenarios, including our new fourth pessimistic scenario that was introduced last quarter.
You can find detailed these at our Q2 mdna.
I'd also point out at the current court provisions are skewed significantly significantly towards the too pessimistic scenarios inline with our approach to conservative provisioning.
Based on current data and current forecasts, we really expect our provisions remain elevated compared to normal levels for the rest of the year.
Turning now to slide 18.
Provisions on performing loans increased 954 million year over year on an adjusted basis.
Quarter over quarter, the increase was 1 billion.
The majority of increase was attributed primarily to retail in both Canadian banking and international banking in line with the unfavorable economic outlook.
While GBM saw an increase largely reflecting the impact a little lower oil prices.
Provisions on impaired loans increased 24% year over year were up 4% quarter over quarter.
Higher provisions on impaired loans compared to last year were primarily driven by higher came commercial and double back end markets.
On a quarter over quarter basis, the increase was principally driven by Canadian and international commercial.
Taking a moment to look specifically at our corporate exposures on slide 19.
I want here to highlight in the sectors that are the most impacted by coping 19.
Including transportation hospitality and certain sub sectors in commercial real estate and energy.
We have provided new slide which shows an aggregate exposure of roughly 4.7% bags total lending book in these sectors.
Our exposure to office and retail real estate is 1.5% of total loans and is largely investment grade.
Okay closure to hospitality and leisure is well diversified.
Thanks to air Transportation are immaterial to the back.
Turning now to the next slide on energy, we believe the relevant sub sectors, our exploration and production and oilfield services, which are most sensitive to weakness in oil prices.
They account for 1.7% of total loans.
Over 40% investment grade.
While the majority of non investment grade exposure is to secured reserve based loans are solving a controlled entities.
Frankly, the remaining portion of the portfolio is not material.
As a reminder, we are a senior lender in all our lending facilities in the energy sector.
In addition to our credit risk is further mitigated by the fact that many of our lending hires of hedge their production through twentytwenty or are the presence of materials subordinated debt.
First loss costs.
Looking now at gross impaired loans are gils on slide 21, gills increased 7% quarter over quarter.
However, the Gil ratio remained stable at 78 basis point.
The Gil ratio declined 11 basis points year over year.
Primarily due to the impact of the divestitures in international banking.
Looking back over the last three years, our gross impaired loan ratio has declined from over 100 basis points to 78 basis points today.
Net formations of 1.22 billion were up 26% from last quarter.
And up 42% year over year.
The increase largely reflecting higher commercial impairments in Canadian and international banking.
On the next slide.
Our net write off ratio was 47 basis points down 70 basis points from last quarter and three basis points from the same period last year.
The improvement was largely driven by lower net write offs, both international banking and global banking markets.
I will now turn the call over to Phil. Thank you Daniel will be will now be please take your questions. Please limit yourself to one question and then rejoin the queue to allow everyone. The opportunity to participate in the call. We will return at the end to make a few closing remarks after Q and eight.
Operator can we have the first question on the phone please.
Thank you.
From Star one after since you have a question.
The first question is from Doug Young from insurance capital markets. Please go ahead. Your line is open.
Good morning, it's probably a question for not showing maybe Daniel but just thinking of the Caribbean exposure. It's an area that's relatively unique for.
For your bank in particular and thinking of the pressure on tourism, how should we think.
Scotia's positioning.
From an allowance perspective, a business perspective can you give us a little bit of an update what you're seeing there.
And I did notice the PCL on the Caribbean in Central America business was up quite materially sequentially.
Just thinking how we should expect that to move sequentially here. Thanks.
Yes, I'll start international fall apart.
So yes, our provisions are up their reflecting as I mentioned before our conserve approach to our provisioning.
I want to say in general.
As a message our our book of business.
What we've done in terms of de risking efforts frankly over the last five years.
It's going to pay incredible dividends through here that matters.
Tremendously in the fourth album.
Principally in the Caribbean, we've been focused as you know on reducing our exposure to higher risk markets through divestitures and active de risking measures in the countries that we remain in.
Currently customers. This is programs are showing improvement in portfolio performance with a significant decrease in early delinquency across the region.
We've adjusted our risk strategies to reflect changes in the risk profile and this has been followed by an extension of customers system capabilities based on those increased delinquency volumes.
Over the coming months, we expect delinquency levels to be.
To be changeable as income economic impact in the region is expected to last through the end of the year and this is reflected in our provisioning methodology.
But I'd say overall not show that we are pleased our recent divestitures and central American Caribbean are complete.
And this results in a better risk profile for the region.
Yes, let me could come thank you Dan let me complement the question Doug I would say first it's important that we have reduced our exposure into Caribbean through divestitures of having important but I would say it has a different programs in general for international banking particular for the Caribbean are very important to help our customers breach these cash flow.
Really impact so and this is not unusual for us in the Caribbean. Let me remind you that two years ago. We had the your mind Maria here, you can see who they were quite material.
Today, we are supporting two median customers in international banking 2.5 million.
That even with supporting half a median customers seem to Caribbean IDN, we ended up releasing some provision because the real losses that we had little to create losses were less than expected. So yes, the Caribbean will be impacted significantly due to recent into short term, but he social very much linked to the us economy as the Utica.
Bonomy recovers the Caribbean should recovered to.
So just to summarize me it doesn't feel like your two concerns you provision it feels like you're suggesting appropriately and you're watching the business like it doesn't feel like your two concerns that a fair kind of take away from.
Yes, I would say, we we are truly issuing the Caribbean, assuming our two international that land banking and really our our PCL deletion east twice, our normal run rates and that applies to the Caribbean and the rest of our footprint.
Okay. Thank you.
Okay. Operator next question please.
Thank you.
Next question is Mems and given the attention from National Bank Financial. Please go ahead. Your line is open.
Good morning, two questions one on the credit when on capital and Daniel just start off with capital you've talked about the.
Look first try to get the.
Can you elevated relative to your normal levels for the remainder of the year.
Pretty broad statement I get it I just wanted to kind of.
Centsper, how your visualizing, we got a big Spike this quarter are we going out of a couple of more quarters like.
This one or the moderate as some of the.
Forming provision migrate into impaired provisions of my kind of.
We do more of a grading down from this level.
Thank you good question goodwill.
Let me start without going into two part question I'll just start with Ellen.
So as I said, we expect the.
Provisions to remain at elevated levels versus normal run rate going forward.
That would be too.
Understanding thats investor wide range, we'd expect to be towards the higher end to that range for the next quarter and then we would do you have a prospective recognizing that a current circumstances Q4 is a significantly long forecast given me the current uncertain economic and outlook climate that we have.
That we see some moderation in that result going into Q4.
Brian I think has some additional where says yes Gabriel Thank you for the question as Brian.
There's a lot of unknowns here as these economies come at a lock down a lot of different variables. So.
We're not trying to avoid the question at all but I would say that as we look forward Q4 is a long way off but in terms of Q.
I would expect Q3 to look very similar to what we experienced this quarter from while how our vantage point is today.
Okay, well it was only 20 million off of my Rubin provision for him I'm happy third variable though.
Among the capital question.
I might be early as well of course, but the you're doing a whole bunch of stress testing between here and economic scenarios you have any.
Huh.
Quantification for light on on the capital consumption that might come from a credit migration.
Sure Gibbons Roger I'll see if I can help you with that question I think as part of prepared remarks, we talked about a 190 basis points excess over Austria minimum, which we have now which equates to between $90 billion to $100 billion of risk weighted assets and that's a lot as you can imagine it's close to 20% to 25% of existing RW eight so long way.
To go before we get there and you're right, we're not allowed us scenarios.
Used in audio recovery, we recoveries and audio and al scenario, a w. scenario all kinds of stuff. We have done in this quarter into limited time that we have like what I can tell you get real based on all of those the dissolves in all its an audio is our capital ratio as far as we can look forward today and using the most conservative assumptions that vacant.
Imagine today is an ex us up 10% and all these scenarios quite comfortably.
And Thats based on obviously declining or lowered earnings that we expect to see in line with beacon innovative any of those on that these stress test and also supporting the dividend payout that we expect to continue to make.
So I think we feel good about our capital ratio the weight is and we've continued to drive it as closely as as we had a quite to do and assay as Brian mentioned as these economies open we'd have a better understanding of what might be to requirement for additional audibly inflation, but most of what we think thats significantly compared with the capital ratios at the getting today, so even though.
I will shape recovery.
Including migration and other factors, you're expecting a quarter one of the remain above 10%.
That's right gave at this time yet thank you.
Hello.
Operator. Please next question please.
Thank you. The next question is France keys Terrile. Some eight capital. Please go ahead. Your line is open.
Thanks, maybe I will turn to margins.
Assuming Ross can you help us out assuming no central bank movement from here no change in drawdown levels although.
I think we all anticipate we will see that overtime, but from what you from where we are today, how much more margin down side do you expect near term.
As some rate cuts sort of filter into the PNM a little more closely.
Thanks, Dave.
You saw this quarter, our margins compared to about 10 basis points and as we had mentioned before we are well positioned for declining rates data driven by market events are driven by central bank rate cuts to wait to place both in Canada International footprint.
The real compression only came because we carry higher liquidity this quarter driven by all the events that happened this quarter and a significant amount of increase in say deposits with banks, which as you know is low margins are tons outside of that it actually offset any compression we saw within Canadian banking, an intervention banking at the all bank level.
But looking forward Directionally, we expect the all bank margin to trend down.
Extremely low interest rate environments higher liquidity levels. All of this is going to play into that factor.
Although what we have done as the hedges that we had on our balance sheet positioning and for lower rates, we have crystallized those hedges, so thats going to another way accounting works. It gets amortized over the next eight to 10 quarters through up handled so that should be a nice offset to it but really we look at risk adjusted margin in this bank as we look good.
All our business and then how we evaluate our portfolio's.
So you look into banks as such as margin over the last few years, it's been healthier on 200 basis points, plus and individually when you look at our business line beat our international business line or Canadian it seems to trend consistently in that range. So directionally lower let it difficult to quantify as you can imagine at this time, but a suspect that you know for us.
Period of time, it'll trend lower than flatten out but in our case, we have the offset relating to the positioning of the bank, which we did in the crystallization of hedges that should help us.
Okay, and then you just a follow up on the previous question you talked about the TG one under under your stress scenario staying above 10 is there any consideration towards a drip discount to create some CTG. One like do you think that's necessary or feasible in this environment or or do you feel like given all your stress testing.
And where you're at that.
That's not necessary from a capital perspective.
Yes, I would say the short answer to it as it is not necessarily from a capital perspective for us to introduce a good discount.
Operations of quite comfortably plays like I mentioned based on all distressed and not as we have gone.
And at this time, we don't think Thats a quite at all.
Thank you.
Operator could we have the next question please.
Thank you.
Next question is from Ebrahim Poonawala from Bank of America. Please go ahead. Your line is open.
Good morning.
I just wanted to follow up.
You could help us domzalski provided clarity Brian thanks for in terms of TCOS.
Well it potentially seeing as elevated.
We saw in Q, what makes you can help us just to pick up I would like all FRS nine impact full impact just the cadence of PCL doesnt take until well into next year than idle can you, maybe you want to stuff but.
Given what we know about the Mac woken up to be into potentially you and shaped recovery.
Do you anticipate that that is building methodology will need to be Seo speaking sometime this year absent something going on or could we see a low teen idled.
Ill now that I don't know pipe pcls once it slows or lost and you start seeing critic might the issue.
Thank you for him.
First of all I want to recognize.
Brian did that this is a challenging time for many of our customers.
And so we worked very hard for back to support them and we're confident of bank in the strength of our portfolio our balance sheet.
I think as backdrop of the asked this question is also important keep in mind. The nature of this event. It is a health crisis with economic effects.
But it's not the consequence of macro economic policies are lending practices.
As a result, the shape of this economic recovery will be driven by the timing of the orderly reopening of the economy, which will direct impact employment wages consumer confidence.
So as Brian indicated based on our data and forecasts and extended the beneath measures that we haven't placed to date, we expect approximately a similar PCL run rate for Q3.
Ultimately the outlook for our Pcls comes down to the timeline to reopen the economy, which tries employment.
Consumer confidence, but I will say there are some promising factors to take notice of you talked about deferral options different options have been offered to those customers who need cash flow relief, we think about these as a bridge.
Customers have been given an option a convenient options some have chosen it.
The objective is to support towards repayment.
And in fact, indicating environment, we see our Kenya household balance sheets being strong and impact being stronger as result of the many deferral and for these measures that have been provided our customers frankly are being fiscally responsible.
You will see and then disclosures that are correct ounces are down 8% globally and 12% in Canada.
We haven't seen material change, our hulot balances Ebrahim and in fact, our Canadian personal deposits are up 3%.
So we look back to when the started mid March.
Total spend for our consumers for bell immediately down about 35%.
But since introduction for these measures on Mark Twain items in a steady improvement and now customer spend just 4% off its prior run rate.
Looking at the balance sheet in the consumer side spot deposits were up 7 billion over that period, whereas the total spend is $3.1 billion lower versus same period between 19.
So the customers balance sheet is looking stronger.
So we think with that backdrop, we are conservatively provisions.
I'd like to take a second here talk about deferrals, it's an important topic and it's been lots of discussion about it.
The deferrals when they come to an end don't result, and much of a change in the required payment amount.
So assuming an economic recovery curve the impacts delinquency shouldn't be significant.
Especially as we arrange payment programs for our customers on a case by case basis.
So to give you some context the impact on payment announcement on average for mortgages would be about $60 per payment as a preferred amount is capitalized and amortized over the remaining term with the mortgage nothing no increase for auto loans as the amortization is extended extended by the deferral period.
For cars, the average increased $22 per month.
We think as a result, it will not be any form of material and contingent on a customer's ability to pay assuming unemployment occur at the end of it appropriate.
Finally, I'd like to say given the uncertainty the outlook, we have significantly enhanced operational capacity to ensure we can help in individual customers on a case by case basis for those that require longer term solutions even.
Ebrahim I'll give some color to the answer.
That's.
Just if one formal update today when you think about deferred is stabilizing do you think your fleet Neil things play out over the next month or tool.
Expected in the next couple of months you'd have a better sense of just.
Actual credit migration that me.
The board into commercial and the consumer books.
I think as we see macroeconomic data we've already seeing this over the last us a six week. So as we've been following bank earnings were getting greater clarity as to what the evolution will look like and what the government measures will allow for reopening of retail and return to employment.
Early stages again as you indicated we'd be Boyd by some of the news that we see but we're not epidemiologists in this room. Although we also composite epidemiologists in our time of but I would say we have reason to be modestly.
Or perhaps even cautiously optimistic on the outlook from here, but that does not count or our conservative approach to provisioning.
Got it all of you wanted to provide any additional color on what Youre seeing your book business.
Standard care for Canadian banking I would just underscore that the majority of customers that have taken the deferral are they're continuing to make payments on that deferred product in many instances or where they have a second loan product or maintaining payments on that second loan products in consumer retail Canada. The net number of.
Loans and deferrals, we expect to begin to decline shortly as a result of either expiring deferrals not being needed or pay down. So recent experience has been has been encouraging it varies a bit by region, but we're encouraged by what we see in the last number of weeks. So it's in summary, we will see flow from performing allowances.
Okay losses into non performing as this evolved thats why we set up are performing reserves is a competitive measure but based on our current forecasts and estimates we view ourselves is conservatively and appropriately provision.
Okay. Thank you for taking my question.
The operating we have the next question please.
Certainly thank you. The next question is Mario Mendonca from TD Securities. Please go ahead. Your line is open.
Good morning.
Well I understand that you.
Conservative.
In addition, you today.
But you're also saying that you'd expect loan losses to be above this level next quarter. So what I'm getting out here is what is the mechanism that you see.
Playing out that causes.
Credit losses to be this high next quarter, because my what I interpreted IRS nine to be.
Is that you build in the lifetime losses, when it stage to the 12 month losses, one stage one.
So if you've already done that then what do you expect to change next quarter do you expect to make your assumptions even more conservative than they are now.
So help me reconcile those two statements that you are properly provisioned today.
But next quarter, you expect similar level of provision.
So I think your observations on the intensive IRS nine are consistent with your original rollout of IRS nine if you follow the guidance Merial from the high ASP in the PR Ray from bank of England that from Aussie here as well as other geographies, we're effectively into version two of IRS now.
Hi.
I think the FTC sort of well when they reference the first fatality of the the pandemic being iOS nine so the guidance have changed significantly.
To ensure that.
And we look to long term established economic trends as well as the full impact of government referral programs and release measures have been rolled out throughout the geography is that we operate in this has changed and better.
Has an impact on our offer side methodologies as we think about how to do this in an environment, where the data is still evolving. So we've typically we think we're taking that cogs appropriately into account.
We look at this going forward of course, this will as I said the impact of going forward by the evolution of employment principally on the duration and extend of relief measures consumer confidence is going to be a big factor and public health factors in general, but the the essence to our perspective on where we stand on appropriateness is that we.
I've done a significant work in de risking the book over the last five years, that's an important foundation matters.
To that point, we've enhanced our customer assistance programs helps our customers get through this you'll know that we've invested significantly $15 billion over five years to keep the bank operationally resilient.
We've invested in digital significantly to improve our accessibility to the customer with 80% of our to pro program internationally access for the digital channel and we've invested in new originations capability analytics and in our core geographies to strengthen our balance sheet and our portfolio's you'll see the impact of that going forward scenario.
But can you tell me what will change next quarter do well you will you just essentially forecast when unemployment is materially higher than 11% is that what we're going to see next quarter that causes the performing loan losses to be side.
No we view the impact in the coming quarter is as you see the shift from the from the estimates produced by forward looking indicators. The unemployment figures that we have to conservatively taken here the Wi Fi that GDP changes that we've taken and are very pessimistic scenarios. You then get the migration into into real.
Staging and into defaults that happened through the normal course of the portfolio. So that will continue to drive the albeit allowance for credit losses and provisions for credit losses that we'll have in Q3, but we would have a perspective that would moderate palm there as a full impact of that comes through.
Marriotts, it's Brian. It's this is as we all know this is not a garden variety recession, so to put traditional recessionary economic modeling on this is not really appropriate.
So the economy will snap back pretty quickly though.
Demand the impact of the relief programs. The government has provided we will have its intended impact, but we've never been through this before.
On the flip side of that there is structural damage to part of the economy and the industries, we talked about whether its energy or hospitality or travel don't know the extended the damaged area.
And that varies by country in region different countries when into different into Lockdowns at different times. So.
We're going to have varied results.
We have a high degree of familiarity of running these deferral programs and Nacho said, it very well with hurricane aroma Anne Marie in the Caribbean two years ago, we had half of the 500000 of our customers and these programs.
The outcome was very good for the bank in terms of our loan losses were de Minimis, but we're cautious here and what were you know this was not a one quarter to quarter event. The banking sector will be picking up broken aid shelves for a number of quarters here.
Okay I just for what is where that I don't see how those two statement both be true simultaneously that year content with your reserves now, but you're going to Buck another maybe 1.8 billion next quarter.
I said they'd be somewhat in the same this entity I Didnt give you a number and I also said look to the balance sheet, we have $6.1 billion of reserves on our balance sheet, which we think is more than adequate at this time, if you're asking me what's going to happen next quarter I'm going to say from what we see.
Here right now, it's going to be similar to Q2.
Okay. Thanks.
Yes.
Operator next question please.
Thank you. The next question is from Darko Mihelic from RBC capital markets. Please go ahead. Your line is open.
Hi, Thank you and good morning.
Few questions here.
These are all primarily for Dan I believe it may be Raj as well.
I'm trying to follow if you look on on the supplemental capital supplementary since page 50.
The flow statement and what I'm looking at is the increase in risk weighted assets from the change in asset quality.
And it's a mere 1.7 billion.
Which is which is very small so I'm trying to connect the couple of thoughts here I mean, what we saw was we saw about $5.8 billion of loans that were migrated to stage two.
This quarter, so presumably they had a significant increase in credit risk and yet the increase in the amount of our WH because an asset quality seems quite light.
So I want to connect the dots here Dan.
As we go forward into next quarter, presumably there will be migration to stage, three and perhaps more stage two.
Because certainly the 5.8 to 5.9 billion of stage to increase its very disconnected from the deferred loans.
So what I'm getting at is as we see this sort of migration occur next quarter and perhaps even the quarter after that.
We should we see it a big connection year to that asset quality of the R.W. way inflation and maybe you can size. It for me. If we have 5.8 billion of stage two migration, if thats seeing 5.8 migrates or let's say happened that migrates to stage three what will be the R.W. weigh in.
And I realize these models are a little disconnected, but I'm just trying to gauge what the R.W. way inflation might look like next quarter in the quarter after.
Okay. So I'll also talk force Darko. Thank you for the question Youre right. The $1.7 billion. Your effort to is positively inflation on migration that happened this quarter.
It's actually an increase of close to $3 billion that relating to our offer commercial portfolio and there was an improvement in the retail portfolio.
As you know retail is highly diversified it goes across many countries. This number that we talk about it's mostly Canadian because there's a RB number that you are referring to and the Canadian portfolio is mostly secular 90% to 93% as we've talked before so you you expect to see some some level of movement up.
Down and are consistent with what you will see into corporate.
Julio.
Onto your question more directly on what do we see at this time looking forward audibly inflation, I think albeit down to 40 45 basis points range that we think based on all the modeling we have done in this and audio said that inflict too earlier in a question on the Atul shaped anew shape and all of those tough.
Medac like I point out to you a highly diversified portfolio extreme levels of stress we have used because they don't do we have adequate capital adequacy objective off that stress.
Testing that we did and that gives us at this time it would be around that range well continue to update strengthen audio has let us not only because as we go forward it could become less press might be become.
Lets pessimistic then we're looking at at this time, but we feel comfortable it'd be around that range. If it platos into maybe a model.
And should I connect the too I mean is it.
Sure that'd be expecting that are to be way inflation to be connected to the migration to stage two industry is that a fair connecting to make I.
I think there'll be some connection Darko I don't know that has a direct connection because as you know I have taught us nine works on.
Point in time cycles while.
Basel woke sell through the cycle, while Basel has gone down going as Judy I have taught us nine does not have done done entity. So this does nuances, which will have differences, but directionally there should be some level of calculation not exactly 100% correlate a number that you would see.
Okay. Thank you.
Yes.
Operator, we have the next question please.
Certainly.
The next question is from maybe Groman from Cormark Securities. Please go ahead. Your line is open.
Hi, good morning, pulling up on the on the deferral question. What are you assuming the unemployment rate at the end of the deferral period and is there any talk of extending the difficult period, what are the odds of not being extended.
Many of Daniel here, I think we've given our forecast for unemployment under a variety of scenarios for our principal geographies in the M. DNA.
At over our scenarios that ranges.
From a rate of frankly, 11% of the 12 month mark through to the high teens. So I think we've provided a conservative unemployment forecast.
For all on the on the.
No deferrals post the end of the deferral period.
A reminder, that our mortgages are generally on the six month deferral, whereas our auto in cards portfolio on a three month portfolio.
Quarter basis, where we're going to work with our customers on a case by case basis as I indicated.
The impact on payment at the end of the deferral period for auto is.
Zero effectively impact underpinning about for cards is about $22 on average so.
So we'll be working through our customers and segmenting them appropriately and reaching out to provide assistance to them through the end of the period.
Okay, and then just more broadly on the health of clean balance sheet.
Reported that you stopped lung brokers do you see lots were down payments on investment properties I'm just wondering.
The other changes to underwriting, but you've made that are notable and anything else, it's being contemplated and do you expect that to impact loan growth going forward mortgage growth in particular.
Many high it's Dan I'll take that one.
Small change you referenced with sort of consistent with the industry. We obviously attracted a little media attention. It was it is the only material change we've made in terms of mortgage origination standards.
We do anticipate that notwithstanding our strong mortgage growth in the quarter, reflecting healthy pipeline in Q1 does that could well moderate a little bit from here and we don't plan on any additional origination changes in that portfolio. At this time I would say, we did tighten origination staff.
Under its quite early on in the auto sector, where where a market leader we work closely with customers as Daniel said, but we felt it was important to introduce the requirement for proof of income and proof of employment and so we should expect to see that loan book slightly slow for the next couple of months.
Thanks.
The operator can we have the next question. Please.
Thank you. The next question is from Scott Chen from Canaccord Genuity. Please go ahead. Your line is open.
Hi, Good morning, it's one that time Don's question about the lies the R.W. inflation and.
Thank you alluded to.
The stresses that you stated.
Uh huh.
I was having a C one way or.
Over 10% was that was that for the duration in fiscal 2020.
Oh, that's looking through to 2020, Scott and beyond because that accommodate low stock, let's say in Q2 Q. If any of next year, then I'm going to equal if it was a low point.
Okay and.
And maybe maybe just one question on Canadian banking can you provide some.
NIM.
Look similar to what you.
What you suggested to us for international please.
Sure I'm happy to go with as far.
As far as Canadian banking, then goes that will be some level of compression like you saw this quarter I don't know seven basis point digital video 30 basis points quarter over quarter.
Driven by all the reasons that I mentioned in my prepared remarks Central Bank rate Cox full quarter impact, we'll see if next quarter.
This quarter couple of times as you know business makes changes definitely is going to have an impact.
And one thing, which is consistent as competitive pressure.
As as you know the economy starts at a coding and opening up over there. We expect all our appears to be competing for the same business and that's always going to resolved and lower rates as we have seen in the past. So multiple factors would we see some level of compression like I mentioned earlier, the all bank it will take compression and you'll see in the Canadian banking business plan as well.
Right.
Okay. Thank you very much.
Okay. Operator can we have the next question. Please.
Soon thank you. The next question is from John Aiken from Barclays. Please go ahead. Your line is open.
Good morning, Roche, we we saw actually a unimpressive performance on efficiency and so this is Brian pointed out adoption digital as we look down the road.
Can you can we see an impact of the pandemic and obviously the work from home scenario could we actually see some material structural changes to the banks expenses going forward call. It in your and a half two years.
It's a good question John and thank you for that.
Part of the fight Wilsonville. This quarter was what we call Colgate related expenses, which talks about the higher podium made payments. We've made a lot of our frontline employees, who were kind enough to come into war physically rather than working from home because of the necessity.
Additional sanitation needs plexiglass more technology investments and so on that 2% over the 5% growth daily at the all bank level, but if you look at the 3% growth then if we look forward.
There will be autumn learnings that we expect to get through this whole process as Brian mentioned in his prepared remarks, 80% of the people work from home there's got to be some benefits that will translate into how we look going forward for the bank as a whole I should result in savings.
Not sure how soon the travel cost will come back to being normally for does come to it if people think we've been effective and efficient not having to travel across the footprint and so on I see some benefits that we're comfortable that I'm sure. We'll see some benefits as we think through our real estate strategy back to work from home lot of things, but all effect.
To say John very early for us to estimate it's on our list of things that we'd like to help understand what worked well what can we look better and how can we change the way, we look which might result in you know audit expense structure changing as we look forward like you mentioned over the auto too.
Looking at only two adult but I would say that we should see some benefits are going forward.
Understood. Thanks Raj.
Thank you.
Okay. Operator, we have the next question please.
Thank you. The next question from so Rob will have me from BMO capital markets. Please go ahead. Your line is open.
Hey, Thank you, Brian maybe I can go to you I mean you were.
The adamant about getting the bank credit.
To be downturn ready if you will I don't if you were forecasting this but.
De risking exercise and what have you I think has.
Allowed you have used to come into this well prepared.
Curious to know how much of your time and he executive Committee is time right now still focused on blocking and tackling associated with dish.
How much of it is basically consumed by which business segments and are you get ready to play offense or is this still and it depends if you keeping that you've been something.
Yes. Good question. Thank you Sarah.
As this.
We made a comment and our remarks about operational resilience and I think thats. The most important thing here as we spent.
A lot of money over the course of the last five years in terms of.
Upgrading technology throughout the bank digitizing the bank make it easier for customers to do business with us upgrading customer assistants technology, all sorts of different things so significant investments in people processes and technology. So as the operating committee meets a number of times during the course of any way.
Leak in this event, it's largely around operations.
And making sure the banks running efficiently our we set up for the next stage of what we have to deal with here in this specific country. So.
You know as I said on an earlier question. This is not a garden variety turned down. This is this is significantly different I'm very pleased with how the bank has responded and again, that's really a reflection of what we've done to make the bank or resilient and operationally more efficient.
Of course, the last five years, so we feel pretty good about that but we're also very cognizant of various structural damage out there from a credit perspective, we think it's it's manageable, but in some cases, it's going to take time as these countries.
Get through Lockdowns and.
Canadian households, and businesses were truly fees deferrals programs as well as internationally. So.
I'm pleased with how the banks performed.
And again, our significant investments in people processes and technology I think of pay dividends for the bank here.
Thank you.
Yeah.
Okay. Thanks. Thanks, So operator, so that's the last question will now conclude with cynical closing remarks, just some brief remarks, it's Brian when I reflect on the current situation of previous downturns I'm reminded of three fundamentals that are key to a stable and successful bank, which.
All relate to balance sheet and their robust capital high quality assets, an ample liquidity in the banks current position is fundamentally very strong in all three areas and this bodes well for the bank has economies reopened in the weeks and months ahead in the markets, where we have a significant presence.
And we look forward to better times ahead, so with that thank you everybody for participating on our call and.
I appreciate your time and attention.
Thank you the conference call I smell and please disconnect your lines at this time and we thank you for your participation.