Q3 2020 Royal Bank of Canada Earnings Call

August 26, 2020

[music] all participants please stand by your conference ready to begin.

Good morning, ladies and gentlemen, welcome to Rd fees conference call for these 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 is on.

Thank you and good morning, everyone speaking today will be Dave Mckay, President and Chief Executive Officer, Rod Bolger, Chief Financial Officer, and grams Hepworth Chief Risk Officer, then we'll open the call for questions. We also have with us in the room, Neil Mclaughlin group head personal and commercial banking, Doug Doosan group head wealth.

Management insurance and I am, yes, and Derek Elder group had capital markets.

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

I would also remind listeners that the bank assesses performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performed.

To give everyone a chance as question, we ask that you limit your questions and then re queue with that I'll turn it over to Dave.

Thanks, Good evening 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 that health and wellbeing of our employees and standing by our clients in communities in these challenging times.

Against the pandemic backdrop, we are actively supporting our clients through numerous relief auction through financial advice and proactive client outreach to meet their needs.

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

By 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 precaution and we expect most to resume payments when deferrals expire.

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

The combination of these government and client support programs strong equity in homes and elevated savings rates, along with strong bank balance sheets provide us with comfort around untrue transition to the next phase of the economic recovery.

In Canada. In addition to client relief program. We are also committed to supporting recovery in a 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 shop in 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 to our Q3 financial performance in the context of the macro environments and client activity.

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

To our capital buffer this quarter, while 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 in 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, our capital levels remain well above the 10% minimum set by our suite 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 the stood at the end of January.

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

As stores continue to open we have seen our over 9 million cardholders spend more this july than last year. So 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 picking up from similarly robust levels at the start of the year.

Our E signature solution is helping our mortgage specialist in the fields that are clients are 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 the Canadian job market has recovered over half of the 3 million job losses since our seen in March.

ER outperformed the rest 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 and encouraging signs of an economic rebound from the depth of March uncertainty remains over the timing in 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 thats why were 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 Covance.

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.

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

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

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

Resulting in record earnings for this segment this quarter.

As credit markets continue 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 for the 13th year in a row. According to Euro 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 market stress.

And Mark contrast, M&A activity generally remains muted as the macroeconomic and political uncertainty are giving Ceos pause in most sectors outside 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 where their assets throughout the cycle.

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

And also saw very strong deposit growth.

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

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

We have 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 deposit in government support payments and they're checking accounts, but have seen a drop in tune of cash outflows due to the bank support programs. The social distancing requirements. These higher savings rates of positive implications for credit quality.

Furthermore, we are seeing the benefits of some of our multiyear investments in digital and analytical capabilities and our capacity 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 as 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 a branch heavy use 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 at our last Investor day.

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

These are important anchor products and they are an important driver of our premium MRO we.

Our leading wealth management platform adds to our continuum of offerings to our call at 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 on important financial decision.

And knowing our clients well as also have great value for the purposes of risk management.

And on this point, 85% of our mortgage clients had an existing relationship with us before requesting mortgage funding.

Nearly 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 U.S, where we are well position 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 and 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 of helping clients thrive and committees prosper in a time of social and economic disruption.

There's no question the health crisis has put a spotlight on many challenges that make society less resilient and more vulnerable.

Finding ways to build a stronger society from the crisis 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% to 30%.

Another critical areas climate, we continue to push forward with RBC of climate group Blueprint and just this month, we became the first Canadian bank to sign a long term renewable energy power purchase agreement.

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

This year, our percentile ranking among the banking sector rose to 90 Eightth percentile.

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

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.

The 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 C. One 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 our seeking one cetone ratio this quarter.

In addition, we saw paydowns of credit facilities and 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 reflective market volatility seen earlier this year.

I will now spend some time on RWS migration in 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 and 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. These portfolios to continue in 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 in 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 programs become delinquent added 10% rate the incremental impact to our cetone 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 of 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 on to 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 sustained 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.

At 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 and 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.

And benchmark interest rates.

Another headwind this quarter was to 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 extent.

In contrast deposit growth had a positive impact very strong double digit growth in 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 were 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, cobot specific cost 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 a 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 banking 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 that.

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 pre tax 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 and 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 at 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 or 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 for 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 us wealth management, a 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 in priest $12 million or 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 were net income declined to $76 million.

As we guided in May results were particularly challenged this quarter, our funding and liquidity business was most impacted by the servicing 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.

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 in 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 paydowns 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 SEC was underpinned by strong credit trading which benefited from narrowing credit spreads.

Rates trading continued to benefit from client demand in the midst of continued global Central Bank 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 expected trading performance to moderate.

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

Thank you Rod and good morning, everyone.

Moving 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 Cuban 19 pandemic.

<unk> 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 our downside scenarios to reflect the increasing uncertainty about how the economy will perform through the fall to the number of government support and payment referral programs roll off.

Overall are you still represent 0.89% of all loans outstanding up from 0.53% six months ago.

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

Let me know discuss PCL and impaired loan go slightly team.

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 due dependent 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 both management.

Including the write off of one account at three 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 reflect the higher impairments across our major lending segments.

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

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 current portfolio.

In capital markets, we had lower new formations in the oil and gas sector, partially offset by higher repayments of 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 requirements.

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

This quarter, 27% of PCR on impaired loans and 46% of impairment 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 throughout Q2.

The creating credit rating assessment in our Canadian brink and commercial portfolio is over one third complete and we expect of substantially completed or 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 in the rise of online activity.

Due to headwinds at predicts overnight team, we have long been cautious in our current strategy and underwriting standards for the segment.

A significant portion of this pork 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 pandemic.

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 from a 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.

Again, our underwriting standards have been strong with let with less than two per silver office portfolio, having both an LTV greater than 75% and debt service coverage ratio of less than one in the quarter times.

Overall, we believe the impact of covert 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 dopey lift and higher vacancy rates.

Let me know provide some color on our client payment the federal 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 the first certain payments for up to six months.

Overall client demand for new deferral has 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 of our Canadian banking retail deferral program to date.

Of the nearly 23 billion in retail deferrals that ended their deferral terms 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.

The only 1% to become delinquent.

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

Well, we view this as critic 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 of 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 the 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 overnight team has had on the labor market and many businesses.

The significant level 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 are both the fixed income and equity portfolios.

When combined with the reduction in our 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 the 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 cereals.

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 Seo and performing loans increased by approximately 25%.

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

And with that operator, we'll open the lines for culinary.

Okay. Thank you.

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The first question is from warm Aiken with Barclays. Please go ahead.

Good morning riding in your commentary you discuss the enterprise wide liquidity to fair extension.

And I wanted to find notes.

You gave us.

On occasion that you were expecting the refund 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 reduced liquidity level and try to ease some of the burden.

Moving 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 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, and other and Bank Bank of England and warm PCB.

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 in spend that cash and invested.

And that cash starts to come down than I would think some 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 a little bit of of margin compression again needs. 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 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 then we expect margin to improve a little bit on this 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 are Ritu.

Thank you and we'll next question 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 a if I heard you could.

You mentioned expectations of these legal higher delinquencies guys.

Just stop to walk you mentioned, 19% of though disclosed.

NBC news in terms of deferred and what was the process also.

Planting that addition, deferral in your level of confidence that those borrowers because of the second deferring. The go back to clarify just in terms of there's obviously a lot of concern around eclipsing van can defer this come to an end and one to get some perspective on what led to that addition to Florida, New York Youre talk to us at on the seat at the consumer.

I wanted to floaters component.

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 certainly why I referenced the company. So we operational pieces around guidance for the program, we rolled out starting back in March I was really a broad based program that the 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 is open and continues to be open until I believe we will be into September and three loss meal to jump in here. After I finish. If you go any further comments on the commercial side that program came to an end in June and so when we look at.

Things like the early cohorts that we referenced here and how there is scope a portion of those were we've extended their deferrals again that was really an auction of the client discretion. So there wasn't a lot of friction.

When it came to that when the program comes to an end in the broad 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 we'll conclude by the end of Q4 in commercial it's something similar in the program changes.

In a very.

Dramatic weight and further deferrals or further actions with respect to clients will be very much be based on an individual conversation with the client will be very much 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 would 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 stage of this we really want to get to that point, where 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 solid position to the extent possible.

Yeah.

The second part Dakota referred to as than what does this mean kind of going forward.

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

In Q4, I would say, you'll you'll start to see delinquencies increases a as these referral programs in but I think no impairments will really start to kind of fall in a more material weaken in 90 days. After after the the deferral 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 picking out kind of mid 2021, I'm, saying this old can contingent on immuno. This is based on kind of the current forecasts, we have out there which are highly uncertain.

And so thats going to give you a bit of back on and what we've got today versus what the and why we're expecting kind of the timeline that we put forward, but certainly would invite me alternative you further comments on and yes. Thanks, Dan maybe just to put some color on.

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 in sort of operational efficiencies to allow customers to go online and then self select a one or two months deferral on these products.

Digitally and so with those short term deferral of the couple of things. We saw we saw because of the ease of at some customers just did it out of abundance imprudent sort of making sure they had as much cash flow as day.

As they could just given the uncertainty and the other reality was some of these customers. They could have walked into a branch or call. The contact center at a conversation qualified obviously for six months deferral. 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 counted.

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

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

This is a top priority for us, we're reaching out to both our retail at 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 or when the majority of deferrals will expire.

Thank you.

Next question is from can you tell you allocate capital. Please go ahead.

Thanks, very much I think for rise brought 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 in city 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 to weigh in any meaningful way in terms of mix on that on the Canadian margin.

So suffice it to question Rod will argue about 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.

Weighed on us 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 had 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.

Does 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 expected to stabilize as well.

So I think looking at all things considered such as that the wholesale funding should benefit us, yes that mix should benefit us, but on a period over period basis. The mortgage repricing is going to bring it down a little bit.

So 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 in 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's 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 a real productive market, we're seeing really strong in Ontario really strong in DC.

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

Really strong in terms of our originations at commitments up a little April and then endemic this but everything to a screeching halt and now we've seen that slingshot back there really pick up some of that demand.

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

You are clearly taking share in real estate secured lending, but the decline antilock started a few years ago and I noticed last couple of 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.

No. It's we it has accelerated to your point and we think it's good advice and and make that client that much more sticky.

Project, just more fixed versus floating.

That's right thanks for that.

Okay.

Thank you.

Next question is from Gabriel Dechaine questionable promotional please go ahead.

Good morning.

I want to rotate back to the deferral.

And on one hand, and obviously, a pretty big decline in the mortgage balances that are deferring payments, but the commercial was up.

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

And then.

And any <unk>.

Cohort I guess.

Coming off the fro the of 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 were.

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.

All of 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].

And now they're the the other point I'd make us think qualitatively as we've mentioned, we're reaching out to these clients I think we're quite 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 know Graham anymore. I knew I think thats. The critical pieces of the program nature is such that Thats why we haven't seen the material decline there.

But just to give context against a movie early proof points behind that we do expect those balances to dramatically shrink in Q4.

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

We saw it again very similar.

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

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

Small program.

With all of that has now been repaid and clients of either didn't use it in no longer needed or pay down debt that incremental excess excuse me. So we'll get us at the door. Another data point, there that gives us a comfort and confidence that the with these programs. These clients port 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 them.

Perfect the basis with.

Thanks, and my next question for Derek.

We ask you to re queue and.

Yeah, we probably install over so we're going to give you some more time given the length of our speeches today. Thank you.

So please re queue and we'll try to get budget.

Thank you for the next question is from Doug Young with Deutsche Bank Capital. Please go ahead.

Hi, Good morning, introspective Canadian banking on I guess is probably for you Neil pretax pre provision basis earnings down 8%, we've talked about the NIM compression on Reitox benefit the outlook just wondering.

No what other leavers do you have to pull here maybe on the next our expense side to kind of support our pretax pre provision earnings because obviously modeling note.

Well she is a crapshoot. So I'm just trying to figure out what are the leaders you have stuck to support this thanks.

Well I mean, 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.

No Rod mentioned interest rate. So we don't we know that's going to be obviously, the big biggest driver of the of the NIM decrease.

And it's going to be the fact that it'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 returns on the mortgage volumes were bookings so we'd say as that kind of rolls on and if that market stays and 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 card stream and 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 pickup.

Our card services revenue has been impacted quite a bit obviously as we as clients 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 or 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.

Obviously, just volumes I think we're feeling really good about the weather 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 covert costs in the quarter, which we think are mostly behind us some incremental compensation costs and then if we take out those those hovater related costs, we would actually have have had.

Negative and a 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.

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

[music].

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 with more liquidity and clients accounts that made up over six basis points of the NIM decline.

Great. Thank you.

Thanks, Doug.

Thank you.

The 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.

Well I would expect us to be an upward trajectory with exception in Q1 next year as D. Osby modification not in 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 goes into 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 are we saw a slight uptick in market risk RWD. This quarter as I mentioned in my comments, we expect a little bit of release next quarter on that and everything else.

Should be or we took a big hit on pension discount rate Im not sure how much lower the pension discount rate and go so that shouldn't have a big impact and I don't see a whole lot of RWS migration, we took our big increase in Q2, all with a modest one this quarter, obviously, we're planning for it and we're taking into our our capital.

Yes, but it's not going to be dramatic so I was seeing 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 save it to you entered this crisis, which is too much capital is would you agree with that statement.

Okay.

[laughter].

Yes.

I would say, though.

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

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.

So 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 we have re contagion in there for both the capital is not burning a hole in our pockets. So rest assured that we will we will allocate capital judiciously, we have strong growth opportunities as you see with strong momentum and all are bit all our businesses that will consume.

Some capital to 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 and we'll next question from abnormal Duncan with TD Securities. Please go ahead.

Morning.

I want to certain try to get to the hard to the matter on impaired credit losses, I think what we're all trying to dealers.

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

Sales could be Graham could you offer an outlook.

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 provided.

I think certainly were.

If your water.

Two.

Not inclined to provide a very specific forecast at this point in time is I think there's 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 difficult last quarter and I would expect a good part of that to continue to play out in Q4.

And Thats, why we kind of really CV impaired situation really starting to kick in.

In 2021, and really seeing it ramp up.

Through the first half and peaking.

Within the middle of 2021 next year, but thats all very much contingent on.

Again that the the macroeconomic forecast plays out consistent or the reality pleased though with the forecasted that we're operating under that certainly we don't see a kind of future downturns associated with the Ovid.

That the translation kind of that we would have expected off the back of macroeconomic situation is consist with what we're looking at so.

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 the transition into delinquencies and impairments on that I think we can have a little better conversations that at this that at that time.

Let me just real quickly to I think has broad 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 here you're talking about credit migrations and so if you break that up into three broad chunks.

Capital markets portfolio, because it 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 commercial or Midmarket are smaller clients at the let's have were difficult assessment to make we don't have real time in for.

Based on those clients, we don't have a financial statements every quarter or bloomberg's that give us kind of the insights there it's not the longer profit that we go through with our clients and so we're working through that now and so that's the piece I Theres about one third done give it context, we think R.W.R.W.A. in that space could increase by.

Seven to 9 billion dollar range on 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 that's kind of built into that plan in the forecast and the capital side and then the retail piece.

The retail piece has been the side, it's been it's been interesting well certainly on one hand, we're seeing a.

So those more distressed and challenged clients in the downgrades, helping 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 that piece of it and so over time, we would expect there to be some ratings migration.

In summary inflation on the retail side, but we really are seeing that cleared over over a much longer horizon now than we had originally expected in so again to Rob's comments.

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

Thank you.

Okay.

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

Yes. Thanks.

Claim I don't know if you could days.

Give us some color.

On the deferrals may be picked and mortgages.

There has to.

Geographic breakdown number one.

And vintage year see originated and of course mortgages and debt and.

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

Ex Tac also follows the same kind of pattern or is there something a bit more specific for Chuck a failure.

As far as initial thanks.

Sure. It begs the question, though ultra brought a few dimensions I don't have all the pieces you were asking a boat 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 business. This large balances 57 billion that because of the opening for that program that we really do expect that to compress to a much smaller much more manageable number and we provided a 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 mix would expect kind of were for the economy are affected so I'm kind of the highest deferral rates would be in Alberta on consistent with the kind of macroeconomic the kind of dual impact that albertus facing both with the pandemic and the impact on the on the oil and gas environments.

Okay 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 that comes out of trouble, but also cut 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 when you look at kind of investor versus versus homeowner segmentation.

We don't really see a differential there and deferral rates, so thats not really been in a risk indicator at this point in time and.

And then you look it's a 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. We think we're seeing on it might be meal, though if you've got any other kind of 60 would want to call out here, yes, I think specific to other points I'd make is it.

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

I think cuts as a place we take a lot of comfort in in terms of the underlying risk ltvs in this 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 it just how long we know these clients and 75% of the clients it with a more.

Luggage deferral have been clients from 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 our history in terms of repayment from the FICO scores. So I think that maybe the only other things I'd add to grams comment.

So just just too just to clarify.

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

Is less than three year.

Redemption ships, okay that trend and and debt the percentage that have gone delinquent stay would follow the same geographic.

Pattern as well the 1% that you say upon delinquent.

I don't have that breakdown at hand, so are we talking follow up with none okay. Thank you 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.

Question is from Mike Mccormack with Credit Suisse, Canada. Please go ahead.

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

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