Q3 2020 Royal Bank of Canada Earnings Call

August 26, 2020

Good morning, ladies and gentlemen, welcome to IB fees conference call for the third quarter Twentytwenty financial results.

Please be advised that this call is being recorded.

I would now like to turn the meeting over to Nadine on head of Investor Relations. Please go ahead and Sun.

Thank you and good morning, everyone speaking today will be Dave Mckay, President and Chief Executive Officer, Rod Bolger, Chief Financial Officer, and Graham Kepware Chief Risk Officer.

Open the call for questions.

Well go have with us in the room, Neil Mclaughlin group head personal and commercial banking that Goodman group head wealth management insurance and line yes.

No there group had capital markets.

As noted on slide one our comments may contain forward looking statements, which involve assumptions and have inherent risks and uncertainties actual results could differ materially.

I would also remind listeners that the bank. That's a good performance on a reported and adjusted basis and consider supposed to be useful in assessing underlying business performed.

Give everyone a chance to ask questions. We ask that you limit your questions and their mchugh with that I'll turn it over to date.

Thanks, Dean and good morning, everyone. Thank you for joining US today, we hope you and your loved ones are keeping safe and well in a period of uncertainty.

Our main focus remains ensuring the health and wellbeing of our employees and standing by our clients in communities in these challenging times.

Against the pandemic backdrop, we're actively supporting our clients through numerous relief options through financial advice and proactive Klein outreach to meet their needs.

Since the onset of the pandemic, we've been able to over 500000 clients globally through various payment deferral programs.

At the end of July the outstanding exposure that's been deferred.

Has reduced significantly as many of our clients rolled off the deferral programs during the quarter.

Many clients took deferrals or the precaution and we expect most to resume payments when deferrals expire.

We had noticed last quarter, the Canada's finances, we're well positioned should further actions be required and since then we have seen an extension to federal income support programs.

The combination of these government and client support programs strong equity can homes and elevated savings rate along with strong bank balance sheets provide us with comfort running through the transition to the next phase of the economic recovery.

In Canada. In addition to quite really program. We're also committed to supporting recovery in the small business sector.

Which is critical to the broader economic recovery.

Through the launch of Canada, United We're bringing together government business associations.

And more than 50 of Canada's leading brands to rally consumers and give local businesses to support they need to reopen during these uncertain times.

We also launched points for Canada, a program to help stimulate local economies by giving increased RBC rewards to our clients as they dine in shopping Canadian restaurants in stores.

We are optimistic the strength and breadth of our market, leading rewards proposition coupled with strong partnerships will provide value to clients and support businesses at the heart of our communities.

I will now speak towards Q3 financial performance in the context of the macro environment and client activity.

Today, we reported earnings of $3.2 billion are strong pre provision pretax earnings of over $4.7 billion.

To our capital buffer this quarter or absorbing the impact of higher PCL and lower interest rates.

Our resilient earnings continue to support dividend payments a commitment we have upheld throughout our 150 year history.

This quarter, we paid $1.5 billion and dividends or nearly half of our net income to our over 1 million retail and institutional shareholders. The majority of whom are based in Canada.

Our C. One ratio of 12% now provides a $16.5 billion buffer over the current regulatory minimum of 9%.

This is an addition to over $6 billion and allowances for credit losses.

Our internal stress testing suggests that even under a severe pandemic scenario.

Capital levels remain well above the 10% minimum set by ought to be prior to the pandemic.

It's important to remember that our businesses have already experienced a stressed events over the last five months and our allowance capital and liquidity ratios are all consistent or better than they stood at the end of January.

And looking at economic drivers as the Canadian economy slowly opens up you're seeing signs of recovery in Canadian consumer spending.

That's stores continue to open we've seen our over 9 million cardholder spend more this july than last year. The first year over year positive trends since mid March.

We're also seeing strong activity in housing markets across North America.

In Canada, Homesales house prices and housing starts have shown surprising resilience, partly reflecting pent up demand and low interest rates.

We reported very strong mortgage growth of 10% year over year.

Going up from similarly robust levels at the start of the year.

Our E signature solution, that's helping our mortgage specialists in the field.

The answer benefiting from investments, we made and digital tools to allow for self serve renewals.

While it's too early to comment on the sustainability of these trends, we will continue to help Canadian homeowners, while supporting balanced growth in the market.

As always we place emphasis on the quality of the bore and we will not compromise our risk profile to add mortgage volumes.

Although labor markets remained soft relative to the beginning of the year. They are showing a positive trend Canadian job market has recovered over half of the 3 million job losses since our seen in March.

Outperform the U.S. recovery on a relative basis.

From a macro perspective, we've also seen rising oil prices and signs of recovery in the manufacturing sector.

The combination of these factors have contributed to the rise of equity markets to record levels and the normalizing of credit spreads towards pre pandemic levels.

While we are seeing early encouraging signs of an economic rebound from the depth of March uncertainty remains over the timing and shape of the recovery.

The real test of the recovery will come once government support program start to wind down.

We anticipate the fall will be a challenging time and that's why we're proactively reaching out to clients to see how we can continue to be health.

In addition, we're cognizant of the potential economic threat of a second wave of cobot.

Given these and other risks, we took prudent action and updating our economic scenario weightings to put a greater emphasis on downside scenarios under IRS nine.

Graham will speak to our assessment of our allowance for credit losses.

Let me now shift to what we're seeing a corporate and institutional markets.

This quarter capital markets benefited from continued robust client activity at the end of Q2.

Resulting in record earnings for the segment this quarter.

As credit markets continuing to open following the extraordinary intervention by global Central banks last quarter, we supported significant client financing demand, resulting in strong debt underwriting.

Our commitment to our clients resulted an RBC capital markets, winning best investment banking, Canada, where the 13th year in a row. According to your money magazine.

This quarter. We also saw strong equity underwriting activity, which continued into early August with RBC capital markets, serving as an active bookrunner on rocket companies 1.8 billion dollar IPO.

Our strong trading performance with highlights the counter cyclical nature of some of our revenue streams benefited from elevated client activity in this period of markets dress.

And Mark contrasts M&A activity generally remains muted as the macroeconomic and political uncertainty or giving Ceos pause and most sectors.

Out of healthcare and technology.

Our wealth management businesses maintain their number one position in Canada, and RBC global asset management surpassed $500 billion and assets under management for the first time as our clients continue to trust us with their assets throughout the cycle.

And our U.S. wealth management also performed well with assets under administration rise into a near record high in US dollar terms city National continued to see very strong loan growth with loans nearing $50 billion.

And also saw very strong deposit growth.

Well, our core franchise continues to grow and at clients. The current low interest rate environment negatively impacted results this quarter.

This impact was exacerbated by a shift in asset mix the material increase enterprise wide liquidity, which rod will speak to.

We've been a source of strength and stability for clients. During this period. This is reflected in a significant 16% year over year growth in average deposits across our segments.

Our retail and business clients are not only depositing government support payments, if they're checking accounts, but I've seen a drop in June of cash outflows due to the bank support programs as social distancing requirements. These higher savings rates a positive implications for credit quality.

Furthermore, we are seeing the benefits of of our multiyear investments in digital and analytical capabilities in our custody business. We're seeing increased client deposits as mid sized global asset managers faced challenging conditions.

Some up we're pleased with our results this quarter, our strong performance has its origins and deliberate decisions made well before the start of the pandemic.

The resiliency of our balance sheet is underpinned by our focus on strong underwriting standards and maintaining a high quality portfolio in both Canada and the United States.

Also following our global funds the global financial crisis, we exited the brand Chevy U.S. footprint and instead focused on consolidating our leading Canada and growing our U.S wealth management private banking and capital markets franchises.

Despite the challenging interest rate outlook, we're not changing our long term strategy, which we highlighted the other last investor day.

In Canadian banking, we continue to execute our growth in technology strategy to capture a larger portion of personal checking accounts and residential mortgages.

There are important anchor products and they are an important driver of our premium ROI.

Our leading wealth management platform as toric continuum of offerings to work what retail clients will also being accretive to our OE.

Our deep relationships with our clients provide us with data insights that allow us to better understand their needs and help advise them unimportant financial decisions.

And knowing our clients well is also a great value for the purposes of risk management.

And honest point, 85% of our mortgage clients at an existing relationship with us before requesting mortgage funding.

The 95% of our mortgage clients up more than one product with RBC with the majority having a checking account.

And 19% of our clients of all four transaction accounts credit cards investments and boring products with RBC.

Our strategy also remains unchanged in the us where we are well positioned to capitalize on our investments and the synergies across our capital markets wealth management and city National platform.

In the U.S wealth management platform, including city National we expect to benefit from the growth of our jumbo mortgage portfolio, our recent expansion into new geographies and the hiring of experienced private bankers and financial advisors.

Our global capital markets franchise provides yet another source of fee based revenue as we increasingly emphasize deepening client relationships to drive growth in non lending revenue.

While we remain focused on creating the bank of the future cost management will be an increasing priority as we look to deliver long term sustainable value.

I wanted to close by sharing some perspectives on how RBC is living our purpose and helping clients thrive and committees prosper in a time of social and economic disruption.

Theres No question the health crisis has put a spotlight on many challenges that makes society less resilient and more vulnerable.

Finding ways to build a stronger society from the prices provides all of us with a once in a lifetime opportunity to Reimagine tomorrow.

We have every intention to seize the moment and continue to transform our company for those we serve pretty meaningful and long lasting value.

This focus includes our recently launched action plan to tackle the fact that block indigenous and people of color have been disproportionately disadvantage for far too long.

Our plan address a significant factors impeding the ability of these communities to compete equally and opportunities for economic and social advancement.

As part of this plan, we will increase our staffing targets for buyback executives from 20% 30%.

Another critical areas climate.

Thank you to push forward with RBC is climate route blueprint and just this month, we became the first Canadian Bank just signed a long term renewable energy power purchase agreement.

And finally for the 19th consecutive year RBC has been named to the FDIC for good index, which measures the performance of companies demonstrating strong SSG practices.

This year, our percentile ranking among the banking sector rose to 98% off.

And with that I'll pass it over to run.

Thanks, Dave and good morning, everyone.

Starting on slide seven we reported earnings of $3.2 billion and EPS of 2020 cents, while absorbing $675 million of provisions for credit losses.

Pre provision pre tax earnings of $4.8 billion were up 6% from last year, largely driven by significant strength in capital markets with solid growth in our insurance and our non U.S wealth management businesses.

Before I turn to the segment results I will discuss three key topics of interest capital net interest margins and expenses.

Moving to slide eight nine we reported strong seat you on ratio of 12% up 30 basis points from last quarter.

Our capital build was underpinned by strong internal capital generation, adding 37 basis points to RCD, one cetone ratio this quarter.

In addition, we saw paydowns of credit facilities in capital markets in contrast to last quarter.

We've also seen Canadian commercial lending utilization levels trend lower from last quarter in nearly all sectors.

And as credit spreads continue to normalize from their elevated peak in March we saw a partial recovery in the unrealized losses, we recorded in OCI last quarter.

These positives were partially offset by higher market risk R.W. way underpinned by an update to the historical period used to compute stressed var.

Two more reflect the market volatility seen earlier this year.

I will now spend some time on RWD migration and our credit portfolios.

This quarter, we recorded a further $2 billion of credit downgrades, adding to the over $9 billion, we recorded last quarter.

The downgrades have largely been in our corporate portfolios in capital markets with over half related to cobot 19 vulnerable sectors.

Following a detailed review of the corporate portfolio last quarter the rate of corporate credit downgrades slowed materially this quarter.

We did see a slight deterioration in our Canadian commercial portfolios, we expect a gradual impact of credit migration nice portfolios to continue in the coming quarters.

Given government and bank support programs and the high quality profile of our client clients, we have yet to see any significant negative ratings migration and our Canadian retail portfolios.

To provide some additional color we stress tested our retail portfolios under client support programs to levels well beyond our expectations incurred loss estimates.

Even if our retail accounts under our deferral program become delinquent added 10% rate the incremental impact to our seat you one ratio from RW inflation would be manageable at less than 10 basis points.

And is seen this quarter our strong recurring earnings stream will continue to act as the primary absorber any deterioration.

So absent a further meaningful economic downturn, we expect our cetone ratio to remain at approximately 12% by the end of the first quarter 2021 as capital generation is offset by risk migration and the reduction in Ospreys transitional capital modification for LTL provisioning.

Now moving onto net interest margins on slide 10, our enterprise NIM declined 12 basis points quarter over quarter, largely due to the impact of both the bank of Canada, and the federal reserve cutting interest rates by 150 basis points in March.

Recall, we had previously disclosed in immediate to sustain a 100 basis points shock would have inevitably negative impact to our revenue of over $600 million over 12 month period as of Q1 2020.

The impact to our NIM this quarter from such an interest rate shock was increased by elevated liquidity levels at the enterprise level with low yielding cash and investment balances up $146 billion from last year.

Our elevated LCR translates into a surplus of $127 billion over the regulatory minimum.

And a segment level Canadian banking, NIM declined 12 basis points quarter over quarter or 14 basis points over the last two quarters due to three main factors first the impact of lower interest rates on to parse deposit margins was the largest driver of the compression in NIM. Our current mix of personal deposits has a greater proportion.

Of noninterest bearing low beta checking accounts, which do not reprice in parallel with movement.

In benchmark interest rates.

Another headwind this quarter was the change in asset mix underpinned by the decline in higher yielding credit card balances as well as strong growth in lower spread Canadian mortgages to a lesser to extend.

In contrast deposit growth had a positive impact very strong double digit growth and higher margin checking accounts and business deposits far surpassed solid growth in interest bearing gses, which themselves were still up 9% year over year.

Although our strong waiting to checking accounts and credit cards resulted in a drag to our NIM. This quarter. Both these products provide important strategic benefits and continue to underpin our leading Canadian banking net interest margin.

Moving to city National where NIM was down 33 basis points relative to last quarter the impact of lower interest rates on low yields was more pronounced given a structure the balance sheet with the majority of our loans are variable rate.

This was partially offset by lower deposit and wholesale funding costs.

On an enterprise level, we expect liquidity remained elevated over the near term, we'd expect lower wholesale funding needs in the coming months, given our strong deposit growth.

Now moving to expenses, which were up 6% year over year, largely due to higher variable and stock based compensation. Excluding these and foreign exchange all bank expense growth would have been relatively flat to last year.

Furthermore, covance specific costs added over $90 million of expenses in the quarter from special compensation costs for certain employees and increased cleaning.

In contrast, marketing and travel costs were down $90 million as part of the 16% reduction in discretionary expenses from last year.

On a segment basis Canadian banking limited expense growth less than 2% year over year.

Excluding cobot specific cost Canadian banks banking expenses would have declined 2% from last year.

Both insurance and science, yes expenses were down 6% from last year, and despite higher variable compensation, both capital markets and our non U.S wealth management businesses reported positive operating leverage.

US wealth management expenses were up 12% year over year in us dollars or less than 3%, excluding the impact of our us share based compensation plan.

And we expect city nationals expense growth to continue to slow overtime following elevated growth in our back office technology and regulatory costs in recent periods.

We also expect to slow our recent accelerated hiring growth strategy.

We remain diligent managing our all bank cost base as we continue to balance project prioritization with our commitment to creating long term value for our clients.

Moving to our business segment performance beginning on slide 11, personal commercial banking reported earnings of $1.4 billion.

Canadian banking net income was $1.3 billion with pretax pre provision earnings of $2.3 billion down 8% from year ago.

Net interest income was lower year over year as solid loan growth of 6% and very strong deposit growth of 18% were offset by the impact of significantly lower interest rates fee based revenue was also affected by the impact of cobot 19, as lower transactional activity resulted in lower service charges also the.

Decline in cross border travel impacted FX fees.

As we see a reopening of economies overtime, we expect to see these revenue stream start to recover.

Turning to slide 12 wealth management reported earnings of $562 million pre provision pretax earnings of $803 million were down 5% year over year, largely due to lower interest rates.

Canadian wealth management revenue declined 2% from last year as lower client transactional activity and lower interest rates offset higher average a way.

Global asset management revenue increased 7% year over year with AUM up 13% from last year to record levels, mainly due to a combination of strong us institutional in Canadian retail flows and constructive equity and bond markets.

Canadian retail net stroke net sales were strong in short term money market strategies in May and then long term fixed income mandates in June and July.

Very strong volume growth city national was more than offset by lower interest rates loan balances increased $11 billion at 29% year over year in us dollars loan growth, excluding the impact of Triple P. loans was still up a very strong 17%.

City National deposits were up $17 billion for 38% from year ago.

We also saw strong growth in our us private client group with a way up $28 billion.

In terms of us from a year ago.

The revenue benefits from very strong volume growth in our U.S wealth management businesses were more than offset again by the impact of lower interest rates.

This quarter saw favorable accounting volatility on interest rate swaps and city national Mark to market seed capital gains in global asset management and.

And our deferred compensation plans in the U.S wealth management partial reversal of last quarter's losses.

On slide 13, we discuss our insurance segment, which provides an important diversified source of earnings that is less exposed to spread revenue and credit risk.

Net income of $216 million priest $12 million were 6% from year ago, mainly due to higher favorable investment related experience and improved claims experience. These factors were partially offset by the impact of longevity reinsurance contracts in the prior year.

Onto Investor and Treasury services on Slide 14, where net income declined to $76 million.

As we guided in May results were particularly challenge this quarter, our funding and liquidity business was most impacted by the servicing to the banks elevated liquidity position. In addition, lower revenue reflected the unfavorable impact from the prior period interest rate movements, partially offset by tightening credit spreads towards pre co bid levels.

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These do not these results do not reflect our expected run rate going forward.

In contrast, our asset services custody business had a solid quarter and that as FX revenue benefited from increased client activity, resulting from volatility and FX markets and lower expenses driven by disciplined cost management initiatives.

Now turning to slide 15 capital markets reported record earnings of $949 million.

Pre provision pre tax earnings of $1.3 billion. We're also the highest level on record, reflecting the strength of our global franchise corporate investment banking revenue was up 12% year over year to a near record $1.1 billion.

Partly due to recoveries in loan underwriting marks as we were able to sell off deals following the thawing of leverage loan markets. The narrowing of high yield credit spreads also helped in this regard.

Also contributing were strong debt and equity underwriting fees, which benefited from low interest rates and constructive equity markets respectively.

These more than offset what remains a muted M&A advisory environment.

As our corporate clients deal increased comfort around their own balance sheets and the stability of their operations, we have seen debt underwriting activity begin to slow.

We've also seen material pay downs of previously drawn credit facilities.

Global markets also had a very strong quarter with revenue up 60% from last year to $1.8 billion record performance in FICC was underpinned by strong credit trading which benefited from narrowing credit spreads race trading continued to benefit from client demand in the midst of continued global central.

Thank actions.

Equity trading was also robust benefiting from continued market volatility and a recovery in our structured products business following severe market dislocation last quarter.

However, as volatility subsides, we would expect the trading performance to moderate.

And with that I'll turn it over to Graham.

Thank you Rod and good morning, everyone.

Turning on slide 17.

This quarter, we continued to build our allowance for credit losses on loans to 6.1 billion up 200 million from last quarter.

The increase in the reserves is mainly attributable to provisions on performing loans in our retail portfolio, reflecting the ongoing uncertainty related to the cobot 19 pandemic.

A ratio is based on macroeconomic forecast that were generally unchanged from last quarter. So we did see some improvement in our equities oil and housing price forecasts.

Also the actual Canadian unemployment rate in calendar Q2 was better than we had forecast last quarter.

We also updated our scenario waves to put greater emphasis on or downside scenarios to reflect the increasing uncertainty about how the economy will perform through the fall the number of government support and payment referral programs roll off.

Overall, a resale represent 0.89% of all Luna gold standard up from 0.53% six months ago.

This represents 4.3 times, our net radar so over the last 12 months and positions us well for an expected Reuters and impairments.

Let me know discuss PCL and impaired loan goes slide 18.

Provisions of 398 million or 23 basis points were down 14 basis points from last quarter, largely reflecting lower provisions in capital markets and personal in commercial banking.

In capital markets provisions were down 199 million from last quarter.

Well, we continue to incur provisions and some of our more vulnerable sectors do depend on mix, we took fewer provisions in our oil and gas in consumer discretionary sectors. This company this quarter compared to last.

In Canadian banking provisions were down 75 million from last quarter, reflecting lower provisions across our retail portfolios, mainly due to the impact of payment deferral and government programs. This was partially offset by higher provisions in our commercial portfolio.

In wealth management provisions were up 28 million from last quarter, largely reflecting higher provisions in us wealth management.

Including the write off of one of the account at city national in the industrial product sector.

Turning to slide 19.

Gross impaired loans of 3.9 billion was up 328 million were six basis points from last quarter, reflecting higher impairments across our major lending segments.

In wealth management, we had higher impairments on a couple of investment accounts.

Canadian banking commercial portfolio, we had higher new formations Wheeler real estate, other services and consumer discretionary and staples sectors and fewer loans returning to performance.

And our small business portfolio, we had higher new formations in sectors, most vulnerable to the impact of cobot 19, mainly in the greater Toronto area. Most of these loans or government guaranteed.

And in our retail portfolio, we had lower new formations and our personal lending portfolio and fewer write offs in our cards portfolio.

In capital markets, we had lower new formations in the oil and gas sector, partially offset by higher repayments in the utilities and oil and gas sectors and higher write offs in the industrial product sector.

Turning to slide 20.

Our exposure to sectors, most vulnerable to the impact of cobot 19 decreased by 7% from last quarter due to the paydowns of credit facilities by requires.

Overall, our exposure the most vulnerable sectors represents only 7% of RBC is total loans outstanding.

This quarter, 27% of TCR on impaired loans and 46% of impairments pertaining to these sectors.

We also saw a slowdown in credit migration related to cope with 19 as credit rating assessments in our capital markets portfolio, mainly occurred through Q2.

The creating credit rating assessment in our Canadian banking commercial portfolio with over one third complete and we expect of substantially completed a review by the end of year.

On slide 21, we have provided some additional information in relation to the commercial real estate portfolio.

Overall, this portfolio is well diversified across geographies and industry segments and has been underpinned by strong underwriting standards.

The retail property segment represents 1.6% of our total loans and acceptances outstanding.

This segment remains under pressure due to ongoing physical distancing measures and the rise of online activity.

Through the headwinds that predict coordinate team we have long been cautious in our clients strategy and underwriting standards for the segment.

A significant portion of this book is comprised of class a malls with strong backing from investment grade clients as well as grocery anchored retail properties, which are performed well during the kind of dynamic.

In the office property segment strong strong rent collections continue for both large and small landlords.

We expect that any impact of the work from home trend on the segment will play a gradually and our clients. We'll have time to adopt given the typical term of an office lease is five to 10 years.

And again or underwriting standards have been strong with with less than 2% of our office portfolio, having both an LTV greater than 75% and debt service coverage ratio of less than one of the quarter times.

Overall, we believe the impact of Cobot 19 on our commercial real estate portfolio is mitigated through prudent underwriting and so on loan structures, including a combination of low ltvs guarantees and debt service coverage requirements dokely lift and high vacancy rates.

Let me know provide some color on our client payment referral programs across Canadian Bankings retail and commercial portfolios starting on slide 23.

As I noted earlier, we expect you experienced lower delinquencies and impairment this quarter as clients at the ability to defer certain payments for up to six months.

Overall client demand for new deferrals, largely abated and overall active deferral balances have declined as our broad claims support programs come to an end.

Slide 24 provide some context around both the performance and risk profile over Canadian banking retail deferral program to date.

But the nearly 23 billion in retail deferrals that ended their deferral term since March 80% of resumed regular payments, 19% of extended their deferral period for an additional two to three months drilling not exceeding a six month deferral period.

And only 1% to become delinquent.

Additionally, we have seen clients continue to make payments during the deferral period.

Well, we view this as credit positive and consistent with our expectation expectations.

The level of payment activity is materially driven by factors such as such as operational ease the economic cost the deferral for the client and the nature of the product.

Substantially all of the remaining 39 billion in retail deferrals are set to expire by November.

Based on the deferral performance to date, along with the insights we have around this level of client cash balances the degree of income disruption.

We are confident that we will continue to see the majority of our clients with active deferrals resume regular payments.

However, there will be clients, who are unable to resume regular payments due to loss employment we're income.

Since we do anticipate an uptick in delinquencies and insolvencies. Once these deferrals expire given the significant impact coordinate team has had on the labor market and many businesses.

The significant level of security and guarantees supporting our deferred loan balances we are well positioned to address this expected increase in delinquencies and impairments.

Looking at our residential real estate portfolio as an example, only 0.2% has a deferral is uninsured and has an LTV greater than 80%.

Let me know discuss market risk on slide 25.

Overall market volatility and credit spreads have improved since last quarter, which has helped reduce the risk profile of both the fixed income and equity portfolios.

When combined with the reduction in are active Luna drilling commitments this quarter of by 58% to 1.7 billion that contributed to a steady decline in var through the quarter.

To conclude or PCL and impaired loans and associated losses were muted this quarter, given the continuation of deferrals and other client we programs.

As these programs roll off we do anticipate PCL and impaired loans to trend higher in Q4 and through the first half of 2021.

At this time, we believe our allowances for credit losses prudently reflect our current view of the difficult economic outlook as well as the quality of our portfolio.

However, as I noted earlier, there is great uncertainty, which we reflected by putting greater emphasis on our more pessimistic scenarios.

For context, our primary pessimistic scenario has the Canadian unemployment rate elevated at around 10% until June 2022, and host prices declining by 8% and remaining depressed until mid 2023.

Should a scenario like this pleo, we could see are easier when performing loans increased by approximately 25%.

However, our history of prudent underwriting the prime each of our retail portfolio and the diverse nature of our wholesale portfolios service strong mitigants against the deteriorating macroeconomic conditions that have arisen as a result of the cobot 19 pandemic.

With that operator, let's open the lines for acuity.

Okay. Thank you.

If you have a question and using speakerphone, Please mr. Han prior to making your selection.

If you have a question. Please press star one on your differences keypad.

And any time you wish to cancel your question. Please press the Palestine. Please press star one at this time if you have a question there will be responsible for participants. Thank you Sir Thank you for your patience.

The first question is from John Kim with Barclays. Please go ahead.

Good morning riding in your commentary you discussed the enterprise wide liquidity to a fair extension and wanted to find notes.

Gave us.

Hi, good indication that you are expecting the so liquidity remained fairly high but you also talked about the wholesale funding necessarily rolling off can we expect to liquidity level to stay at this balance on a relative basis, and then going forward what would you need to see in order to actually reduce liquidity level and try to ease some of the burden.

Having on the margins.

Thanks, John for your question I mean part of this is the liquidity that's in the system.

And RBC is as going to take its fair share of that liquidity and I think that will remain in the system.

As long as the bank in Canada in Federal Reserve, another and Bank Bank of England and.

Maybe.

Continue to flush.

As appropriate liquidity into the system to help with the economic turmoil caused by the pandemic.

So I would expect that to continue for some time and then as clients, both retail and commercial and corporate.

Start to utilize that cash and spend that cash and invested.

And that cash starts to come down than I would think some of that liquidity would come down.

Obviously, we would like to replace it with good client assets, but we're not going to change our risk appetite.

To accommodate that and so we will accept the little bit of margin compression again nice. This is not costing us a lot of money a lot of these deposits our low cost deposits. So the PNM impact is muted the NIM impact just because the math is higher because the denominator is greater.

But we don't expect this to exit the system anytime soon certainly not over the next 12 months.

But we do expect to reduce our wholesale funding.

And we expect margin to improve a little bit on the on the heels of our asset mix as well, but that said the liquidity compression on our NIM is going to continue.

Thanks for the Colorado or Ritu.

Thank you.

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

Good morning.

I guess just a question full gamut owned outlook on the impact as if I heard you could actually.

You mentioned expectations of these legal Hyatt delinquencies guys just talk to US you mentioned, 19% of.

The flows were again the news in terms of deferred and what was the process of.

Granting get additional deferred.

And your level of confidence that those borrowers because of the second distorting. The go back to current just in terms of there's obviously a lot of concern around but clearly vancocin. These deferred is comping in and one to get some perspective on what led to that addition disorders and you also talked also said on the seat at the consumer wants to floaters come to an end.

Sure. Thanks, a question I think with a few pieces. There one is centered on the deferral programs and then to Hello translating into expectations next year.

I think theres a key piece understand in terms of the deferral program or will recall the client treatment plan and how that was executed and enroll though to today versus what we would expect after that program comes to an end and that's certainly why I reference currently so we operational pieces around guidance of the program. We rolled out starting back in March I was really a broad based program that.

That was really there to support current clients.

It was not the intended to to really put a lot of friction into the system and just really made it very much widely available and that program on the retail side as open and continues to be open until I believe deal at the end of September and three loss Neal to jump in here. After I finish if he's got any further comments on the commercial side that program came to an end in June and so when we look at things.

It was like the early cohorts that we referenced here and how others, who have a portion of those were we've extended their deferrals again that was really an auction of the clients discretion. So there wasn't a lot of friction.

When it came to that when the program comes to an end and abroad majority of these deferrals will come to conclusion in Q4 on the retail side I think the number there is 83% of them, we'll conclude by the end of Q4 and commercial it's something similar in the program changes.

In a very.

Dramatic weight and further deferrals or further actions with respect to the clients will be very much be based on an individual conversation with the client will be very which based on their circumstances.

And so the future deferrals that may happen, there will be very different than kind of the pieces that we've seen re up to date. So I really differentiate kind of what we saw in this quarter in the early cohorts versus what we will see when we go into Q4 in the in the broad based program comes to an end and that's really tied to it as we roll into the next stages as we really want to get to that point.

We're having a very deep conversation with our clients we're understanding their their financial profile what income they have what their their assets are and how we can work to develop solutions for them.

And really keep them in a in a in a solid position to the extent possible.

The second part do you kind of referred to as then what does this mean kind of going forward.

Again break that up into a couple pieces. There is when you look at delinquencies and impairments certainly these federal programs and the government support programs of have suppressed delinquencies and impairments in this quarter and I think that was something we kind of have had indicated last quarter that was our expectation.

In Q4, I would say, you'll you'll start to see delinquencies increases as these different programs and but I think you know impairments will really start to kind of fall in a more material way kind of 90 days. After after the deferrals come to an end and so when we kind of look forward, we do see impairments.

Really starting to rise in 2021, and so kind of peaking out kind of mid 2021, I'm, saying. This all can contingent on this is based on kind of the current forecast we have out there which are highly uncertain.

And so thats kind of give you a bit of back on what we've got to date versus what.

We are expecting kind of the timeline that we put forward, but maybe it and but neal to add any further comments on that yes. Thanks, Dan maybe just to put some color on a on the the point about the the 19% that Graham mentioned that had opted for a second deferral operationally what we did early on in the pandemic is we created online tools just for ease of use and.

Sort of operational efficiencies to allow customers to go online and then self select a one or two month deferral on these products digitally and so with those short term deferral is a couple of things. We saw we saw because of the ease of at some customers just did it out of abundance and prudent sort of making sure. They they had as much cash flow as they.

[music].

As they could just given the uncertainty and the other reality was some of these customers. They could have walked into a branch or called the contact center had a conversation qualified obviously for six months to fill they chose not to do that and one online for shorter term. So when those shorter term deferrals came up and they did requirement then that would have count.

But as a as option as opting for a second deferrals, so I think.

Yes, some of that was operational and I'll, just reiterate daves point in his opening comments that.

This is a top priority for us where we ching out to both our retail and our commercial clients getting really good response from both of them in terms of the support on they're getting and the advice. They are getting and we'll continue to do that through the fall and in Q4 Graham mentioned October really being.

The peak in which the deferrals will start to expire.

The majority of referrals will expire.

Thank you.

Yes.

Thank you.

Question is from Korea.

Please go ahead.

Thanks very much.

For ride Brian Thanks for the additional disclosure on the Nims.

Could you give us a little bit of an outlook to the extent possible in terms of both Canadian banking and so the national and in particular.

You expected very strong mortgage growth, which I expect you would tell us is going to continue at least in the short term despite the uncertainty.

Strong mortgage growth you expect that to weigh in any meaningful way in terms of mix on the on the Canadian margins.

So thanks for the question Ruddle.

Nems and Neil will talk about the mortgage growth.

Sure. Thanks, Thank Steve for that so, yes, I would expect the impact to be muted going forward I think you. The biggest drop was this quarter.

Because we had the full three months of the interest rate cuts in the results and when you think you think through what the impacts are going to be going forward.

The asset mix has certainly.

Wait honest this quarter.

In Canadian banking that should improve as credit card spending improves the balance of credit card as a percent a total I should improve which which would benefit. The NIM also I'd mentioned, the less wholesale funding as well as our wholesale funding rolls down we wouldn't need to replace it with more expensive wholesale funding given the strength.

Assets that we see over the medium term on so all of those factors should benefit us and but we will see on a year over year basis, we'll still see continued NIM compression, but on a quarter over quarter basis. It should be much more muted same thing with city national the biggest impact was this quarter. The next few quarters we had.

Back to stabilize as well so I think looking at all things considered such as at the wholesale funding should benefit US, yes, a mix should benefit us, but on a period over period basis. The mortgage repricing is going to bring it down a little bit Asa the impact should be muted Neil on mortgage growth enters a mortgage growth.

We had pre pandemic, we had an awful lot of momentum we've made things really foundational changes.

Last year and that that really had a great start to the year. So in terms of our outlook you a high single digit for the rest of 2020.

We do see that starting to soften next year more sort of falling down into the mid single digit.

We're seeing good demand across the country. Some of that we'd say was was really delayed from very low volumes in April may beginning of June. So some of that I would say has been pushed back.

But we see I think your real productive market, we're seeing really strong in Ontario really strong in BC.

Two markets, where we have a really good footprint really strong team. So I think those would be kind of the outlook and I guess really just sort of the shape of that demand curve, which was.

Really strong in terms of our originations of commitments up a little April and then.

Endemic to us, but everything to a screeching halt and now we've seen that slingshot back there really tick up some of that demand.

Thanks, a lot of color I guess Neal I have you.

You are clearly taking share and real estate secured lending, but declined antilock started a few years ago and I noticed last couple quarters. It's accelerating is there anything.

You can offer up there in terms of.

Turning now.

Yes, I mean, it's just really client advice in terms of as rates have come down more more clients are saying.

They want to lock into those lower rates and so.

Our advisors are talking to clients about that choice and.

Yes, it has accelerated to your point and we think it's good advice and and makes that client that much more sticky.

Gotcha, just more fixed versus floating.

That's right thanks for that.

Okay.

Thank you. Your next question from Gabriel Shane with National Bank Financial. Please go ahead.

Good morning.

Rotate back to the deferral stuff and on one hand, obviously, a pretty big decline in the mortgage balances that are deferring payment, but commercial was up up.

A bit I would've expected to be down because of the deferrals of periods as I understand there were three months six months, what's what's going on there are you providing a lot more extensions.

And then.

And any okay.

Cohort I guess thats coming off deferral do you have any stats on how many are current versus extensions versus impaired.

Yes. Thanks, a question its Neal all start.

Yes, our our deferrals for our commercial book were six months deferrals and dealer, yes. So that's that's what's driving that we have seen about 25% of the clients already roll off.

Of those deferrals.

Again, the bulk of those will come in October.

Well I have those clients who are on deferrals, we have seen almost 30% of them still make payments. So we're still seeing I think some really good trends there.

[music].

Yeah and identify the other point I'd make a think qualitatively as we've mentioned were reaching out to these clients I think we're quite I'm encouraged by the feedback we're getting from clients and their ability to resume these payments so whether it's on.

Mortgages and having clients ask if they can catch up on the payment they had deferred.

And generally just more so little bit more strength and we would have anticipated as we started to follow up but I don't Graham anymore. I think that's the critical pieces of the program nature is such that that's why we haven't seen the material decline there.

But just to give context again some of the early proof points. The how that we do expect those balances to dramatically shrink in Q4.

Similar to retail will be kind of the early cohort that we have though it is less than six months, which is much smaller here than was in retail.

We saw it again very similar.

There wasn't any when they re up to me in the deferral sense, but the deferral or the delinquency component of that was very small.

And then the second piece outside of deferral programs, which is what everyone is very focused on an American context, we did have other parts of our client support program and so one of those we did provide clients with the temporary increases to operating facilities are opera operating lines that they had there and so that was largely a three month program for us. So we do have the read on that well it was us.

Moldx program.

With all of that has now been repaid and clients of either didn't use it and no longer needed or pay down that incremental excess excuse me. So so again thats a another data point, there that gives us a comfort and confidence that the but these programs. These client support programs, we put in place back in March or better meeting back down to much more manageable balances that we can engage with clients on number.

Like the basis with.

Thanks, and my next question for Derek.

We ask you to re queue and.

Alright, we probably will still over so we're going to give you some more time given.

The length of our speeches today. Thank you.

So please re queue I will try to get budget.

Thank you. The next question is from Doug Young with today's foreign capital. Please go ahead.

Hi, Good morning, just back to Canadian banking on I guess is probably for you Neil pretax pre provision.

Yes. This earnings down 8%, we've talked about the NIM compression on Red talk to benefit the I was just wondering.

What other leavers do you have to pull here, maybe on the knicks or expense side to kind of support our pretax pre provision earnings because obviously modeling out how pcls is a crapshoot. So I'm just trying to figure out what other levers you have to support this thanks.

Well, maybe I'll speak a little bit in terms of some of the trends that are are really impact big NIM, and which ones, we expect to stick around which ones will be.

More transient Rod mentioned interest rates. So we don't know that's going to be obviously, it's a big biggest driver of the of the NIM decrease and it's going to be the factor that's going to be in the book for quite a while on the pricing side and and we talked about our mortgage book and just mortgage growth there were feeling better about Rick.

Turns on the mortgage volumes were booking so we'd say as that kind of rolls on and if that market stays it's still competitive, but we'd say a lot more constructive than it was.

That would help in terms of I think rod mentioned in his opening comments, but definitely a transitory part of what's impacting NIM is the credit card business. So as part of our client treatment plan. We also did offer all those balances that went into the cards treatment plan, a 50% reduction in the rate that they pay.

As those.

Credit card treatment plans roll off that margin will reset and go back and then the other part Dave mentioned in his opening comments just about the the velocity of spending by the consumer. So we are starting to see that pick up.

Our card services revenue has been impacted quite a bit obviously as we as pines aren't spending we're not creating that that interchange that credit card service fee revenue. So we still have a couple of categories like travel as an example, muesli.

That are way down dining is way down we're starting to see the everyday spend pick up and now we're into a positive territory year over year. So I think those are some of the things that they obviously just volumes I think we're feeling really good about the the our ability to capture deposits and and have clients make RBC their choice and whether that's.

On on a core deposit account or again on the strength of the mortgage business.

And then the last one would be Rod mentioned, where we are on on our cost and we have had cobot costs in the quarter, which we think are mostly behind us some incremental compensation costs and then if we take out those those covered related costs. We would actually have have had net.

Give any year over year, so cost as today's point, we'll continue to be another lever.

And and can you just quantify the credit card.

Reduction.

In the rate and as that comes off it'll have a positive impact on can you quantify how much that weighed on nims is it possible.

Yes, it was.

If we look at that the credit card as a category both inclusive of the lower rate from the treatment plans as well as the business mix. So our is having lower balances and and we have seen a lower revolve rate more liquidity and clients accounts that made up over six basis points of the NIM decline.

Great. Thank you.

Thanks, Doug.

Thank you.

Next question is from many grapple with Scotiabank. Please go ahead.

Hi, good morning.

Just a question on capital assuming no further spike in covert do you expect your C.T. one two to climb from here how do you see the the flight path.

That's right I'll I'll take that many thanks, So I would expect us to have.

Absent the downturn as you mentioned there.

Well I would expect us to be an upward trajectory with the exception in Q1 next year as the osby modification on the state one stage to bill.

Starts to go back from a 70% relief to a 50% relief.

That would impact us as would any migration from stage one stage two stage three as soon as those in the stage three there's no modification, it's an immediate hit offer either the 70% this year.

Next year, but absent that our internal capital generation.

Has been quite strong and we expected to continue to be strong we saw a slight uptick in market risk RWD. This quarter as I mentioned in my comments, we expect a little bit of relief next quarter on that and everything else.

Should be equally we took the big hit on pension discount rate Im not sure how much lower the pension discount rate in go so that shouldn't have a big impact and I don't see a whole lot of our WJ migration, we took our big increase in Q2.

With a modest one this quarter, obviously, we're planning for it and we're taking into our capital forecast, but it's not going to be dramatic. So I would see a slight uptick in just about every quarter with exception of the first quarter next year.

Thanks for that run and just as a follow up so we've seen the biggest stress test ever in your 12%. So what lessons you draw from that is it reasonable to say that to me you entered this crisis would just too much capital is would you agree with that statement.

No.

[laughter].

Yes.

I would say, though.

Sure appropriately reserved therefore, there was a lot of learnings from the first.

Crisis that we went through 10 years ago, we needed more liquidity or capital in the system. I think are the investment we've made and risk management has helped but we still have uncertainty ahead of US site, we where we're not out of this yet we've got the fall to get through be have re contagion and therefore.

Capital is not burning a hole in our pockets of rest assured that we will we will allocate capital judiciously, we have strong growth opportunities as you see with strong momentum in all our bid all our businesses that will consume some capital the rods point, even with our normal growth perspectives and the momentum we have we will likely have surplus capital that will build.

And we'll be very careful with it and therefore, if we carry excess capital for a couple of years and it depresses our ways I think thats a good thing I think the overall kind of perspective, as we're going to remain somewhat defensive and careful through still.

What I think will be fairly challenging year.

Thanks, Ron.

Thank you.

My question is from Mario Mendonca with TD Securities. Please go ahead.

Good morning.

I want to certain try to get to the heart of the matter on impaired credit losses, I think what we're all trying to do is.

In asking questions about the deferrals us make an estimate of were impaired.

Else could the.

Graham could you offer an outlook, perhaps a range. If you will aware impaired loan pcls could be over the next few quarters.

Thanks Mario.

So maybe just a few comments I'll reiterate a bit of I think some of the commentary I provided I think certainly were.

If you a lot of uncertainty and and so I think in the face of all that uncertainty.

Not inclined to provide a very specific forecast at this point in time is I think theres too many factors that go into that I.

I think the general guidance I would provide and just to confirm what I said before it will certainly the impaired loan situation and that in the PCL that come with that this quarter trended down in large part because of all the deferral and government support programs that are out there and I think that was kind of our views as to how the.

Last quarter, and we expect a good part of that to continue to play out in Q4, and that's why we kind of really see the impaired situation really starting to kick in.

In 2021, and really seeing it ramp up.

Through the first half and peaking.

The middle of 2021 next year, well, that's all very much contingent on.

Again, the macroeconomic forecasts plays out consistent or the reality plays though with the forecasted that we're operating under that certainly we don't see a kind of future downturns associated with the Cove, it and that the translation kind of that we have expected off the back of macroeconomic situation is consistent.

What we're looking at so I'm really difficult to put a forecast out there at this point in time and something certainly as we work through Q4 and and cut to get a better transparency on on a on the transition into delinquencies and impairments.

I think we can have a little bit better conversation with that at this but at that time.

Let me just real quickly to I think as Rod you made the comment about one third of a review of probability of default was completed I Didnt follow you there what what did you referred to when you said one third.

So just we're talking about credit migrations and so if you break that up into three broad chunks of the capital markets portfolio because of the real time information, we get there on our clients because their public we were certainly able to really reassess our credit ratings on largely in Q2 to be consistent with the cobot 19 kind of environment or come.

Commercial or mid market are smaller clients that thought that that were difficult assessment to make we don't have real time information on those clients. We don't have financial statements every quarter or bloomberg's that give us kind of insights there it's not the longer process. We go through with our clients and so we're working through that now and so that's the piece I'd say, it's about one third done to give you a context, we think R.W.R.W. Baird.

In that space could increase by.

Seven to 9 billion dollar range, but we'd expect that to happen kind of over the next six months into the kind of feeds back to Rob's comments that thats kind of built into that the plan in the forecast in the capital side and then the retail piece.

Retail piece has been the side, it's been it's been interesting well certainly on one hand, we're seeing I'm you know those more distressed and challenge clients and then the downgrades happening there in our in our rating models. The flip side is the broader client bases seeing an upgrade there and that's just reflective of these cash balances in the lower spend that's really improving their credit ratings and so thats really offset.

Piece of it and so overtime, we would expect the there would be to be some ratings migration and some of your inflation on the retail side, but we really are seeing that cleared over over a much longer horizon now than we had originally expected and so again to Rob's comments.

We expect that to be much more readily absorbed through ongoing earnings.

Yes. Thank you.

Okay.

Thank you. Your next question from Shahram overhead with BMO capital markets. Please go ahead.

Yes. Thanks.

Hey claim I don't know if you could day.

Give us some color.

On the deferrals, maybe pick the mortgages.

Just to.

Geographic breakdown number one.

And vintage Europe origination Dutch mortgages and and.

And whether or not the 1% that you see have have gone delinquent.

We have stats also follows the same kind of pattern or is there something a bit more specific geography earlier.

For information thanks.

I'm sure. It begs the question, though ultra bright a few dimensions I don't have all the pieces you were asking about on that but if you. If you look at the I think few things we're trying to make sure people are traveling with here is on one hand.

Appreciating that this is this large balances 57 billion that because of the openings for the program that we really do expect that to the compressed to a much smaller much more manageable number and we provided the proof point there around the early cohorts and what we're seeing on that when you look at the you asked about the regional segmentation on that.

The.

You'd see a bit of what's your ex would expect kind of where the economy are affected so I'm kind of the highest deferral rates would be in Alberta, consistent with the kind of macroeconomic the kind of dual impact the Alberta is facing both with the pandemic and the impact on the on the oil and gas environment GPA would be next highest there and again, that's a reflection of two things I would.

Say, one is kind of a lot of the service, calling me that comes out of trouble, but also kind of the higher level of home prices.

And then on the lower side.

You'd see a comeback and some of the other parts of Ontario outside of the GCA.

Other segments that we would look at a when you look at kind of investor versus versus homeowner segmentation, we don't really see a differential there and deferral rates. So that's not really been in a risk indicators at this point in time.

And then you look and say condo in non condo condos, we're seeing a lower deferral rate on so those are skewing better from a risk perspective than the non condos on right. Now. So those are some of the dimensions. A you know we think we're seeing on it might invite meal, though if he's got any other kind of 60 would want to call out here. Yeah. I think just pick two other points I'd make is.

We look at the Ltvs and the FICO scores on the uninsured book I.

I think thats at the place we take a lot of comfort in in terms of the underlying risk ltvs and that sort of the mid 50 mid fiftys sort of 56% and then average FICO at set at 758 I mean, these are strong credit clients with a lot of absorption capability. The other thing we'd look at is just how long we know these clients and 75% of the clients it with a more.

It gets deferral I've been clients more than 10 years, another 20% somewhere between three and 10 years. So we know these clients. While there is a lot of capacity in these transactions and we have a good history in terms of repayment from the FICO scores. So I think that maybe only other things I'd add to grams comment.

So just just too just to clarify.

Neil about 5% if 75 to 10, plus 20, I guess is three to attend and about 5%.

Is less than three year.

Redemption ships, Okay, that's trend and and then the percentage that have gone delinquent they would follow the same geographic.

Pattern as well the 1% that you say have gone delinquent.

I I don't have that breakdown at hand, so are we took a follow up with okay. Thanks very much extra we've got a couple more to get to before we have to break here. So we'll try to get a couple of more and.

Thank you.

My question is from Mike I think with Credit Suisse, Canada. Please go ahead.

Good morning, I had a two part question on the mortgage deferrals.

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