Q3 2020 Bank of Nova Scotia Earnings Call
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Good morning, welcome to Scotiabanks Twentytwenty third quarter results presentation. My name is Phillips Smith Senior Vice President of Investor Relations.
Presenting to you. This morning is Brian Porter, Scotiabanks, President and Chief Executive Officer Raj just want It then our Chief Financial Officer, and Daniel Moore, Our Chief Risk Officer. Following our comments, we'll be glad to take your questions. [noise] also present to take questions on the following Scotia Bank executives, Dan reads from Canadian banking.
I mean, not Jody shop from international banking, Jake Lawrence and Jean need from global banking markets and Glenn gallons from global wealth management.
Before we start on behalf of those speaking today I'll refer you to slide two of our presentation, which contains scotiabanks caution regarding forward looking statements with that I'll now turn the call over to Raj. This one.
Thank you for oil and good morning, everyone.
I'll begin by discussing our financial performance starting on slide four.
I will then pass the call with the Daniel to discuss risks and Brian will come toward our presentation with some observations and comments.
The banks results in Q3, when negatively impacted by a full quarter Apco with 19, which resulted in higher loan loss provisions and lower customer activity.
Jim banking in Canada, and across a international footprint, so lower revenue and higher loan loss provisions.
At the same time, we had record results and global banking and markets and solid growth in wealth management, both of which benefited from strong customer activity.
Adjusted net income was $1.3 billion on diluted EPS was a dollar and four cents for the quarter.
It says in line with the last quarter.
On an adjusted basis.
Token pcls of $2.18 billion increased 335 million quarter over quarter as we continued to add to alongside us to capture the impact of cobot 19, and its future credit migration impacts.
The PCL ratio increased 17 basis points quarter over quarter, and 88 basis points year over year.
This or long since have increased to $7.4 billion or approximately $2.3 billion in the last two quarters.
Pretax pre provision profit decline to more modest 3% on an adjusted basis.
Adjusted revenue declined 3% from last year or in line, excluding the impact from divestitures net interest income excluding divestitures was flat as higher contributions from asset liability management activities and loan growth was offset by the negative impact of foreign currency translation.
Non interest income excluding divestitures was higher from strong trading and underwriting revenues that were partially offset by lower banking insurance and commission revenue.
The core banking margin of 2.1% was down 35 basis points from last year.
This was largely driven by higher balance sheet liquidity investment in lower yielding assets, which contributed 13 basis points hope this decline.
I wasn't compression was primarily driven by corporate and commercial loan growth outpacing the retail loan growth this quarter that reduced margins by approximately 22 basis points.
Adjusted expenses were down 4% year over year or 1.5%, excluding the impact from divestitures.
Lower performance and share based compensation.
Advertising and business development expenses and the positive impact of foreign currency translation also contributed to lower expenses.
Just a product of the ratio of 51.4% improved 30 basis points year over year, and 260 basis points quarter over quarter.
Year to date adjusted operating leverage excluding the impact from divestitures was positive 1.1%.
Turning to slide five.
We provided an evolution of our common equity tier one ratio over the quarter.
The banks common equity tier one capital ratio improved 11.3% an increase of approximately 40 basis points from the prior quarter due primarily to lower risk weighted assets.
Until on capital generation, partially offset by the impact of revaluation of the pension liability.
Risk weighted assets declined $15.6 billion or $11 billion net foreign currency translation.
Production was primarily due to lower organic growth.
Business banking those weighted assets reduced by $10 billion largely due to copper prepayments was counterparty credit risk and CV risk weighted assets that use by 4 billion from the prior quarter.
Credit migration increased risk weighted assets by about a billion dollars.
Business banking unfavorable migration of $4 billion was offset by favorable retail migration of approximately $3 billion.
Retail risk weighted assets benefited from lower overall delinquency rates in each of the banks portfolios.
Lower delinquency resulted from the impact of the government stimulus and the bank payment method of programs, while lower consumer spending also contributed to the lower revolving credit utilization rates.
The common equity tier one ratio.
Also benefited by approximately 17 basis points from all speeds transitional adjustment for the partial inclusion of increases in stage, one and stage to expected credit losses of relative to the big crisis baseline levels as of January 31st 2020.
Turning now to the business line results beginning on slide six.
Canadian banking reported adjusted net income of $443 million down, 53% year over year, and 10% quarter over quarter.
Higher provisions for credit losses, and the full quarter impactful to pandemic on revenue impacted earnings.
The higher performing loan pcls quarter over quarter was due to date Piper estimated future credit migration.
The PCL ratio 85 basis points increased by 57 basis points year over year, 10, eight basis points quarter over quarter.
On an embedded basis, the PCL ratio 36 basis points was flat quarter over quarter, but up six basis points compared to the prior year.
Total revenues were down 6% year over year as net interest income declined 4%.
Due primarily to margin compression.
Total loans grew 5% with mortgage this up 6% and commercial lending up 10%, while credit card balances declined 13%.
Sequentially mortgages grew 1%.
And deposits grew a strong 10%.
The net interest margin was down 18 basis points year over year, and seven basis points quarter over quarter, driven by the full quarterly barco freight costs and changes in business mix.
Non interest income was also down 13%, primarily due to lower insurance banking and credit card fees.
<unk> expenses declined 2% year over year, and 4% quarter over quarter, mainly driven by lower advertising and business travel costs and the impactful other cost control initiatives.
Turning to the next slide on international banking.
My comments that follow up based on results on an adjusted and constant dollar basis.
Earnings of $53 million were down significantly low due primarily to higher provisions for credit losses on performing loans.
And the impact of previously announced divestitures.
Similar to Canadian banking International banking revenues were also negatively impacted by a full quarter of step endemic.
Excluding the impact of divestitures pretax pre provision profit was down a modest 10% year over year.
On an embedded basis, the PCL ratio was relatively stable up four basis points quarter over quarter, and 12 basis points was this a year ago.
Total pcls increased by $835 million from year ago.
Primarily related to performing loans due to the pandemic.
And its impact on future credit migration.
The PCL ratio increased by 208 basis points to 333 basis points.
Revenue declined 16% year over year.
Excluding the impact of divestitures revenue declined 8% due to lower retail sales.
Given the slogan and consumer activity and lower trading revenues and investment gains.
On a quarter over quarter basis revenue decreased 4%.
Due mainly to lower retail fees, given the slowdown in consumer activity.
Net interest margin of 3.99% declined year over year due to excess liquidity.
And commercial loan growth outpacing retail loan growth.
As well as a backup interest rate reductions across the footprint.
Sequentially commercial loans grew 8%, while retail loan growth was flat.
Expenses declined significantly down 11% year over year or 6%, excluding the impact of divestitures, driven by acquisition synergies and cost saving initiatives quarter over quarter expense was down.
4%.
Moving to slide eight global banking and markets.
Record net income this quarter of $600 million was up 226 million or a strong 60% year over year.
Quarter over quarter earnings were up 15%.
Hi income was driven primarily by strong fixed income trading and hide underwriting and advisory fees.
Corporate loans grew a strong 18% year over year, reflecting continued support to our customers as well as growth in repos and derivatives related assets.
And the impact of foreign currency translation.
Strong income growth coupled with prudent expense management resulted in a positive year to date operating leverage of 26% in this segment.
Turning now to our global wealth management segment on slide nine.
Earnings of 332 million were up 6% year over year, driven by stronger sales higher trading volumes and market appreciation.
This quarter, we will ranked number one in Canadian mutual fund net sales.
Excluding the impact from divestitures assets under management increased 4% year over year and assets under administration increased 6%, largely reflecting higher net sales and market appreciation.
Asset growth was robust across 18, 32 asset management generous Lawsky Fraser and MB financial management.
Adjusted expenses were down 3% year over year youth impactful divested operations.
The productivity ratio improved by 160 basis points quarter over quarter, and a strong 190 basis points year over year to 60.3%.
Adjusted year to date operating leverage was 240 basis points, excluding divestitures, which makes this a third consecutive quarter with positive operating leverage.
Wealth management results remain supported by strong investment fund performance.
80% of funds for them to talk two quartiles for three year and five year accounts.
I will now turn to the other segment on slide 10, which incorporates the results of group Treasury smaller operating units and certain corporate adjustments. The results also include the gains and losses on divestitures and asset liability management activities My common set follow.
On an adjusted basis.
The other segment continued to see favorable contributions from asset liability management activities that improved net interest income.
Adjusted net income declined $33 million due to lower investment gains and higher operating costs related to cope with 19.
Ill now pass the call over to dine in more to the view risk. Thank you Roche and good morning, everyone.
I'll begin my remarks on slide 12.
The bank reported total allowances for credit loss of $7.4 billion.
Adult grew $5.1 billion, two quarters ago, an increase of 45%.
Over the same period performing pcls increased 56%.
To put this in context.
Total allowances provide robust coverage for our current estimates of future net write off through to a latter half of 20 to 41.
Turning to slide 13.
The bank reported provisions for credit losses of $2.18 billion in Q3.
Reflecting an increase of $335 million from the prior quarter.
The PCL ratio increased 17 basis points last quarter, and 88 basis points from the prior year to 136 basis points.
Over 80% to this increase was related to performing loans, mainly in international retail and related to the macroeconomic outlook.
Estimated impact on future credit migration.
Impaired PCL ratio of 58 basis points was stable.
It was up only two basis points quarter over quarter, I'd Upto six basis points year over year.
Moving to slide 14.
Last quarter, we stated that the coated 19 pandemic and higher provisioning was likely not a one quarter event given its continued spread.
Its impact on the global economy and of course, the resulting structural damage.
With that in mind, I think it's important to understand what drove the quarter over quarter increase in total pcls and the changes to our assumptions since last quarter.
First.
Our Q3 estimates reflect increased economic impact from a later spread of the virus to Latin America and the Caribbean.
And second.
In many countries around the world, including Latin America, but expected to reopen their carnaby economies, but were subsequently delayed.
It's also impacted our macroeconomic outlook.
In addition to these development. We've also exercised significant expert critic judgment to overlay model generated numbers in order to capture the impact of future credit migration.
Performing loan provisions increased $277 million quarter over quarter, approximately 80% of this increase is related to international retail and this reflects the items that we talked about earlier.
More specifically the increase international retail provisions were related to unsecured lending exposures in Peru, and Colombia as shown on the next slide.
These are bit appropriately provider for based on our current estimates.
I will now discuss the status of our customers systems programs on slide 15, and how they can incorporated into our outlook.
Our customers with some programs are working effectively.
We can see this as our balances are declining regularly on payment activity is hard for customers are getting the programs approximately 90% of the remaining customers. This installed losses are expected to exit the programs through Q4.
It's also important note that participation and customer assistant programs is highly skewed to secured lending such as mortgages.
Unsecured lending such as credit cards represents only 6% of customers. This is balances.
And these have been well provision.
In Canada, approximately $42 billion or 13% of our retail portfolio was enrolled in our customers. This is programs in Q3.
And this was mostly related to mortgages.
In fact, only $200 million or the exposure is in our credit card book.
Furthermore, 96% of customers were exited the program our current.
The delinquency rates are well below pre coated level.
Turning to international banking.
Approximately $18 billion or 25% or international retail portfolio remain and customer assistance programs in Q3, the higher rate to participation international are mostly explained by the directives from local regulators while Lockdowns continued.
More than half of our international customer systems balances are mortgages would carry low ltvs of 48% on average.
Our remaining exposure is split between personal loans and credit card.
The performance of which is in line with our expectations.
We've also doubled our collection capabilities to further mitigate any potential impact.
Approximately 90% of customers and international banking book exited customer systems programs, our current on their payments.
We haven't corporate the customers systems program participation rates under estimate impact on our portfolio into the current outlook.
Which I'll review in a moment.
But firstly, let's look at the credit quality of the portfolio on slide 17.
Our Gil ratio of 81 basis points improved by five basis points year over year improvement was driven by international banking.
At our net formation ratio also improved sequentially and were stable year over year.
These metrics demonstrate strong credit quality of our portfolio.
Additionally, on slide 18, you can see our net write off ratio has improved gobank is at the lowest level relative to recent quarters.
This positive performance has been driven by Canadian banking and international banking, which have been favourably impacted by the customer assistance programs.
Net write offs are a key factor in our ABL calculations.
Yes.
We've assumed elevated net write off ratios through 2021.
These expectations have been incorporated into our 7.4 billion Hcl develops.
Looking ahead.
We expect Q4 pcls to decline below the level reported in Q2 for the all day.
As I mentioned earlier allowances factor in both the curve experience for customers. This of programs that have ended.
And the estimated delinquency of when the programs and.
And we have good data underpinning our extra credit judgment given over half of our unsecured exposures have already exited customer systems programs.
In addition, we have incorporated current macroeconomic outlook and its potential structural impact to our portfolios that are not part of custom assistance programs.
By the end of fiscal Twentytwenty, almost all of our customers. This is programs will have expired.
And then we expect to see higher efficiency provisions offset by lower performing loan provisions.
Overall, we view this quarters total provision for credit loss.
The peak.
And we expect provisions to decline substantially.
We are well provisions on the balance sheet to cover our current estimate of future that write offs.
I'll now turn the call back over to Brian.
Thank you Danielle and good morning, everyone.
To begin my remarks on slide 19, I would like to again, thank our customers for their loyalty and understanding and our employees for their continued hard work and dedication.
I would also like to thank our shareholders for their support as we navigate this environment. It has been a trying time for all that we are beginning to see some positive signs which provide cause for optimism as we look ahead.
I would like to frame my comments on our results today by looking back to our Q2 earnings call in late May and focusing on what has changed at that time. The outlook was highly uncertain lockdowns restrict governments for introducing new policy actions almost daily retail customer assume.
Since programs were highly active and corporate customers have been actively drawing down on their loan facilities, which increased risk weighted assets.
And this uncertain environment. The bank was well pairs, we were operationally ready and transition quickly to remote work environments, while 90, while keeping 90% of our branch network open.
In addition, we had completed all divestitures, which were part of our strategic Reapers physician.
We were also well prepared for the sudden increase in market volatility, but being prudent in the amount of market risk we were taking before the pandemic struck.
Today business conditions have begun to slowly improve across our footprint, although many challenges remain due to the timing and uneven impact of the recovery.
Yes, with that said our outlook today is more positive and has improved.
In Canada.
Progress in containing the virus has been steady with Paul provinces entering stage three of the reopening.
A significant significant amount of cobot 19 related losses in economic output have already been reversed.
Sold spending has returned to more normal levels. The housing market has experienced strong year over year increases in both sales and average sale price.
And Canadian auto sales posted a third straight month of recovery in July in.
In fact, just under half of the reduction in GDP due to the virus has been reversed.
We are seeing that improvement reflected in our day to day banking with saw was 6% growth in mortgages and 10% growth in our commercial banking business from a credit risk perspective, we are well positioned with our unsecured lending exposure being among the lowest of her peers.
Our current outlook is for the rebound in economic activity to continue for the balance of this year and for GDP growth averaged 5.4% in 2021.
And the Pacific Alliance, the delayed spread of the virus means a rebound in economic activity. It's more nascent at this stage. Despite substantial policy actions by governments and central banks, Chile has managed to plasma cobot curve than the trend in proven Mexico is down.
While much has been written about the spread of the virus in Latin America, particularly in Brazil. The per capita rates have confirmed cases in the Pacific Alliance, our comparable or in some cases less than developed nations, including the United States. This is illustrated on slide 20.
As we look ahead the substantial stimulus provided by policy actions in the steady reopening of economies combined with a strong rebound in prices for important commodities, such as oil copper and gold are all positive.
In the Pacific clients.
Slide 21 summarizes policy actions and our economic outlook for the Pacific aligns our current outlook, which was updated after Q3 is for a return to positive GDP growth in 2021 with growth rates, averaging 5.3%. This.
It's an improvement from our previous forecast of 3.7%.
We are confident that the Pacific Alliance countries will prove to be is resilient today.
I've been in the past.
Turning now to slide 22.
Across our business, we are seeing positive trends in both retail and wholesale customer activity.
For example, we have seen debit and credit card transaction volumes returned more normal levels in several of our core Mark.
As Daniel highlighted we are experiencing a steady decline and customer assistance balances along with positive trends in payment activity.
We are also provision conservatively to deal with potential delinquencies when customer assistance programs come to an end.
Utilization of corporate loan facilities has largely returned to pre cobot levels as the bond market has normalized we have assisted many corporate customers and taking advantage of record low rates to paydown corporate loan facilities and increased their available liquidity for future growth then.
Results as a return to normal lending volumes and improved nutrition.
I'd now like to close my remarks by focusing on a few key areas from today's presentation, which highlights the strength of the bank the first areas credit risk.
I would strongly encourage everybody reviewing our results to focus on the balance sheet, where we are very well provisioned as Daniel outlined our allowances for credit losses now stand at 7.4 billion.
An increase of 2.3 billion over the last two quarters and now represent two and a half years of loan loss coverage roughly 90% of the increase in allowances is related to performing loans.
Our forward looking indicators are weighed towards pessimistic scenarios and our assumptions are very conservative.
And we have factor Dan possible delinquencies associated with customers exiting assistance programs and government support programs moderating.
In summary, we believe Q3 was the peak for the bank's loan loss provisioning.
The second areas capital as Rusty Rush mentioned, the banks common equity tier one ratio improved in Q3 from 10.9% to 11.3% demonstrating the resiliency of our capital in a stressed operating environment and our prudent approach.
It is now 230 basis points above the regulatory minimum.
The third area is expense management.
In a challenging revenue environment.
Training record low interest rates are strong and.
Expense management is critical as Raj highlighted expenses declined across the bank quarter over quarter and year over year, our productivity ratio of 51.4% is the lowest in 10 quarters. This reflects our commitment to expense management are positioning and.
Digital and our substantial investments in technology.
In a very challenging environments. The bank has supported our customers provision conservatively demonstrated strong expense management and increased its capital and liquidity ratios. As a result, we are very well position for the economic recovery with fast I will turn it back to fill for the QNX.
Thank you Brian will we will now be pleased to take your questions. Please limit yourself to one question and then rejoin the queue to allow everyone the opportunity to participate in the call.
Operator can we have the first question on the phone please.
Thank you.
Please press star one at this time, if you have a question.
The first question is from Ebrahim Poonawala with Bank of America Securities. Please go ahead. Your line is open.
Thanks, and good morning, good mobile.
Hey, good so my question, both for Brian and Dan.
Insisted on one [laughter] beyond the Pacific Alliance continues but.
To us until late which currently are you most cautious at all when you think about credit you flagged the unsecured portfolio at this quarter.
Dennis review, we should expect will they do team does this concludes blindsided over the highest level of risk on that it is going to full continues in its Ben just add some color to your guidance for more Pcls you did some cadence good double what we should expect in Fabless is performing in the magnitude of the claims about discrete.
Thank you.
Hi, Graham. Thank you for the question I'm going to has not yet have started off and then Daniel or I might jump going after.
Thank you emerging and look let me give you my perspective on where are we to Latin American countries as Brian mentioned a call. We started later than Canada. So there's a lag effect, whereas we're already seeing signs that the proceeding the lines countries are in the recovering path and totaling 10 plus into trend Marci.
Okay, Let me give you and lot of some examples in general commodity prices are important for the region and in China. For example, mining for adoption piece above last year and copper prices are above precautions that will so exports of call of mining in Chile, our 13% year over year we.
She is very positive impact on Colombia, we wait to see their recovery easy electricity consumption due to lockdowns, Dave electricity consumption without significantly around 30% in both countries for more and they are reaching pre call. These levels. So these shows that JV economies coming back.
I think the case of Mexico, Mexicans in nice manufacturing exporter renewal growth. So manufacturing is a very important industry.
He's really positive to see that's half of the tactical sorry of coffee has been recovered as a us economy has reopened on reactivation value chain Scott reactivated.
So am I would like to highlight that vcs due to this strong fundamentals. These countries chart managing comprehensive stimulus programs. They have the ability to fees come also to duly due to the low levels of GDP and these have had very active monetary policy to boost to support the recovery.
Other measures are also important to high 19 days when she to for example governments have allowed workers, who these urged us to 25, 25% of their pension venue and 10% in Chile, you just say very material support to $20 billion, even in the machines.
$10 billion in Peru.
He's helping former workers. So overall, a very say is lagat Facebook, we are going to see an improvement in the comp.
Maybe values would like to answer also for like trades perspective.
Graham you asked about outlook, where we go from here I'd say in summary that we are at the high watermark and we're seeing the Taco Bell from here.
In fact, we're going to see our total pcls declined significantly going forward as I mentioned in my remarks, we see the total PCL going below in number that we report in the Q2 results.
Yes, we're confident that because over the last couple of quarters, we've increased our performing reserve by 56%.
At that number by looking both at our net write off sort of bottom update OLED analysis as well as our top down macroeconomic forecasts, which as we indicated remained skewed toward the pessimistic, we're going to data from the expired or customers. The residual portfolio of our book being highly secured Isnt. Your mortgage book you look great confidence.
And that future outlook, notwithstanding the positive macroeconomic indicators of Metro line.
So overall I think we know that structural damage done to the economy going to require a lot of quarters to clean up from here, but we do view this quarter PCL as our high watermark refute declined substantially from here and we're well provision of the balance sheets to cover our current estimates of future net write offs.
Thank you. Thank you think the next question is from calculated this chain with National Bank Financial. Please go ahead.
Good morning.
Well. Thank you first of all first slide 16 move some good bad or whom there a couple of questions about it so.
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Firstly, a person to have a.
But.
People coming off of the deferrals that are current.
96%, Canada, even 9% International do you think that trend. The number is representative of what we should expect the.
There is a more expirees over the next few months and then.
Second.
In international we see the percentage of deferral exposure that expired. It was 27% in international I thought there would have been higher because a lot of the.
Deferral, there were four month periods, which probably will regardless.
Into Q3, I'm wondering if there were any extensions that you granted there or or plan to.
Okay.
Okay.
Let me take that question, certainly I'll hand over to industrial for first in mortgage that I'd be first of all if you look at where we stand on the.
The outlook on the deferral customer assistance programs from here in Canada, I think the important thing the call out here is that the residual book that we have is 94% mortgages. So these are high quality mortgages with an average loan to value, 45% high FICO scores is effectively to Super Prime book of business. So really.
We're not very worried about that the residual portion of that portfolio is effectively a small piece encouraging mentioned that that was 200 million and then its prime auto again, we're we've got a very positive outlook on how that's going to perform from here. So.
We're actually were relatively well positioned optimistic on the kind of the portfolio.
Your question on.
Business mix driving different deferral expirees.
International banking here I think it's important to note that the deferrals were offered later, okay and in many geographies in international and and even within international there was a bifurcation between some of the countries and held and how they offered programs. So if you look at Peru front.
Since we've had a material the time.
Our balances of 40% versus some other countries, which lets such as Mexico, which went entered later I'll let.
Now for give additional color there well do get started the internal if you can come with his role on the argue with experience grew more than half of those are expiring in August and were through most of the month.
If you see would tell me what's going on now.
Sure. Let me, let me say Jerry that I'm quite encouraged with these payments levels close to 90% of the $6.5 billion that have exceeded probably customers see some programs because they see because I didn't mention a large portion on dice through which is on mostly on unsecured portfolio. So is showing inquiry Cds and also I would like to high debt.
Those are knocking the feral are paying FCB levels to pre Cogs. So we expect us as you can see these lighting the schedule, we're going to have in August and September the bulk of DVD Fells program exceeding as you also highlighted rate and that sort regulators have extended the option for customers to participating the customer.
Recent progress after Knockdowns also extending the reach.
Oh, probably a follow up.
North line here.
Right.
Thank you. The next question is from John Aiken with Barclays. Please go ahead.
Good morning, more Daniel when I look at the macroeconomic scenario on slide 25.
Obviously, we are seeing improvements across the board forecast for counted in the rest in terms of the outlook.
Can you give us some sense in terms of what changed on the international side.
Between the two quarters, obviously part of that is what drove the increase in performing loans, but also.
Commentary.
Around how much that actually did did drive the decreasing alone for the quarter fleets.
Yes so.
Other reference in Canada course in the U.S., we follow the very closely we've seen.
Matt macroeconomic data, that's better on a cumulative basis and you'll see that reflected somewhat in our forecast. Although I will note again here that we use overweighted, our pessimistic scenarios versus our base case.
We continue to though we continue to have a negative perspective, so that we have conservative provisioning here.
If you look at international the change in the macroeconomic forecast there has been driven by the longer and extended impact of the of the lockdown measure that we had in those countries. Most countries are now coming out of those lockdown measures were seeing the positive return our fast moving macroeconomic indicators are improving and was.
Substantially back or pre path much our international footprint, but we were conservative provisioning and in our most affected countries took a negative outlook on the Fourg apiece productions.
Daniel just just a little unclear there wasn't.
In the quarter again towards the pessimistic scenario.
We have maintained our overweight pessimistic scenario outlook that is correct understood. Thank you very much.
Thank you. The next question is from Steve Yeah, you with eight capital. Please go ahead.
Thanks.
Thanks again for the.
For the disclosure on the customer assistance programs.
I call me I'd ask a question on international and cards in particular.
Daniel No I've had lots of questions around the risk with PC all remaining elevated for a protracted period of time.
And I'm not a bad gas if that if that were to come to pass.
This is a decent area of focus so two thirds of.
The book is that roughly two thirds of the books under deferral and.
There's three and a half billion of exposure I guess, maybe if you could give us a sense of how prudent you're being there in terms of outlook. It looks like you know if the percent current following deferral expirees around 87%.
Does that imply you know 13%.
Delinquencies or loss rate in and just thinking that 90% of that is scheduled to be coming off by the end of the quarter like how meaningful could that be in terms of.
Impair their stage three PCL, but how should we think about I guess, the how conservative or are you being how should we think about that and how concerned should we be about that international credit card, but going forward.
Sure. So the unsecured portfolio as we highlighted is primarily in Peru, and Colombia. Those are the two geographies in international where our Ford PV and macroeconomic forecast of sequentially gotten worse.
Net effect on pessimistic perspective, and again, we've got some data that indicates industries outland and improving situation.
And so some of the footprint but.
We've intentionally taken a worst GDP forecast with clinical of top down perspective macro perspective, we've been conservative here.
As I said, that's been driven by the longer locked down I'd say.
The general matter were pretty broadly satisfied with the credit quality of our book.
We had we had.
27% of the portfolio.
Is it isn't deferral.
Or cylinder fro process is performing in line with expectations.
90% expired book as we said it turned the current status.
Residual portfolios, 55% mortgages that Scott hi loan to values of 48%.
You know many the customers between cards are still making payments to us even though there in those deferral period, and we'll have lunch than those programs off the books by the end of October 31, we estimate.
So as we've taken a look at this we benchmarked ourselves carefully to our peers.
And if we look at the PCL increase on a year over year basis, what we've done versus local and international banks, who often seen footprint.
We've taken a peafiel increased that's.
In line with peer group.
And Thats notwithstanding the fact that we have a business there that's more index to commercial corporate business, which as you know has a better experience in a lower default rate in these new situations.
So we think we're very well provide forward, we look across the book or maybe a different way to look at it and that sort of from talking to all of math for you you look at our total.
Cards portfolio that in deferral across the whole bank level today, and you look at the allowances for pro loss that we have on that.
Were 50% covered and does that doesn't include factoring in percentage people that are that are currently payment or that both the expects to exit so that's a very good coverage ratio.
Steve It's Brian just to give you a context is that not all markets are created equally and if you look at Chile, and Mexico for instance, the composition of our portfolio with look more like Canada in terms of Big mortgage book auto lending and less less unsecured lending just as in terms of the economic development.
And that progression of economic development in Peru, and Colombia difference.
You don't have big mortgage market, the mortgage market improves and as nascent stage and so people rely on personal loans.
Which we adjudicate appropriately enter and the season and the loss rates. The return on that business is a very good return.
Yes.
It's it's you're going to have some.
Some collateral damage and pandemic like this but my point is that people need that liquidity for their day to day life. This is 40% of the economy improves in warm. So so people in a time of crisis tend to Soc away cash.
In our experience put it under the mattress and it comes out and we're seeing that in our repayments here as people come on a deferral. So we're very encouraged of.
Consumer behavior in our international book, and we expect that to continue.
Thanks, Michael people.
Thank you. The next question is from Scott Chan with Canaccord Genuity. Please go ahead.
Hi, good morning.
Two part question for not too on international.
Yes, just you called as consumer loan growth was flat quarter over quarter, but commercial was strong sequentially again.
Maybe just why commercial was strong and maybe the outlook on both those segments and and how much of the commercial I guess, the lower margin commercial versus retail impact the NIM in the quarter versus liquidity.
Thank you.
Sorry.
Thank you look let me let me give you a my perspective on the performance with the quarter in general.
As we have said I'll earnings worried at all mainly impacted by innovating Pcls and we have talked about that but in terms of in today's date. So from that our revenues decreased decreased 4% fuel requeue, reflecting a full quarter of coffee.
Most of the impact Threed you see is driven by retail transaction on credit card fees that we expect will gradually increase and we also see experienced some margin compression, but I would like to highlight that he sees mainly driven by seeks medium duration of excess liquidity due to government funding off.
The call you'd see some programs and also due to the business mix as you say commercial going off more faster than retail assets and deposit growth were strong Q over Q, our loans increased 4% driven by 8% growth in commercial and were flat in retail and impulsive grow less 4% strong in.
All business lines. So these positive trends that will reflect the futures future, earning growth I will also would like to highlight that our expenses also reduce 4% in line with our revenue reduction and I'm fighting the fight pass the word we have reduced the hundred median endorsing expenses and we continue to.
Many opportunities to improve our efficiency.
If you put all together, including these local our year to date, our pretax pre provision is just 2% down on operating leverage east for that and I would like to leave you with three messages first than we have reshaped our footprint for fourq in our in our business. We feel we're in the right markets and we are committed to our international banking.
Strategy second we expect these to be they partner with the highest PCL International banking and third you will see our earnings improving in Q4 and beyond.
Let me just make a comment on NIM since you asked about it.
Yeah.
Overall, I think national NIM forecasting and find them great don't is visas is complicated.
The number of they both have economies viavi tenacious driven pricing and so on.
A number of factors more the NIM even in normal times also says it's about 20% of the all bank assets. It actually doesn't move the all bank NIM as much putting dominant 11 basis points impact this quarter on seven basis points, when you look at quarter over quarter.
But having said that international banking NIM compression is completely driven by liquidity when I looked at quarter over quarter off at 28 basis points compression that we had 20 basis points on nature that liquidity on excess liquidity. We've had to carry is auto customers and divest like you pointed out is due to higher commission and most secure during April as compared to the previous quarter.
[music].
And even looking forward, we expect to see some level of margin compression in investment banking in Q4, as well certainly not as much as you've seen this quarter and then we expect that to improve the mix shifting back to what we would call normal levels that are integral could come back once customer activities comes back across international banking foot.
Very helpful. Thanks, very much.
Thank you. The next question is from Paul Holden with CNBC. Please go ahead.
Thank you good morning.
I want to ask I recognize you're seeing Q1.
Ratio looks quite strong and now I'm wondering if you've done some additional work on the impact of.
Credit migration over the coming 12 18 months on the on the ratio complied.
Any guidance for good morning.
On a five sort of fee for that would be helpful.
Sure Paul It thrive salty if I can help you with that question.
As you pointed out the Cetone ratio was up 40 basis points quarter over quarter of 11.3% couple of Fokko as good a Dundee capital generation, Although we had high loan loss provisioning and lower risk weighted assets as we got Paydowns from.
Let's go down halter draws which use of aboard.
47 basis points of capital just last quarter. So we've seen some good come back and what 20 basis points this quarter through the reduction in automotive and now business banking, both and counterparty credit. This also reduced because of BB had extreme level. So.
Got it my credit.
Spreads that moved in Q2 of those will come back as well that give us on what 12 basis points back.
So part of that as.
Certainly as you look forward in this quarter be absolve migration of about $4 billion relating to our business banking, both and we actually saw some positive or favorable credit migration. When you look at the retail book and that a few factors that are.
Influencing dock.
Lower delinquency rates in each of the banks portfolios, whether you look at Nava does credit costs auto loans the entire gamut.
But also within the credit card portfolios, because you have credit scoring that comes into our models on so long simply because of the government stimulus that effort programs that have been in place, particularly in Canada as little as lower consumer lending episodic and consumer spending I should say.
Also contributed to lower revolving credit utilization rates. So really the PD is on our retail book rock, if you look quarter over quarter not a R&D book It dropped from 91 basis points to 78 basis points in one quarter. So that's the reason you see favorable migration.
To answer your question on stress testing like like we talked about last quarter, we do multiple stress test by declining environments. Like this you can call to be U shaped V shaped recovery l. shaped recovery and so on but the most likely it's an audio we see excluding this quarter's migration, which has already gone through on business banking, we think it would be.
And on the 40 basis points range and cannot capital ratio 11.8 wasn't on did you continued to grow because most of that idle available in the coming in Q1 Q2, particularly in the retail boat. We think it would be completely absorbed by they don't capital generation that we expect to see since volume growth is going to be slightly lower compared to a normal growth.
Base and that should help us.
And keeps us capital ratio definitely about 11.3%, we think that we look forward in Q4 and as we talked in Q4, we give them better understanding of how this might nails through Q on Q2 industrial next year.
Very helpful. Thank you.
Thank you. The next question is from Doug Young with these I think capital markets. Please go ahead.
Hi, Good morning, just wanted to go back to be performing loan build this quarter and it seems like most of the bill was related to migration.
Seemed like a change your scenarios, where you're at the line.
And so I just want to understand better.
How you went about looking at this migration is mostly a management overlay is there something where you went out over the next year or so and looked at as these deferrals come off what delinquencies would be and then can bring it back to today to what the Hcl would be.
Yeah. Thanks, Doug So you're absolutely right with the credit quality has driven a swing pcls kind of quarter quarter basis of about 350 million, whereas in fact on a quarter quarter basis. The the macroeconomic growth a lot I was down about 50 million. So this quarter is really going all about.
Seeing the impact the structural impact of this portfolio this impact on our retail portfolio and our corporate commercial.
I can give us where records the good news story, there and be able incorporate that data on customer exits as well as.
As well as the remaining portfolio that we have in and the quality of that into our estimates going forward.
And you're right in order to make that assessment, we've had to execute execute significant extra credit judgment in order to make that happen because macroeconomic factors. We haven't we don't have employment driving a drug income levels and what we have come assistance programs in many cases driving.
Income levels. So we'll use that as an overlay in terms of thinking about how are we looking that let us going forward, but.
From an overall perspective.
We have assumed a significant increase in net write off levels versus pre cobot level and we've looked out five quarters ahead, making assessment and taking that into our allowances for credit loss and we've done that both by incorporating that top down data that bottom up real experience.
Our customers as well as particularly I would be looking at the outside in perspective from our peer group.
There is there anyway to quantify that I mean, when we look at what you've said in terms of your experience for stuff coming off the deferral rate now I think it was 89 or 90% sustain current after they come up in international and it was higher up in the and Ninetys in Canada is that what you're expecting or are you expecting it to actually get worse from here as you go build out the performing loan.
Allowances. So two things first of all I'd expect that to be a at least as good going forward, but secondly, and I think more importantly, let's look at the credit quality of the remaining book of business because those expirees have related largely to the unsecured book of business, which has shorter to for all periods. So we've had about 60% about two third.
Other expirees.
In Canada relate to the unsecured book of business now encouraged we're down to 200 million. So if you look at the impacted on Pcls, which is really what role after here.
Have a.
I'm.
Optimistic perspective on that experience going forward given the remaining quality. The book as I said, it's effectively a super Prime remaining book of business in Canada, That's a very low LTV. So while we've taken appropriately pessimistic perspective on the overall provisions.
We have high confidence in the high Watermark statement, we made before and then lastly, the credit card book Trina billion.
In international that's on deferral, you said that there was a good chunk, that's still current and making payments can you quantify like how much about how much of those clients are still making payments.
Yes.
So international the current payment rate is remains significant.
And we're tracking that very very closely.
But you haven't quantified that sorry.
Customers deferral is your question, yes, we've seen at around one third of foreign customers that see remain remaining continued to pay even when the R&D for.
Great. Thank you.
Yeah. The next question is from Deco mini Litch, but.
You see capital markets. Please go ahead.
Hi, Thank you I'm going to stick with Dan and just follow up here on and your answer just now to at least as good which is a little surprising to me and you know your slide 16 is very useful. Thank you again for this.
Turning to slide and it will help me frame my question. So if you if I look at Canada for example, when I look at the.
Last call the current fault deferral expiring.
I think about mortgages somebody who is off expirees come off early so they probably didnt need that the deferral anyway, let's think about credit cards and personal loans when you've got a high current following deferral, but those are smaller payments and many of the people probably getting served payments.
So the issue Dan is is really as we look forward the biggest payment that people have in their lives is typically the mortgage.
So what I'm interested in understanding is.
Sort of how you see this playing out in October or or Q4.
When they come off deferral that they've got a mortgage and they're still unemployed and serve as being wild battle.
Can you provide some insight as to how many people in that mortgage book.
Our unemployed have served and potentially other loan balances, where they would have difficulty making those payments once that big deferral of the mortgage comes due.
And maybe perhaps provide some data on this credit cards, you say their current but how many are actually making full payment versus versus minimum payments. Thank you.
Yes thought on the on the occurred.
On the cart before the end of your question there, we still have about 70% of our portfolio maintaining current position on the on the card balances in Canada.
And that's consistent with our experience through this since the start of the so they put the quality of that remaining card portfolio, although as I said were down 200 million.
Has remained.
Remained consistent from a payment for factor.
Your question due to revolve talk around what's happened on transition.
Some of these government assistance programs roll off in what is now October given the additional extension that we've had in Canada and transition into the revised the I assistance programs that we haven't Canada now that were recently announced amounting to a significant 37 billion of assistance in Canada, and you know here significantly that has been extended not only to those that need sick leave.
For instance, but also to.
To those that only had 120 hours of employment in the last year.
That's a material piece of the systems that we had in Canada. So.
We think that will that.
Addresses many questions we had prior about some of the challenges about transition off those serpent payments going forward.
Youre right that the bigger portion of the payment amount is in the mortgage portfolio, but here again I'm going to come back to I think what we're all focused on today is the provision for credit loss outlook.
And when we're dealing with a mortgage portfolio the super Prime effectively under the 45% LTV, we don't see significant back.
And Daniel maybe I'll, just follow Darko standards for Canadian banking hair.
Clearly at 99.4% current following deferral expire is a tremendous results so far for those still in deferral of FICO score is close to those that are non deferrals. So in general our mortgage book sits around 800, and Dosen deferral are above 750 or higher we have identified in June based.
On seeing serve data and data that customers, we would qualify or characterize as vulnerable through the course of July and into August we will have contacted all of those mortgage customers. Two months ahead of their scheduled repayment and are working with them on a case by case basis and we're encouraged by what we saw through the month.
As of August.
And what would the proportion be those that are vulnerable Dan and can do you have is similar to support the international.
I would say the proportion would be less than 10% of those that are still in deferral that we would consider to be vulnerable the size of their payment while significant is not in comparison with the rocks and their credit capability. So when we look at that.
Hey, Alipay like we get comfort, especially to Daniels point around LTV should the consumers decide.
There are not capable of continuing the mortgage will move and we will we will exercise our right that that is.
As a possibility on the mortgage side in international not just want to what I would say in international aim at each that customers are also seem in R&D 72 cents option B two cars for regulators broadly and I would like to highlight that a decreasing the memory of hard customers a major events in our region like.
Earthquakes in Chile, Mexico, he reducing the Caribbean.
We have allowed us to provide massive support similar to what we're seeing so what I can try that come telly leased at these levels no payments that we are seeing on the issues in portfolios on the Assistarm programs are on targets and the on these are quite encouraging and we hope we have now the imports and xcede into Fourq.
For the vacancy not the same pace, we have increased our our allowance for for performing loans $1 billion in two quarters International banking on our Hcl to the east more than two times, our NAND rifles over last year. So we feel where loan provision we the formation we have today Darko it's Brian.
And just one thing that not show.
In answering another question from somebody else earlier, and it doesn't get a lot of color here, but the release that the Chilean government approval in government hasn't given for people to take money out of their pension.
Plans, we can argue whether that's good policy or bad policy, but that's equivalent to the government. The Canada, saying you can take $100000 tax free out of your RSP to get on with your like these are big Big programs for these countries and will bode well for consumers in terms of.
How they handled.
I think I so.
Just wanted to emphasize that yes, they represent two to three times in one fee income our average working these countries quite ventures.
Okay. Thank you.
Thank you next question is from Mike is Vanda, which with credit Suisse. Please go ahead.
Hi, Good morning, probably a question for nodule.
Just wanted to go back a couple of quarters on the guidance that was provided the earnings power International business Post dispositions I think the number was 525 million. It obviously, it's a much different environment now, but is that something that you could potentially get back to maybe by the end of fiscal 2021 or is that more of a fiscal <unk>.
22 story, when we think about that segment earnings power without the noise from from elegant pcls.
No and thank you for your question and.
I didn't quite confusing that almost call. We do these countries we show a non by another cycle of very high growth and this is because of the structural characteristics of the countries at 200 on CTCL population load enables from banking penetration fundamentals matter and they have manasion whether well.
Coffee so a portion of Twentytwenty why is going to be a transitional year, but I have no doubt that the banking industry will resume double digit growth Pos Colby.
I'm quite confident these targets for international banking CACI medium term target of course, the highlighting that we are still going through difficult launch and we still have to see a let's say a consistent and recovery and growth.
Okay. Thanks, Thanks for that color of how to really quick numbers question as a follow up on the customer assistance programs slight so in the footnote it said to keep Canadian payments percentage includes accounts that have not yet completed for stealing cycles since expiring. So what I'm wondering is about 96.3% in the right column, that's quoted Uh huh.
I would that be <unk>, how much lower would that potentially be if you excluded where if you only included the accounts that have come off deferral that it did have actually gone through a first billing cycles since the deferral expiry.
Hi, It's Henry Chan from Canadian banking, I don't have that number at hand, but it's not a significant difference were simply sharing that footnote for being to reflect the point that.
When the loan expires. It takes a full 30 days for the payment to become due in those circumstances, that's all I wouldn't read into that.
Thanks very much appreciate it.
Thank you. The next question is from Malleable Mendonca led to TD Securities. Please go ahead.
Good morning, Dan if we can go back to the comments you made around credit you said that.
The estimated future credit migration you built in estimated future credit migration out to the latter half of.
2021.
I would have expected that that kind of credit migration contemplated that it would have had a similar effect on book quality, specifically, what I'm getting at I would've expected the probability of default to have moved materially higher across your loan book, including consumer but.
There does appear to be a disconnect then between what you're building in for a credit perspective on what we've seen so far in terms of book quality.
I guess my question is is that still to come like updates tier probability and we felt across all your loan books corporate commercial and consumer are those still.
To come in subsequent quarters or are you done.
Hey, Marriott strides I think it referring to book quality, which we did see put out as far how far regulatory stuff back correct.
Yep.
Okay, Yes, so yes, the capital will lag like I mentioned earlier because of these definitely programs. It's talking as part of the business lending those I mentioned be to full billion dollars of risk weighted assets. So that can be kind of in sync with what you would see for loan loss provisioning, but certainly the loan loss provisioning on the retail boat is coming in much earlier because.
The Biopharmas nine performing loans requirement and the capital impact Alpha globally delayed as right I'll start coming in Q1, Q2, and these portfolios actually migrate to.
A higher or lower PD, I should say, a higher PDN and lower quality as well as that they've entered the impact and that will reflect in the capital which is why I said about 40 basis points could be the impact on migration to an earlier question, but that will come through I would say only part of Twentytwenty. One as these programs made up but you're right. It's a lag effect.
So let me correct in saying that the probability of default.
Those those numbers have been updated for corporate in commercial and retail is just as you suggested will come through later is that is that correct.
Completed correct Mario Thats why it upfront to the retail Cds you get about a RV portfolio in the banks up back has dropped from 91.
Basis points of 78 basis points, and then come back to 91 being a more normal than perhaps Michael Ohio, depending on how these portfolios Mike that in future quarters.
Thanks, Mike.
Sorry God.
Barrier Weve Daniel here, we've gone through and we've taken a full bottom up position on the whole corporate commercial portfolio and Rerated everything that's in there as necessary. We found frankly, only 4% of our portfolio needed we rating and all that 80% was only one credit knowledge. So that shows the resiliency of our portfolio, which as you know is 85%.
Investment grades that performed very well very pleased with that.
And then your comments, there specifically related to corporate and commercial.
Yes.
Thank you.
Thank you. The last question will be from Sohrab Movahedi with BMO capital markets. Please go ahead.
Okay. Thanks, but just wanted to go back to not show.
And get a sense not yet as to what.
Any changes being made to risk appetite towards.
Yes that in India region, where the growth is likely to come and debt and whether or not there has been it ships and does Dan Dan's forward looking for an expert judgment assume.
It's skewed towards more upside secured book or is it more if the same and whether or not.
Business perspective.
And the trends in expense management did you have done a highlighted persist or are there minutes as to how much more expenses can go from here and international segment, particularly thank you.
Thank you. Thank you very much for us for your question, well and I keep already happening and I expect that in the first thing. If you knew for next few launch and we will have more opportunities to grow in commercial and the rig few retail secured business. They have they are more recipients of the recession.
Onto the economies are back to a growth factor growth path, but eventually us as we have mentioned before eventually we expect that both segment will start to grow in a much more balanced way and our risk appetite has been our adjusted accordingly, taking some lessons from DC from this event, but we.
The remaining highly confident on our strategy on the risk appetite would gradually out that also through the conditions of the markets.
Yeah, I I would like to say that there's a significant de connection duration, we have enabled to help our customers experiencing a very difficult circumstances accessing their bank direct counts remotely.
And and therefore, dcs, helping us invest and she's a lot of an engagement in detail channels and therefore, we continue to see as we have seen significant opportunities to improve our efficiency in and continue these trend on track record, we happy to give songs expansion.
Management Sarah.
And so.
And on factoring in the.
The the changes in strategy of that.
After looking at margins going forward, we've not factored any of that into our extra credit judgment, we've done it off the current portfolio as it is.
Since its daniel to be to be crystal clear on that.
Nice for the foreseeable future.
Growth in commercial and.
Sure I call it secured stuff would be an improvement so to speak relative to where youre overwhelmingly estimates are that we are proven versus big case estimates today that is correct.
Okay. Thank you.
Okay. Thank everyone for participating in our call today on behalf of the anti management team, we want to thank our investors and analysts for participating in our call I also want to thank all of our employees for the continued focus and hard work the dilutive all our stakeholders and our customers and shareholders for the light ends up both.
We look forward to speaking with you again at our Q4 Twentytwenty call on December the flushed 2020, how great day.
Correct.
Thanks.