Q3 2020 Canadian Imperial Bank of Commerce Earnings Call
All participants please stand by your conference he's ready to begin.
Good morning, and welcome to the CDC quarterly financial results call.
Please be advised on this call is being recorded I.
I'd now like to turn the meeting over to Jeff Whites Senior Vice President Investor Relations. Please go ahead Jeff.
Thank you and good morning, everyone will begin this mornings presentation with opening remarks from Victor Dodig, Our President and Chief Executive Officer, Following Victor Ricebran Ocean, Our Chief Financial Officer will review, our operating results Schonberg, our chief risk Officer will close out the prepared remarks with a risk management update.
We're also joined in the room by she Ibcs business leaders, including Harry Culham, Laura Dottori, Athanasios, and John and talent as well as my top appetite is who is joined us remotely from the USA.
There will be available to take questions. Following the prepared remarks as noted on slide two of our Investor presentation. Our comments may contain forward looking statements, which involve assumptions that have inherent risks and uncertainties actual results may differ materially with that I'll now turn the meeting over to Victor.
Thank you Justin good morning, everyone. Thanks for joining us and we hope you and your families are well.
Over the last six months, we've seen significant change in the market as a result of the cobot 19 pandemic.
Initially our focus was on the urgent response required to deliver relief to individuals into businesses as we navigated through a period of great uncertainty.
More recently, our focus has shifted towards recovery maintaining your commitment to our clients as we have reignite, our long term strategic growth plans and to do our part to support the recovery of our economies.
With that context I'd like to show three key messages with you. The first is our CBC team has responded to this pandemic with professionalism with dedication with purpose. They are the foundation for growth efforts moving forward.
There's no substitute for purpose driven culture and our entire team remains focused on making our clients ambitions reality.
The second is that we're investing for the long term.
Position C.I.B.C. for success as we emerged from the pandemic stronger.
Prepared to capture growth.
And the third is that the investments that we've made over the past several years to simplify and to modernize our bank.
Deepening client relationships have positioned us well the results this quarter reflect the resilience of our bank.
Since our second quarter call with you in May Canada's economy has seen some signs of recovery with this with a cautious reopening of many sectors.
Many businesses are still operating far from pre pandemic levels.
The bank of candidates message last month underscored the path to a full recovery could be both lengthy and uncertain.
And the U.S. well many states reopen during the quarter the continued spread of the virus could translate into a prolonged recovery.
Against this backdrop backdrop, we remain cautiously optimistic and believe that ours strong core franchise Hyatt centric focus and diversified business will enable us to get back to pre cobot levels of profitability.
To that end I'm pleased to report that CBC achieved adjusted earnings of 1.2 billion Canadian dollars.
And earnings per share of $2.71 in the third quarter.
The resilience of our core business and continued expense discipline resulted in stable pre provision earnings despite a more challenging and lower interest rate environment.
Included in these results as a provision for credit losses of 525 million, which is significantly lower than the 1.4 billion provision last quarter Rochon, Sean will provide more detail on the shortly.
On the balance sheet.
In capital, our balance sheet and capital position remains strong with the C.T. one ratio of 11.8%.
Our excess capital provides significant flexibility to continue to support our clients to invest in our business and maintained dividends to our shareholders.
We rose to the challenge of supporting our clients with much neither financial relief during the first phase of the pandemic.
After peaking in early April request for payment relief I've been on a steady decline.
In the last six weeks the number in your request had been diminimus and averaged around only 1% of peak levels.
Now I'd like to return now I'd like to turn to our business units.
On the retail side overall consumer spending is recovered somewhat though it remains below pre pandemic levels in line with this personal and business banking credit card purchase volumes have trended upwards since the trough in April.
A lot volumes were down 6% year over year compared to a decline of 33% in April over the previous year.
We drove year over year growth in mortgage balances of 3% on a spot basis. That's the real estate market started to recover in June and July.
And our performance is not yet where we wanted to be our recent growth has returned closer to market levels supported by additions to our mobile advisor team and a streamlined application process.
We continue to see very high levels of digital engagement with digital banking sessions and transactions up approximately 25% from pre pandemic levels.
Our North American commercial banking businesses continued to see strong deposit growth in the third quarter as our clients emphasized liquidity amidst the economic uncertainty.
Within our North American wealth businesses, we're seeing good momentum with more than $8 billion of net year to date client inflows across our Canadian and U.S. walls platforms.
Our capital markets business had a very good quarter, driven by strong trading activity across most asset classes.
Continued strength in debt underwriting and improved equity underwriting.
Our emphasis on building deep client relationships in connectivity with other areas of our bank is delivering strong client focused results.
This includes our focus on growing our U.S. market share, which is progressing well with revenue up 43% in this region a year to date basis.
As we navigate through the pandemic remained well positioned to balance short term actions necessary to fully support our clients and the economic recovery, while advancing our long term strategy.
We have a number of key strategic initiatives underway to further streamline operations improve our efficiency enable us and enable us to reinvest strategically to further strengthen our market position.
As you recall, we announced a workforce restructuring earlier this year, we expect to complete this restructuring in the fourth quarter and deliver the previously disclose run rate savings of $260 million by the beginning of fiscal 2021.
We are re purpose sing a portion of the expected savings towards targeted strategic investments.
To that end, we continue to invest in technology and innovation to simplify our bank and create an engaging and modern modern banking experience for our clients.
These investments build on the foundational work we've done over the last five plus years to building a industry, leading digital banking platform as clients increasingly shifted these alternative platforms. We're pleased to be ranked number one among the big five banks for customer satisfaction to mobile banking as ranked by JD power this quarter.
We will continue to make investments in this area to further cement our leadership position.
During this pandemic, we continue to prioritize the while being over clients NRC IVC team.
And as more communities. We open we're taking a measured approach to how we manage our business.
We continue to employ many precautions and our physical space, including and shrink physical distancing, adding signage and installing physical barriers as needed.
In addition, approximately approximately 60% of our team continues to work remotely and we anticipate that the majority of these colleagues will continue to work off site into 2021.
We are aligning our decisions and timing around a long term real estate plans, including CBC square.
The work that was already underway to prepare for a new headquarters proved very valuable when the pandemic said and as our tech enabled team was able to stay connected and productive throughout.
Going forward CNBC square will afford us greater flexibility and the opportunity be nimble as we adapt to the up environment, we operate and well keep you apprised of our evolving workplace transformation in the coming quarters.
Now before I turn the call over to her I'd like to highlight our commitment to diversity and inclusion.
Since our last earnings call the issue of systemic racism has come to the for its incumbent on all of us as individuals and organizations to look inward and understand what we can do to address social justice, which disproportionately affects the black and indigenous communities.
For CBC, our success hinges on our people were part of a singularly connected team and inclusion is foundational to the way we do business. While we've made good progress on building a more inclusive bank. It's important to acknowledge that we have more work to do.
We are committed to addressing systemic racism in all its forms within our bank and to being a force for good in our communities and with that I'd like to turn the call over the horizon for more detailed review or over financial results.
Thanks, Victor and good morning, everyone.
Starting on slide seven this morning, we reported earnings of $1.2 billion and diluted earnings per share of $2.55 for the third quarter of Twentytwenty. Excluding the items of note detailed in the appendix of our presentation adjusted earnings per share was $2.71. This.
This quarter, we absorb an incremental 525 million in provision for credit losses up 80% from the prior year, but down 63% from last quarter as we experienced a comparatively smaller changing the economic outlook and we did in Q2, Sean will speak to provisions in more detail in his remarks.
Pre provision earnings of 2.1 billion increased 1% from the prior year, reflecting the strength of our diversified franchise and management actions in response to the current economic environment, while our personal and commercial banking businesses continued to face revenue headwinds due to the ongoing pandemic. These were more than offset by growth in funds managed across our bank.
A record quarter and capital markets and strong expense discipline.
Revenue of 4.7 billion with stable year over year as a 2% increase in net interest income helped by trading and deposit growth offset a 3% decline in noninterest income largely due to reduced transactional activity by our personal and commercial clients.
Adjusted expenses of 2.6 billion were down 1% from the prior year, despite headwinds from covert related expenses and foreign exchange translation, resulting in positive operating leverage we will continue to be focused on expense discipline and expect expense growth to be contain going forward.
As illustrated on slide eight we continued to demonstrate the resilience of our balance sheet building on the strength in our of our capital and liquidity positions over the quarter.
We experienced significant growth in client deposits across our business, resulting in an increasing our liquidity reserve.
Average LCR was 150% through the quarter, representing a buffer of over $60 billion relative to the 100% regulatory minimum.
Our capital position also strengthened over this period, ending the quarter, where the cetone ratio of 11.8% and 12.2% pro forma including the pending FDIC transactions.
Internal capital generation and net decrease in our WH and an improvement in the value of securities in our H.B. I lay portfolios all contributed to the near 50 basis point increase over the prior quarter.
While our WH this quarter reflect negative migration, resulting from the completion of credit reviews across a large part of our wholesale portfolios. This was more than offset by lower utilization across our credit portfolios delinquency trends in retail and a reduction in market risk.
Our ending capital position represents a buffer of over $7 billion in capital or almost $80 billion in RW, a relative to the 9% regulatory minimum and our current medium term outlook is relatively stable as such we continue to be confident in our ability to support our clients and our dividend payments as we navigate through the impact of.
Kogut 19 pandemic.
The balance of my presentation will refer to adjusted results, which exclude items of note.
Slide nine reflects our personal and business banking results. Despite revenue headwinds from the ongoing code 19 pandemic, we continued to make progress against our longer term goals net income for the quarter was 510 million down 23% from last year revenues of 2.1 billion decreased 8% year over year largely as a.
Consequence of the ongoing pandemic net interest income was down 6% due to lower rates and the interest rate relief provided some credit card clients, partially offset by strong deposit growth.
Noninterest income was down 13% as average transactional activity by consumers remain below the prior year despite improvements from the last quarter.
Net interest margin of 238 basis points for the quarter was down 16 basis points from last year and six basis points sequentially.
While the expiry of interest rate relief will provide some sequential benefit to margins in the short term, we anticipate facing gradual pressure longer term as we continue to absorb the impact of the decline in the yield curve earlier this year.
Expenses of 1.1 billion were comparable to both the prior year and the prior quarter, we continue to manage our expenses as market conditions evolve balancing efficiency improvements with targeted reinvestment.
Slide 10 shows the results of our Canadian commercial banking and wealth management business, while we maintained our strong market position. The segment was impacted by the market slowed down due to the ongoing code 19 pandemic net income for the quarter with 320 million down 7% from a year ago, while pre provision earnings were in line with the.
Prior year, driven by stable revenues and a 2% decline in non interest expenses.
Commercial banking revenue was up 2% from a year ago benefiting from the growth in both loans and deposits offset impart by the negative impact rates and lower transactional feet.
The positive in lending balances were up 17% and 5% respectively over the year, while deposit growth continued to be strong in the quarter loan balances stabilized as both new originations and utilization moderated.
Wealth management revenue was down 2% from the prior year, primarily driven by lower fee revenues in our full service brokerage business as it was not sell to reduce market activity. The 2% decrease in expenses reflects lower revenue based variable compensation and strong expense discipline over the quarter.
Turning to slide 11, U.S. commercial banking and wealth management results reflect continued growth in our U.S. franchise.
Net income for the quarter was 77 million down 58% from the prior year pre provision earnings growth continued to be strong at 10% year over year in Canadian dollars or 7% in local currency.
Revenues were up 3% in Canadian dollars and in line with the prior year in us dollars as double digit growth in client balances offset headwinds from a significant decline in interest rates and lower it syndications.
Average loans grew 19% from a year ago, reflecting continued momentum in client development and loans advanced as part of the Paycheck protection program.
Excluding paycheck protection program loans lending growth was 12% over the same period deposits outpaced loans growing 36% from a year ago and a U.M. grew 8% driven by client flows and market appreciation.
Net interest margin was 276 basis points down 29 basis points sequentially, and 48 basis points from a year ago, driven by the continued decline in effective LIBOR rates and the impact of lower yielding triple P. loans, we anticipate further margin pressure from these factors to moderate going forward.
Noninterest expenses were down significantly, reflecting the impact of our efficiency initiatives and a reduction in travel and business development expenses.
Slide 12 coverage capital markets, where we delivered a record results net income of 392 million was up 67% from a year ago, while pre provision earnings increased 62%, both largely as a result of higher revenues.
Revenues of $1 billion were up 33% from a year ago, driven by strength across our diversified business and a recovery in valuation adjustments recorded in Q2.
Higher client activity in interest rates and commodity trading growth in corporate banking as well as higher debt and equity underwriting all contributed to growth, partially offset by lower foreign exchange activity due to cross border travel.
Noninterest expenses were up 6% from a year ago, primarily driven by higher spend on ongoing strategic growth initiatives, particularly in the U.S. and higher revenue links variable expenses.
Finally, slide 13 reflects the results of the corporate another business unit net loss of $56 million in the quarter compared to a net loss of 7 million for the same quarter last year, driven by lower revenues and higher pcls, partially offset by strong expense management.
Revenues for the segment were impacted by lower rates and reduce transactional activity in our international business as well as the increased level and cost of our liquidity reserves and treasury and with that I will turn the call over to Sean.
Thanks, Rich and good morning.
Well, we've seen a moderation over the last few months relative to the extreme volatility at the outset of the pandemic.
There's still a good deal of uncertainty in terms of the course of cobot 19, and its effects on the economy and our clients.
We've built on our analysis from last quarter as we continue the exercise judgment in determining our provision for credit losses for performing loans for avid context, we have provided the incremental disclosure we added last quarter on select industry exposures.
Last quarter, we noted that if our economic estimates at the time were to materialize close to forecast, we would not expect to see material increases in performing allowances in subsequent quarters.
Our results this quarter are consistent with that.
We had a comparatively small additional build and performing provisions this quarter, principally driven by some deterioration in the economic environment and reflected in our forward looking indicators and economic scenarios.
As I will discuss shortly our credit portfolios of generally performed in line with our expectations this quarter and in some cases better than expected.
Turning to slide 15 provision for credit losses was 525 million this quarter down from 1.4 billion in the prior quarter with lower provisions in both impaired and performing loans.
Provision on impaired loans of 300 million was down 43 million from last quarter, primarily due to lower insolvencies and write offs experienced in our Canadian retail portfolios.
The decrease in insolvencies was in line with the industry trend as a result of lower consumer filings the lower level of write offs resulted from a combination of factors, including government support as well as assistance offer to clients through our bank relief programs.
Partially offsetting this decrease we have higher provisions on impaired loans in the oil and gas sector of our capital markets business.
As well as a small number of loans in our us commercial banking business.
Provision on performing loans was 225 million largely due to an update of our forward looking indicators and scenario, we changes based on impact input from our economics Division.
This particularly affected our U.S. segment provision, where recent virus activity in associated impacts on economic reopening resulted in a deterioration or economic scenarios for the us economy.
At this time, we're not seeing broad based credit weakness in the portfolio, where we have seen issues they've been episodic with some concentration in the oil and gas portfolio and the retail and hospitality sectors.
That said, we anticipate additional negative credit risk risk migration across the portfolio the longer the pandemic and associated economic conditions persist.
We believe we've been prudent in recognizing performing allowances to reflect our current outlook.
Turning to slide 16 allowance for credit losses grew by 9% to 3.6 billion this quarter with our coverage ratio to gross loans, increasing from 78 basis points to 86 basis points.
Similar to last quarter, we've provided additional detail on are performing provisions in the bottom left corner of the slide.
We recognized $113 million of model driven provisions representing half of the total performing provisions this quarter as a result of revisions to our forward looking indicators and changes to scenario weightings before any benefit from government support.
The other half of the performing provision this quarter as a function of 236 million in additional provisions net of 124 million of other adjustments shown in the third column of the chart.
Consistent with last quarter. The additional provisions are a function of applying judgment to reflect the impact of government relief programs and specific analysis on select segments of our portfolio in particular, we recognized additional performing provisions in our retail portfolio to offset some of the positive portfolio movement reflected in the other adjustments call them.
Which we believe are affected by temporary relief measures.
Similarly, we increased the provisions in our business and government portfolio to offset model driven releases to address qualitative factors that we believe or not fully captured in our models.
Overall, the loan losses. This quarter were generally in line with our expectations for business and government portfolios and somewhat better than expected in our retail portfolios.
Turning to slide 17, we've provided details of our allowance coverage is by line of business.
As a result of the updates to our forward looking indicators as well as qualitative adjustments the allowance coverage ratio increased marginally from last quarter and significantly compared to the same quarter last year.
We feel comfortable with the current level of coverage and we'll continue to closely monitor the credit quality of our portfolios for potential future adjustments.
On slide 18, we show our credit portfolio mix, which remains well diversified and consistent with last quarter.
Our total loan balances were 414 billion and the overall credit quality of our portfolio continues to remain high.
Nearly two thirds of our outstanding loans or to consumers. The majority of which are mortgages with our uninsured mortgages, having an average loan to value of 52%.
The balance of our portfolio is in business and government lending with an average risk rating for the portfolio equivalent to a triple B plus.
Since the pandemic, we've reviewed over three quarters of our business and government portfolios, taking risk rating actions and specific impairments as appropriate.
Overall this lending portfolio continues to perform in line with our expectations.
Slide 19 provides the status of our client accommodations and credit quality details by segment.
New accommodation requests have decreased substantially this quarter as Victor noted.
Residential mortgages account for the majority of the loan balances that are subject to deferrals.
Within this segment more than 75% of clients have a FICO score of greater than 650.
Uninsured mortgages represent approximately 60% of the outstanding balances with an average loan to value of 58% and average FICO score of 723.
Our cards deferrals are now complete other than for a very small number of new request that are being dealt with on a case by case basis.
The payment behaviors of clients, who have come off deferral are within our expectations and we're comfortable with our provisioning as it relates to this group of clients.
The majority of Canadian business banking clients, who had taken deferrals I will now have now come off the relief program.
We had higher deferral balance request in the U.S. This group this quarter based on timing and processing of initial client requests.
Overall, the commercial clients coming off payment deferrals are not exhibiting higher delinquencies in the overall book, which remains very low.
And we've had almost no requests for deferral renewals.
Turning to slide 20, we've included details of our exposure to the leisure and entertainment and the retailer sectors, which are sectors that has been particularly vulnerable during the pandemic.
Our exposure to these sectors represents approximately 2% of our overall portfolio with 29% of leisure and entertainment exposure and 47% of retail exposure being investment grade at the end of this quarter.
On slide 21, we provide detail of our commercial real estate exposures in both Canada and the U.S.
Our exposures in these two regions remain well diversified and continue to perform well, 68% of our Canadian portfolio and 35% of our U.S. portfolio, we are investment grade at quarter end.
Slide 22 details our oil and gas exposure, our wholesale exposure was 9.6 billion in third quarter down approximately 900 million from the prior quarter with 43% of the portfolio being investment grade.
The portfolio continues to be affected by low oil prices. We've reviewed the risk ratings of over three quarters of the four of the portfolio, which has led to some ratings downgrades in the oil and gas book. This was primarily felt in the exploration and production and the services sub sectors, where we downgraded approximately one third of the names.
Slide 23 provides an overview of our gross impaired loans gross impaired dollars were up in both consumer loans and business and government loans, mainly due to covert 19 and continued pressure on oil prices.
And our Canadian mortgage portfolio, we experienced a small increase in gross impaired balances. However, given the moderate average loan to value ratio of his portfolio. We do not expect this increase to translate into material losses.
New formations this quarter were up from last quarter, driven by loans in our Canadian commercial banking segment, along with higher impairments in the oil and gas sector, partially offset by lower consumer formations.
We do expect new formations to remain volatile in the near term.
Slide 24 shows the net write off and 90 plus days delinquency rates of our Canadian consumer portfolios.
In the current quarter, we had lower insolvencies and flow write offs as a result of government support programs and bank relief offerings.
The overall Canadian consumer late stage delinquency rate was up this quarter with a higher rate in residential mortgages and a lower rate in credit cards and personal lending.
In closing while there continues to be uncertainty in terms of the course of the pandemic and impacts on the economy in the weeks in the months ahead, we remain comfortable with the quality of our portfolios and are well positioned to continue to support our clients while managing through the crisis.
Provisions on impaired loans were lower this quarter than the second quarter. However, we do expect to see impaired provisions trend higher over time as relief programs come to an end and flow write offs in insolvencies increase.
That occurs we would expect to see more of our performing allowance transfer from stage two to stage three and provide a partial offsets the losses in future periods.
We believe our allowances are appropriate in the context of current macroeconomic conditions and as we indicated last quarter, assuming our economic forecasts doesnt deteriorate, we would not expect to see further material increases in performing allowances in subsequent quarters.
I'll now turn the call back to the operator for questions.
Certainly thank you. Please press star one at this time, if you have a question there will be a brief talk a little participants register for questions. Thank you for your patience.
The first question is from Gabriel to shape National Bank financial. Please go ahead.
Good morning, first question I want to talk about the a them all bank margin in margins overall.
One aspect the hitting all banks of but you're carrying a lot of excess liquidity.
And that's creating some negative carry in the treasure Treasury area I'm wondering what I should look.
In terms of.
About excess liquidity, how do I measure that.
Maybe a year from now things, Okay that comes back and we can start.
Assuming elimination of that issue.
And then the other one would be.
Aside from this factor.
And then Roger you mentioned the whole you know gradual.
Impact of the yield curve, giving reflected in your margin can you walk us through the the timeline there and how much that represents an erosion over the next few years as you reinvest your your liquidity book.
Sure. Thank you Gabriel good morning, and thank you for the question. So let me start with Q3 and what happened what drove that and then I'll talk about the outlook. After that so if I look at a total bank total bank margins on a quarter over quarter basis down 16 basis points.
Already of that I would say kind of in the 11 12 basis points was actually related to that excess liquidity that you described and so the way I would think about that is.
More than Eni, it's a balance issue and you can triangulate that even if you just look at our Investor presentation, you look at deposit growth versus loan growth deposits outpaced growth of loan significantly. So lot of this liquidity is coming from deposits or.
Not wholesale funding and net of that again as you can almost triangulate. There. There is a you know in the mid Thirtys billions there of the of excess liquidity that came on and so that balance effects margin now I wouldn't assume it's all from negative to Eni, that's why differentiate between the two as we take on deposits were very focused.
On pricing of deposits and profitability and positive margin so going forward, while there could be for a period of time some much some NIM impact from NII perspective, I wouldn't assume that necessarily that's negative.
The rest of it was a couple of basis points from the reduction that we saw and net personal and business bank some of that as it related to rate headwinds, which had we continue and I'll touch on that but some of that as transient right. So we had a reduction in utilization a number of I revolving portfolios that carry higher yields as you know so that would have impacted us now and that will reverse.
Yes, we had the interest rate relief provided to credit cards and not on a year over year basis is sort of four ish basis points to margin in that business and that expires and goes away. So starting next quarter, we'll see that reversion to that and then there was a few basis points from the reduction in the less which was largely driven by quarter over quarter, we had 90 basis points decline in it.
Two library and as you know most of our assets our library link loans in the U.S., but.
But that given LIBOR has now stabilized is largely behind us. So what does that mean going forward. We're very focused on managing our liquidity position. We do think overtime that we will manage this and as I said in the interim we're very focused on the eni not necessarily the margins and we are managing to positive and I for the bank.
In terms of the outlook on the longer term rates.
We had provided some disclosure before we got into this pandemic round their interest rate sensitivity and gave I would say that stands it plays out over a long period of time, but at the time. We had said 100 basis points shock is about $280 million of Eni for us.
Interest things change, but when you look at 150 in Canada 200 in the US of movement. Since then I would see that coming into PNM over time, but it will be gradual and so in Canada. I'd guide you to more gradual in this sort of few basis points quarter type of range going forward.
And then in the U.S. because a lot of that as LIBOR at length I would say we've stabilized from here on.
Sure. Thanks for all that and just.
Just a question on the outperforming allowance and Sean you mentioned, you don't expect material additions to the going forward.
I'm wondering if I look at performing allowances to performing loans, you're at the low end of the peer group I'm wondering if that's something you're wanting to.
[music].
Move closer to the peer group average or upper end or or how are you thinking about building up the performing provision overtime.
Yeah.
Thanks, Dave.
It's a but it's very much that process that we undertook and continue to undertake that I talked about last quarter and weve carry that into this quarter. So.
We continue to work do a lot of analysis around the portfolio, we have our model driven elements and then the expert credit judgment that we that we apply we're very comfortable with our allowance coverage at this point based on our current economic outlook.
If you if in to the extent that changes where we see.
Deterioration in the in the credit books, which were not seeing today.
That would impact that but currently we're comfortable with where we are okay. I got mix, obviously, comparing banks like a simplistic mix.
Factors matter, but.
Just trying to get a sense, if theres any targets you have or but doesn't sound like you're.
You all sounds like you're comfortable where they are so anyway altogether.
Thanks.
Thank you.
Next question is from Ebrahim Poonawala with Bank of America Securities. Please go ahead.
Good morning.
I guess just wanted to follow up.
In terms of Coleman said on expense management I.
I think we tell you mentioned you expect the $260 million an annual savings to be fully baked in by the time the into first quarter of next year, just talk to us meaningful.
Broaden the meeting about expenses.
Seems like you thing and I should stabilize some yet if not move higher how should we think about expenses in the context of what's likely to be adjusted revenue environment should we still expect expenses could just lower beyond the one to 21, well just how you're thinking about it internally.
Sure agreements Roger Thanks for the question I'll take that.
I think.
You are right in that we're being cautious with our expenses as mentioned in our prepared remarks.
In light of the potential of topline environment that we're facing so we will continue to be prudent with expenses, but we are balancing investment as Victor mentioned in his remarks with a good result on expense growth. So.
Going forward you referenced the restructuring as Victor mentioned, we will we will look to complete that and so we'll have the benefit of that and if you go back to when we announced that restructuring. We had mentioned that that gives us the ability to keep the expense growth than not and 21 and the low single digit range and that we would adjust from there depending on the invite.
I am and so we're looking at the current environment. We're looking to make then investments and accelerate in certain areas to position the bank for growth in the topline headwinds that we're going to face, but at the same time given that environment, we're finding more efficiency opportunities and that's why saying the comments I may we will look to keep expenses contained we aren't looking too.
You generate sad pre provision earnings growth, but in terms of giving you specific numbers beyond that for 2021, I think it's a little bit or at least so we will update you on that in Q4, but that's the way we're looking at it.
On the balance.
Got it and I guess, just typically domes also looking at the mortgage business.
I think you'll get an update and Orlando.
The good business went to a little bit of restructuring over the last two years Middleby in terms of the growth rate of the mortgage business turning to peer like levels and how do you think about matching up growth in a backdrop that one could debate that the housing market looks a little bit cookie once again and could get worse.
That standpoint over the next few quarters.
Good morning agreements, Laura so I'll I'll take that one.
On mortgages.
We're comfortable with where we're at so if you were to take a look at our disclosures.
I think you'll see that our origination activity is actually quite strong where I think we need to do better is really where it comes to retention and that relates to previously booked mortgages.
Thank you Larry if you go back to some of the previous vintages that we have.
Where we could do a better job if you will retaining them.
So if you take origination sorta.
Minus that retention issue I mentioned.
We'll see that were up 2.5% year over year.
So we're not where we want to be a I think we have more work to do.
That said, we have reversed the trend it does feel like we're headed in a more promising direction and when we look at some of the off the information that was released if you look at the month over month gross data you can see CNBC, where we've moved from a fourth spotted may into the third spot.
In June and so well, we're still not where we want to be I would tell you that we're headed in the right direction and when I look at our pipeline.
It does feel.
Deal again, promising and we are I would say being very diligent and mindful about the new business that we're putting on our books as well so again, not where we want to be but comfortable with the direction, we're headed and if that answers your question.
No. It does thanks for taking my questions.
Thank you.
The next question is from many Graham with Scotiabank. Please go ahead.
Hi, Good morning, just following up on the mortgage business I'm, just wondering how much of their activity that you're seeing now is is pent up demand and really.
The pointed out is just to wonder about to the outlook for 21, and how much of a risk to peg on more dramatic slowdown in the mortgage market.
Next year.
Well I'm happy to start that will.
Many I'm not sure I'm going to call sort of where 2021 goes.
Again, I can tell you for the things we control is the type of business that we wanted to take on our bond.
Very comfortable as I said with that type of origination that we're doing and I do think again as I mentioned earlier for the real question is one of retention and so if we can do a better job on the retention side I think you will see or that should translate into.
Better numbers from us.
We'd also like to do better in the first time homebuyer market. If you go through again, our disclosure you can see sort of regionally.
We've got some I'd say well balanced we've lost a bit in the JV area, and that's where we have our bigger retention issue that we're working on.
So hopefully that answers your question.
That does and then I just wanted to switch gears and just ask about to the U.S. margin and the the impact of the Triple play loans on the U.S. margin, what we what would the margin B. If you exclude the triple play loans.
Sure. Thank you Manny.
It's a small and a few basis points I would say at this point in the margin of the U.S. due to the triple coupons and those are still a positive margin loans, but lower than the rest of the portfolio and so there'll be a little bit of noise. While that is in the book and as it rolls off, but but that should be positive noise, but so.
Okay.
And should that rolled off happened by.
In the first half of 21, what's the timing there for that.
Yes, and a you know as you know there has been an extension to add to the program, but we do expect over the next few quarters here I don't play out.
Thank you.
Thank you.
Next question is from Scott Chan with Canaccord Genuity. Please go ahead.
Good morning, Lora, just going back to mortgages, you kinda talk about the retention issue.
What are some of the things that that you're focused on to the kind of.
I guess improving that that aspect.
Sure Good morning, Scott well, I'd say, it's really about a better client engagement.
And better franchising of our clients and so we as I mentioned earlier I think do a really solid job from an acquisition perspective, we just need to do a better job from the retention perspective, and so that is all about a client engagement engaging I would say with our client.
Sort of during the <unk> from the time, we've onboarded a up until the time renewal comes is where we're going to focus on ensuring we do a better job. If you will franchising our clients having a deeper.
Relationship conversations with them and that should help us in my view on the retention side.
And then just big picture question for Victor now that your capital is as a lot stronger I was wondering if M&A or bolt ons are an equation.
And I know the focus will be on organic growth than we think about.
See IVC positioning for that growth, what business units or or areas. During this pandemic.
Okay and can see obviously capitalize on.
Scott We're a good question, we're pleased with our capital levels. Obviously, we're at a very good level I think we've been very very clear with our investor base that our focus is on organic growth and driving that organic growth in the transformation of our bank, particularly given that pandemic Oh, we recognize that there is some things we don't country.
Role, we don't control interest rates, we don't control the path to a vaccine or a treatment, but we do control how we can generate returns for our shareholders and our focus.
And our very sharp focus is in three specific areas, making sure that we have the resources to support our clients, whether there's downside in the market or the there is upside the market our focus on the simplification and the transformation of our bank and the the core of our bank. So that we can operate.
Efficiently and see that makes ratio overtime drop as the world Normalizes and the third thing I'd say is maintaining the tailwinds in the businesses, where we have tailwinds, we have tailwinds and.
Many of our businesses and the one area that was been touching on it is into Canadian consumer banking, creating the tailwinds, there and investing in that business in a disproportionate amount of our resources are being directed to drive a better result in our Canadian consumer franchise.
And just on bolt ons is that anything in the cards in the short term or is it is just primarily what you talked about on the organic side listen there's always opportunities for for things that strengthen our organic growth trajectory, but it really is.
For the short to medium term of very much focused organic growth trajectory for bank.
Thank you very much.
Thank you.
The next question is from Doug Young T shirt and capital. Please go ahead.
Hi, Good morning, just back to the CET, one ratio and just curious to see how you see that credit migration flowing through and impacting the CET one ratio, let's say over the next year through fiscal 2001, it sounds like you've gone through two thirds of your business or wholesale block I assume the retail book and the review.
You have the risk ratings comes over the next few quarters, just wondering how we should think about migration in the evolution of that CET one ratio in the context of migration and the reviews that these portfolios. Thanks.
Thank you, it's Roger I'll start and I'll pass it on to Sean to talk a little bit about that credit migration in more detail after but.
Let's start with the overall outlook on C. One and as we mentioned in the remarks, we did see a and you reference to the credit work that was done we did see a significant amount of migration and when you pour through our pillar three sub pack, you'll see a small change in asset quality in the quarter, but that really was a net as you mentioned wholesale was that.
Finally at fairly large number offset by retail as we went through this and we do see that playing out over time, but the guidance I would give you as this this will play out over several quarters, we feel very good about our organic capital generation net of organic growth and the portfolio until we think we have some capacity there too.
Or migrations as they come out and so you know that's why as I said in my remarks, I would guide you around stable on C. One going forward as that plays out and exactly which way it'll bias from that stable up or down frankly depends on a number of factors that are uncertain at this point the level of organic growth in markets.
As the economy recovers or potentially goes down.
And and the speed at which those migrations will come out but the overall migration impact is no different than the outlook. We gave you last time it'll play out over the next few quarters, but as Sean anything that.
Good morning, Doug.
So from a credit migration perspective, we have started to see as we as we telegraphed last quarter, we expected to see some credit migration.
Over the course of timing, we did see that this quarter, we as I mentioned in my my remarks, we've been through over 75% of our business and government portfolios and the picking rating action, where it was appropriate.
So thats been reflected in the seeds you when there were some offsets to that across a number of different asset classes and interesting including in the retail portfolios.
Given elements of utilization a the deferral programs.
Updated beacon scores, so that had an offsetting impact, but we expect to continue to see some negative credit migration that things play out the way we're forecasting over the next.
Several quarters.
I guess given the size of your retail.
<unk> business was kind of sizable as you indicated the retail was and so it's a positive I would imagine so you're not anticipating a significant negative migration out of the retail book over the next few quarters and you're basically suggesting your organic capital generation can more than offset that is that the way to think of it.
Yeah, I'd say, there's some probably.
And your representation I would say in terms of the credit migration in the retail book because of temp those temporary measures I mentioned government support lower utilization et cetera that could revert my sense is based on the modeling that we've done I'd suggest sort of a billion to two maybe a billions of two and a half.
Of R.W.A. migration from that perspective to sort of get back to something that would look more normal to offset those temporary measures, but otherwise.
As we forecasted in the normal course.
Yes, just.
Okay. Go ahead, sorry, I know is going to say and as I mentioned in my remarks, we view.
To answer your question on retained earnings we do have some strength, there and can offset that level of migration over several quarters.
And your thoughts Roches, that's net of Bcl transition kind of migrating the benefit of that migrating down I would assume.
Yes, so as Sean mentioned, the R.W., a number that that'd be a piece on the E. C. L out on that as well, but net net we're looking at it as you know as a deferral programs go away and some of those delinquent start flowing through maybe it's sort of in in that 10 basis point range. If you want all included including that Hcl thing.
And in addition to that over time, if we see government support go in some of the behaviors on de leveraging and utilization you know start going the other way you cut out a bit more there to take you another 10 or so but you know as you see those numbers are pretty small them when they play out over several quarters with the level of organic generation.
We have a it does tend to make it easier to absorb.
Great and then just second the Canadian commercial NIM was held in relatively well I'm just was a bit surprised you can you talk a bit though what.
What help tempered the negative impact on on that in the quarter and is there anything unusual in there and maybe just a bit of an outlook just specifically on Canadian commercial names.
Sure Yeah, and there can be noise in a in Canadian commercial names as we've talked about before because of a of BA funded credit facilities and so forth, but you know this quarter, we did have eight basis points quarter over quarter and some of what you saw there was that the funding costs going up and data the wider prime da which which is.
Noise and then a really offset that was the strengthened deposits. So the margins on deposits are strong in that business and we continue to see very strong deposit growth that provided an offset to that prime da impact and going forward from what we see at this point there continues to be strengthened deposits and.
Some of the fluctuations around fine da hard to predict I'll call that volatility so.
Net net some stability.
Thank you.
Thank you.
The next question is from move ahead with BMO capital markets. Please go ahead.
Hi, Thanks, Laura quick question for you you. Your bank is housekeeping very good at doing this as as I said of other banks, you've got pretty good statistics year round.
Basically the digital angle of your business and your digital adoption rate I think on page 27 is up to about 75%.
I guess a two part question is Theres saturation point on digital adoption and when you look at some of these statistics that you give us on digital is there any one in particular that youre focused on that will help drive your business forward and how will that do that is it true topline growth or is that through improved efficiency.
Okay.
Through cost management, just trying to kind of get a feel for.
How much benefit is still on the comp relative to that 75% digitally option.
Sure Good morning, Sohrab, well I tell you that they're all important.
In that in a perfect world, 100% of our clients are actively using digital and so that would be call. It on the Frontend, where I think we will get the most pickup is as we really work through not just our digital sales capability is sort of that the frontend, but.
A full end to end Digitization and automation, if you will to get to remote fulfillment. When we do that we should see an increase in.
Our productivity and so I would hope we will start to see when you look at that slide you've mentioned where are we just see more from a self serve transaction the seem more active mobile users.
So we're going to keep going to try to get to 100%. That's always been targets in everything that we can do digitally its.
Again, it's easier and that adds to our bottom line. If we can get more folks using digital and if we can do more end to end digitization.
And if you get their Laura are we looking at a no 40% expense to revenue ratio field business or what is it still going to be in the mid to high fortys.
Well Youre about 50, right now, but I'm, just trying to kind of get appeal or what's the potential of kind of.
Sizing the price if you will.
Yeah, I think all I can tell you at this point in time. This we're going to work hard to do better on that next ratio. So we want to deliver obviously a more growth we want to work on better client engagement as I mentioned earlier with mortgages and a stretch mentioned contain a expenses.
So hopefully all that will that will contribute but I'm not prepared to put a number on it today.
Okay.
Just maybe just for a point of quick clarification, Sean I mean, I think you answered this to doug's question, but if you if I can comment a little bit differently can you give us say it kind of yardstick, what's the ought to be way associated with that with the mortgage is that.
That our current but didn't get sarles nurses mortgages that are.
On current.
Just so that we havent send stuff that I think you mentioned that they want to too I think one to one and a half billion incremental arguably it but I'm just trying to kind of get a sense of how much more capital intensive those those mortgages could become if their knowledge.
I guess I could do the math, but if you haven't handy that would be helpful.
Yes. So then the number that I was was guiding to was in respect of the cars in the personal lending book on the mortgage book it would be a small.
Pick up I think from that person I don't have the number handy, but it would be a relatively small add with respect specifically to to the mortgages.
Okay, so not that much more capital intensive 2%, it's that 98% on mortgages that arc.
The 2% pulls away a 1% go up.
Good spread the delayed so that's not going to cause a huge capital drag from an I'll give you.
No sorry, then maybe I'll jump in and you'll see this in the and the pillar three sub pack and you'll get into the PD bands, you'll see a lot of the improvement in the PD bands was in other categories not in the mortgage and that's why it's playing out and you had some in the mortgage side, but as you know mortgage RWS aren't low to begin with so because of the allergies and so forth and so as you get some of these.
Movements in PD is up or down with the change in environment in delinquency that doesn't drive that much in our definitely so duchamp's point those are total numbers in there largely driven by the other categories with mortgages being a small impact.
Thanks for the classification.
If I can just jump in before the next question, we have a number of view in MCU and if I can reminds you that try to limit your questions to one we'd like to get through the Q will go a few minutes beyond nine o'clock, but I know you have another banks to get too. So if I could just ask you to stick to one question that'd be great. Thanks.
Thank you and the next question is from Darko Mihelic with RBC capital markets. Please go ahead.
<unk>.
Hi, Thank you I guess, if I just have one question.
Oh revert to Laura.
On page 19.
As I look at the deferrals, what I'm trying what we're all trying to triangulate here is how it's going to play.
When people come off deferrals.
And I know you don't want to guess at a number so a couple of statistics might be helpful for us.
The first is statistics that I was specifically looking for around the mortgages. There's 99000 accounts are currently still on deferral.
Those accounts that are on deferral, how many are unemployed. How many are receiving served payments how many of them have a credit card with your company with an outstanding balance those statistics, Mike might help us and.
Maybe it's unfair that I'm trying to get from you and not the other banks, but hopefully can give you handler.
Good morning, Darko, so feeling kind of used to life being unfair at times. So let me try to answer that is that best I can so.
With our mortgage deferrals.
We have most that have taken as you know I'd see greater than 90%. So the six month deferral, we do have an awful lot. It data I think some of the more important data just you've asked about served so we're at about 15% of our client base.
That are in mortgage deferrals that have taken the third payments.
Not sure that I've put too much emphasis on who got serve and who didn't just given all the government government assistance programs.
And others that will come it's a bit hard to call based upon this particular stat.
I think some of what is important to look at as some of the information that we provided when you look at the.
Average FICO scores you can see there that they are pretty solid which would indicate a good clients.
From a franchising perspective, 65% to those are long tenured clients and that sort of then that greater than.
10 year bucket, a the majority of fall into that 35 to 50 year old range. The majority are employed a notwithstanding the smaller percentage that are taking the served.
And most of them are sitting in Ontario about 40% to that book is insured.
So hopefully that gives you a I guess a little bit of color in terms of our clients that have requested deferrals.
I hope that helps and I think one of the important takeaways here too is when we look at our mortgages and we go back and perhaps was talking about it when you look at losses in the event of default like we lose one maybe two basis points out with mortgages and so.
You know, even if we were to lose more it's still a small amount. So I I mean myself don't get overly concerned when it comes to the mortgages in the deferrals and I actually feel I would tell you more comforted when I look at the the profile of those that have a request and deferrals.
Does that answer that question.
It does almost I mean, that's I agree with you on the losses, but that's also why asked about credit card exposure. So how.
How many of the of those on because the mortgage payments the big one right every lumpy and make a very small payment on the credit card but.
With that big mortgage payment coming how many of them how balances and is there any concern that we should think about those balances, presumably you're starting to grow so any any sort of indication on cross a.
Product utilization rates might be helpful.
Okay, well I would so we do have that information I don't have it. So I don't have it off the top of my head. So assuming we can share that at a later date.
What I would say, though if you look at our credit card and Sean spoke to it.
That payment behavior is what's important because I would tell you that that's more of the leading indicator.
And as Sean was talking about the payment patterns were seeing they're all within expectations and as John pointed out the levels of provisioning that are there adequately reflect the trend.
So I think were good in that regard to but we can look to pull that percentage.
Thanks, very much lower.
Thank you. The next question is from at Night, you will see so with their Cas investment research. Please go ahead.
Thank you good morning.
I wanted to turn to delinquency numbers that you outlined on slide 24.
And on that slide you noted delinquency rates would be excluding payment deferrals and I was wondering if you could just provide more color how some of those numbers.
Yeah. Good morning, it's Sean.
So.
The way we looked at that was what would the roll rates have been had we've not provided the deferrals.
For those products. So we would have had a higher delinquency rate had we not shown moves deferrals as an example on the credit card side, we've modeled out what we would have expected the roll rates to be and the associated credit losses would have been that would have flowed through as a function of that so we would have probably right.
I think nice somewhere between 50 and $60 million worth of incremental net charge offs.
As a function of those had we not branches. The deferrals, we provided for that and so much as we've taken that into consideration as we thought about expert credit judgment and doing overlays. So more of a timing issue as it relates to those we haven't assume that it would we would lose less less on some of those balances as a function of provide.
Having the deferrals, but you can think about in terms of 50 to 60 million that we've not recognizing impaired and you saw the drop in impaired losses on the retail side this quarter, but we have taken that into account and believe weve been we're well provisioned for.
For that portfolio.
Okay, and just on credit card, so should we interpret it as much that number there I'm going to to interpret as that you expect delinquency rates Mcclard book to go up meaningfully next quarter or is it just I'm always a list.
Yes.
As deferrals come off a we do expect to see a migration in that portfolio and ultimately or some of those balances will lead to losses, we expect to see those losses peak in the first half of 21, if I had to guess it would be sort of towards the middle.
Or the latter part of the first half.
Of Q.
Oh 2021, but Ah so yes, we will see that migrate over the course of the next few quarters.
Okay. Appreciate the color. Thank you.
Thank you.
Next question is from Mario Mendonca with TD Securities. Please go ahead.
Good morning, if we could just go to market general topic of client activity looking at.
A number of your fee categories like deposit and payment beans credit card fees. The trends were are fairly apparent a big drop off in Q2 smaller drop off in Q3, and even maybe I should point here, what I'm getting that now as it is it conceivable that what the reopening of economies that.
Client activity will cause some of these fee categories to actually start to grow and on a sequential basis I appreciate year over year, perhaps not but sequentially is that reasonable assumption.
Good morning, Mario Troche, I'll start and then that the businesses can jump in with some color on the client side, but I.
I think you're generally in the right territory. So as you mentioned if you look at a card fees. For example that has that has rebounded from where it was add but not quite there yet and you'll know that that the fee income we recognize as an average across the corridor and so we did see things improve than that.
Sense over the quarter. So we ended the quarter and a much better place on card transaction activity than we started and so we don't have the full impact in the current levels that were seeing yet in Q3. So that will continue you know assuming things stay the way they are now.
That will continue to provide some benefit there as we go forward on the deposit fee side. As you mentioned there is there's a bit of a drag there still in that one that when particularly has continued to be challenge and a lot of that as related I think to the activity that we're seeing with that with clients that keeping more cash and so forth so and some of the act.
Tivity around handling of cash itself also down so whether you talk about ATM fees account fees and so forth that one could take a bit longer.
And as the cash sort of start leaving the system. If it does and some of those activities go back to normal we would see that coming back as well over more of the long term and obviously a number the fees around investment management Mutual fund we are confident in our trajectory on net flows and sales of assets with clients, but the market's impact.
That far more in the short term than that net flows do so that will depend on where markets go.
That's helpful. Yes. Thank you.
Thank you.
Our last question will be from Mike.
With credit Suisse Securities. Please go ahead.
Good morning, a quick question, maybe or for Crotch, just Oregon further expense saving opportunities I'm. Just wondering is it fair to think that the majority would be coming from additional head count reduction gradually I'm not referring to another restructuring charge, but.
Just through normal attrition is it fair to think that you could see your total head count come down maybe by a couple two to three percentage points over the course of 2021.
Thanks, Thanks, Mike for the question then we focus on expenses across the entire bank and all categories of east the our head count is a big component to that but a you know we've announced our restructuring as we said we will complete that restructuring so on a year over year basis, just the impact of that.
Coming through and 21.
Caused that will cause a reduction or sort of in the neighborhood, what you're talking about and we are also very focused on the growth in head count going forward from here and so with the increase in Digitization and virtual interactions that we're seeing we are and Victor talked about transformation of our bank. We are very focused.
Digital and finding ways to to automate work internally and the operational side of our bank and interact with our clients more virtually which gives us potentially some more leverage. So it is conceivable over time that that allows us to manage the growth and a and obviously attrition gives you an opportunity to add to drive numbers down if you don't replace that.
Well.
That's helpful just real curious.
What's the what's the.
Reasonable attrition rate is 3% or reasonable number at the all bank level over the course of a year.
I think it the it depends that it depends and know what part of the bank a you're talking about and so some areas. We do tend to see out potentially higher just given the revolve rates. For example, if you look at a feeling good Laura side of the business, which tends to have a lot of our employees it could be a bit higher than that in the mid single digits in any given year.
That's helpful. Thanks.
Thank you.
I'd like to turn the meeting a couple of Victor.
Thank you operator, and thank you all for your very insightful questions before we end this call and what it again. Thank her incredible CBC team. While there are still many on loans related to the pandemic. Our people have stepped up and remarkable ways. This year to reinforce that we have a singular connected team that is relentlessly focused on our clients and.
Currently we have executed decisively on our long term vision amid this pandemic and are confident our transformative plans will help us emerged from this is stronger in a much more resilient bank with clear growth momentum I'd like to thank our shareholders for their continued support and our entire see IVC team for their dedication to making our CLO.
Lines ambitions of reality.
Thank you and take care and off your next call enjoy the day.
Okay.
Thank you.
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