Q3 2020 Bank of Nova Scotia Earnings Call
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 Swanson, Our Chief Financial Officer, Daniel Moore, our Chief risk Officer.
Following our comments, we'll be glad to take your questions.
Also present to take questions on the following Scotia Bank executives Gan raised from Canadian banking Nacho de shop from an international banking, Jack Larsen James need for global banking markets and Glenn calendar from global wealth management.
Before we start on behalf of those speaking today I'll refer you to slide show presentation, which contains scotiabanks caution regarding forward looking statements with that I'll now turn the call over to Raj just want it.
Thank you Phil and good morning, everyone.
I'll begin by discussing our financial performance starting on slide four.
Oh, that's not the color what to Daniel to discuss risk and Brian what kind of toward all presentation that some observations and comments.
The banks results in Q3, when negatively impacted by a fourth quarter of code 19, which resulted in higher loan loss provisions and know what customer activity.
Retail banking in Canada and across international footprint, So lower revenue and higher loan loss provisions.
At the same time, we had record results and blanking in markets and solid growth in wealth management, both of which benefited from strong customer activity.
Adjusted net income was $1.2 billion can dilute any P.S., what's a dollar and four cents for the quarter.
It says in line with a lot Florida.
On an adjusted basis.
Total P C O so $2.18 billion increase.
Hundred 45 million quarter over quarter.
We continue to add to alongside us to capture the impact of go but 19.
And its future credit migration in Cox.
PCL ratio increased 17 basis points quarter over quarter, and 88 basis points year over year.
That's a long since have increased to $7.4 billion or approximately $2.2 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.
That's higher contributions from asset liability management activities and loan growth.
It's offset by the negative impact of foreign currency translation.
Noninterest income, excluding divestitures was higher from strong trading and underwriting revenue.
<unk>, 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've been compression was primarily driven by corporate and commercial loan growth outpacing the retail loan growth this quarter.
I'd use modern 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 had productivity 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.
He provided an evolution or <unk> common equity tier one ratio over the quota.
The banks common equity tier one capital ratio improved to 11.3% and increase of approximately 40 basis points from the price.
Due primarily to lower risk weighted assets.
So on capital generation, partially offset by the impact of evaluation of the pension liability.
Risk weighted assets declined $15.6 billion or $11 billion net foreign currency concentration.
The reduction was primarily due to lower organic growth [noise].
Business banking risk weighted asset reduced by $10 billion, largely due to corporate repayments, what counterparty credit cuts can CV risk weighted asset 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 greeted migration of approximately $3 billion.
But again risk weighted assets benefited from lower overall delinquency rates in each of the banks portfolios.
Lower delinquencies resulted from the back from the government stimulus and the bank payment definitely programs, what 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 speech transitional adjustment for the partial inclusion of increases in stage, one and stage to expected credit losses.
Relative to the big crisis baseline levels as of January 31st 2020.
[noise], turning now to the business line results beginning on slide six.
Canadian banking you reported adjusted net income of $443 million down, 53% year over year, and 10% quarter over quarter.
Hi provisions for credit losses in the fourth quarter impactful, depending on revenue impact to donate.
The high performing on Pcls quarter over quarter, what you could they popped up estimated future credit migration.
The PCL ratio 85 basis points increased by 57 basis points year over year.
And eight basis points quarter over quarter.
On a new paid basis, the PCL ratio 36 basis points was flat quarter over quarter, but up six basis points compared to the prior year [noise].
Total revenues were down 6% year over year as net interest income declined 4%.
Due primarily the margin compression.
Total loans grew 5%, but mortgage this up 6% and commercial lending up 10%.
Got it balances declined 13%.
Sequentially mortgages grew 1%.
And the Boston's 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 fourth quarter, they backed off rate cuts and changes in business mix.
Noninterest 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 [noise] 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 due primarily to higher provisions for credit losses on performing loans.
And the impact of previously announced divestitures.
Someone at the Canadian banking International banking revenues would also negatively impacted by a full quarter of step endemic.
Excluding the impact from divestitures pretax pre provision profit was down a more modest 10% year over year.
On an embedded base system PCL ratio was relatively stable up for <unk> basis points quarter over quarter, and 12 basis points was a CEO to go.
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 PCM ratio increased by 288 basis points.
833 basis points.
[noise] revenue declined 16% year over year.
Excluding the impact from divestitures revenue declined 8% due to lower retail food [noise].
Given the slowdown in 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% decline year over year.
To access liquidity.
And commercial loan growth outpacing retail loan growth.
Well, let's see backup interest rate reductions across the footprint.
Sequentially commercial loans grew 8%, while retail loan growth was flat.
<unk> expenses declined significantly down 11% year over year or 6%, excluding the impact from divestitures, driven by acquisition synergies and cost saving initiatives.
Quarter over quarter expense for the down [noise].
4%.
Moving to slide eight global banking and markets record net income this quarter of $600 million was up 200 at 26 months in auto 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 that over time related assets.
And the impact from foreign currency translation.
Strong income growth coupled with prudent expense management resulted in a positive yesterday to operating leverage of 26% in this segment [noise].
Turning now to a global wealth management segment on slide nine.
Well I think some 332 million went up 6% year over year, driven by stronger sales higher trading volumes and market appreciation.
This quarter, we will ranked number one Canadian mutual fund net sales.
Excluding the impact from divestitures assets under management increase.
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.
Slomski Fraser and empty financial management.
Adjusted expenses were down 3% year over year, you'd think back from divested operations.
The productivity ratio improved by 160 basis points quarter over quarter, and a strong 190 basis points year over year.
60.3%.
I just heard yesterday to operating leverage was 240 basis points, excluding divestitures, which makes this a third consecutive quarter with positive operating leverage.
Wealth management goes out to the main supported by strong investment fund performance.
80% of funds for them to talk to Cortiles for three and five you haven't done.
I will now turn to the other segment on slide 10 between coffee. So it was also group treasury smaller operating units and sudden Crawford adjustment.
The results also include the gains and losses on divestitures and asset liability management activities.
Common set follow up on an adjusted basis.
The other segment continued to see favorably contributions from asset liability management activities that include net interest income.
Adjusted net income declined $33 million due to lower investment gains and higher operating costs related to cope with 19.
I'll now pass the call over to dine in a more tw risk like your rush and good morning, everyone.
I'll begin my remarks on slide 12.
The bank reported total allowances for credit loss of $7.4 billion.
I felt it was $5.1 billion two quarters ago.
An increase of 45%.
Over the same period performing pcls increased 56%.
To put this in context.
Allowances provide robust coverage for our current estimates of future not write off through to the latter half from 20 to 21.
[noise] turning to slide 13.
So back reported provisions for credit losses of $2.18 billion in Q3.
Reflecting an increase of $345 million from the prior quarter.
The PCL ratio increased 17 basis points from last quarter at 88 basis points from the prior year to 136 basis points.
Over 80% of this increase was related to performing loans, mainly in international retail related to the macroeconomic outlook.
Estimated impact on future credit migration.
[noise] impaired PCL ratio at 58 basis points what stable.
It was up only two basis points quarter over quarter adopt a six basis points year over year [noise].
[noise] moving to slide 14.
Last quarter, we stated that the cobot 19, pandemic and higher provisioning was likely not a one quarter events 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, increasing total pcls and the changes to our assumptions since last quarter.
First.
Our Q3 estimates reflect increased economic impact from a later spread the virus Latin America and the Caribbean.
And second.
Many countries around the world, including Latin America.
Perfect to reopen their carnaby economies, but were subsequently delayed.
Also impacted our macroeconomic fallbrook.
In addition to these developments we have also exercised significant expert credit judgment to overlay model generated numbers in order to capture the impact future credit migration.
[noise] performing loan provisions increased $277 million quarter over quarter.
Actually 80% of this increase is related to international retail and this reflects the items that we talked about earlier.
More specifically increase international retail provisions were related to unsecured lending exposures in Peru.
Colombia as shown on the next slide I.
But he is a bit appropriately provided for based on our current estimates.
[noise] I will now discuss the status of our customer assistance programs on slide 16, and how they can incorporate it into our outlook.
Our customers. This is programs are working effectively.
We can see this as our balances are declining legally and payment activity. It's hard for customers are getting the programs approximately 90%.
The remaining customer assistance palaces are expected to exit the programs through Q4.
It's also important note that participation that customer assistance programs.
Ladies skewed to secured lending such as mortgages.
Unsecured lending such as credit cards represents only 6% of customer assistance balances.
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, 20 $200 million or the exposure.
Is that our credit card book.
Furthermore, 96% of customers what exit the program our current.
The delinquency rates are well below pre coded level.
Turning to international banking.
Approximately $18 billion or 25% or international retail portfolio remain and customer assistance programs in Q3.
The higher rates are participation international are mostly explained by the directives from local regulators well Lockdowns continued.
More than half of our international customer system spouses are mortgages would carry low LTV is a 48% on average.
Oh remaining exposure is split between personal loans.
Credit card.
The performance of which is in line with their expectation.
We've also doubled our collection capabilities to further mitigate any potential impact.
Approximately 90% of customers and international banking <unk> exit customer assistance programs, our current on their payments.
We haven't corporate the customer systems program, it's a patient rates and their estimate impact on our portfolio into the current outlook.
Which I'll review in a moment [noise].
[noise], but firstly, let's look at the credit quality of the portfolio on slide 17.
Our Gil ratio could be one basis points improved by five basis points year over year.
The improvement was driven by international banking.
I don't know formation ratio also improved sequentially and was stable year over year.
These metrics demonstrate strong credit quality of our portfolio.
[noise]. Additionally, on slide 18, you can see our net write off ratio has improved all bag is at the lowest level relative to recent quarters.
This positive performance has been driven by Canadian banking and international banking, which had been favorably impacted by the customer assistance programs.
Net write offs are a key factor in our PCL calculations.
Yes.
We've assumed elevated never went off ratios through 2021.
These expectations have been incorporated into our 7.4 billion Hcl develops.
Looking ahead.
We expect Q4 Pcls two declawing below the levels reported in Q2 for the all day.
[noise] as I mentioned earlier, our allowances factor in both the current experience for customers. This is programs that have ended.
We estimate delinquency when the programs and.
We have good data underpinning for credit judgment, given over half of our unsecured exposures have already exited customer assistance programs.
In addition, we haven't corporate and current macroeconomic outlook and its potential structural impact to our portfolios are not part of custom assistance programs.
By the end of fiscal Twentytwenty.
Almost all of our customer assistance programs will have expired.
And then we expect to see higher Sixthree 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 a future that write off.
Now I'll turn the call back over to Brian.
Thank you Danielle and good morning, everyone [noise].
I'll 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'd 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 restricted governments for introducing new policy actions almost daily retail customer assist.
Since programs were highly October.
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 remote work environments, while 90, well 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 that said our outlook today is more positive and has improved.
In Canada.
Progress in containing the virus has been steady oh provinces entering stage three of the reopening.
A significant significant amount of cobot 19 related losses in economic output have already been reverse.
Hold 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 three straight month of recovery in July.
In fact, just under half of the reduction in GDP due to the virus has been reversed.
We're seeing that improvement reflected in our day to day banking, but saw was 6% growth in mortgages and 10% growth in our commercial banking business.
From a credit risk perspective, we are well positioned with her unsecured lending exposure being among the lowest up her peers.
Our current outlook is for the rebound and economic activity to continue for the balance of this year and for GDP growth averaged 5.4%.
2021.
And the Pacific Wise, the delayed spread in 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 flatten the cobot curve than the trend in Peru in 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 at had substantial stimulus provided by policy actions and the steady reopening of economies combined with a strong rebound in prices for important commodities such as oil copper and gold are all positive outlook in the Pacific Alliance.
Slide 21 summarizes policy actions and our economic outlook for the Pacific Alliance.
Our current outlook, which was updated after Q3 is for ever turned a positive GDP growth in 2021 with growth rates averaging 5.3%.
This represents an improvement from our previous forecast of 3.7%.
We are confident that the Pacific Alliance countries will prove to be as resilient today as they have been in them.
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 return to more normal levels and 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 pay down corporate loan facilities and increase their available liquidity for future growth then.
As a result is a return to normal lending volumes and improved new issue.
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 provision as Daniel let up on 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 his related to performing loans.
Our forward looking indicators are weighed towards pessimistic scenarios and our assumptions are very conservative.
And we have factored 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 management, 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.
And is now 230 basis points above the regulatory minimum.
The third area, there's expense management.
In a challenging revenue environment.
Featuring record low interest rates and strong him.
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% has the lowest in 10 quarters. This reflects our commitment to expense management.
Positioning in digital and our substantial investments in technology.
In a very challenging environment. 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.
I will turn it back to filled for the QNX. Thank you Brian will you 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 [noise].
Operator, we have the first question on the phone please.
Thank you. Please press star one at this time, if you have a question and the first question is from Ebrahim Poonawala with Bank of America Securities. Please go ahead. Your line is open.
Hello, and good morning.
Hi, I give so my question, what's the Brian and Dan.
It's just sit on one [laughter].
Specific alliance countries, but.
Yes.
Which currently are you most cautious at all when you think about credit you flashy unsecured books when you get this quarter just tell us when you we should expect will they you team.
Scoping Blindsided Oh, the highest level has concluded is good the full continues and its Dan you could just add some color to your guidance for lower Pcls.
That's come cadence good double what we should expect in paid was performing in the magnitude of the claims about this great. Thank you.
Hi, Graham. Thank you for the question I'm going to ask Nacho to start off and then Daniel or I might jump in after.
Thank you mean racing.
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 Pacific Alliance countries are into recovering path I totally the policy do trend, we're seeing in North America, Let me give you.
Some examples in general commodity prices are important for the region and achieving for example mining for adoption piece above last year on copper prices are above pre copies level. So exports of course of mining in Chile, or 13% year over year, which is very positive.
EBITDA, one Colombia, we wait to see that recovery easy electricity consumption due to the Lockdowns deep electricity consumption, we don't see neesy kind of the around 30% in both countries for more on their Ricci pre call. These levels. So these shows that JV economies coming back.
The case of Mexico, Mexico is in nice manufacturing is for turning to world. So nice actions are very important industry.
He's really positive to see that half of the tactical sorry of Kabi has been recover I see us economy has reopened on reactivation value chain Scott reactivated so yeah, I would like to highlight that vcs due to this strong fundamentals. These countries are managing comprehensive.
Stimulus programs they shop the BDC the fees come also to do we due to the low deals so GDP.
He has had very attitude monetary policy to boost to support the recovery.
Other measures are also important to highlight even when she to for example.
Governments have an out workers at least hurst up to 20 for 25% their pension even knew and 10% cheating you just say very material support $20 billion in a ichi they haven't $10 billion in Peru that these healthy former workers. So overall.
And there is a lack of Facebook, we are going to see improvement in the comp.
Maybe that you'd like to answer also from a price perspective.
Ebrahim you asked about Oh look where we go from here I'd say in summary that we are the high watermark, we're seeing the tyco out 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 pcls going below the number that we report in the Q2 results.
Yes, we're comping up because over the last couple of quarters, we've increased our performing reserves by 56%.
Got it at that number by looking both at our net write off sort of bottom up data, let analysis as well as our top down macroeconomic forecasts, which as we indicated that means skewed toward the pessimistic, we're getting the data from the expired or customers and the residual portfolio of our book being having secured Isnt your mortgage book.
That's great confidence in that future outlook, notwithstanding the positive macroeconomic indicators I'm not sure outline.
So overall I'd say, we know that structural damage done to the economy going to require a lot of quarters clean up from here, but we do view this quarter's PCL as our high watermark, we see it declined substantially from here and we're well provision on the balance sheets to cover a current estimates of future net write offs.
Thank you. Thank you thanks.
Next question is from gather the as they're saying with National Bank financial. Please go ahead.
Good morning.
I want to thank you first of all first slide 16, Miss him a good data in there.
Couple of questions about it so.
Firstly a person.
You can.
Yes.
People are coming off of the deferrals that are current.
96%, Canada, you May 9% International you think that trend. The number is representative of what we should expect the.
There's a more expirees over the next few months and then.
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.
For all there were four month periods, which probably would have gotten a into Q3 I'm wondering if there weren't any extensions that you granted there or or plan to a in August.
Hey, good let me take that question certain certain though how does not show for a first mortgage I'd be first of all know if you look at where we stand on the.
The outlook on the deferral customers. This is programs from here in Canada, I think the important thing the called out here is that the residual book that we have is 94% mortgages. So these are high party mortgages with an average loan to value, 45% high FICO scores is effectively a 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 I encourage you mentioned that that was 200 million and then its prime auto again, where 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 a business mix driving different deferral expirees.
International banking here I think it's important to note that the deferrals were offered later, okay in a in many geographies in international and and even within international there was a bifurcation between some of the countries and how they how they offered to programs. So if you look at Peru for instance.
We've had a material decline or in our balances a 40% for some other countries, which lets such as Mexico between entered later.
I'm not forget some additional color there well do yes, sorry, the a entered a if you can comment as well on the Argus experience with more than half of those are expiring in August and were through most of the months just.
If you see would tell me what's going on now.
Sure. Let me, let me say tell you that I'm quite encouraged with these payments levels close to 90% of the $6.5 billion desktop XC taste, probably customers see some programs because they see because I didn't mention a large portion on dice through which is mostly on on secured portfolio. So is showing quite resilience and also I would like to high that does.
Those are knocking the feral are paying off CVR levels to pre Cogs. So we expect us as you can see these lighting the schedule, we're going to having in August and September the bulk of different deferrals programs X seating as you also highlighted rating that sort regulators have extended the option for customers to participating that customer.
Some programs after Knockdowns also extending the reach.
Oh, probably a follow up Oh flying here.
Right.
Thank you. The next question is from John Aiken with Barclays. Please go ahead.
Good morning.
When I look at the macro economic scenarios on slide 25.
Obviously, we're seeing some improvements across the board in terms the forecast for for counted in the U.S. 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 the increasing amounts of this quarter. Please.
Yeah. So.
Or the reference in Canada course in the U.S., we follow those very closely we've seen of.
Macroeconomic data that's better on a cumulative basis and see that reflected somewhat in our forecast. Although I will note again here that we you overweighted, our pessimistic scenarios versus our base case, we continue to that wouldn't seem to have a negative prospectus 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 measures 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 pads, much where international footprint, but we were conservative provisioning and in our most affected countries took a negative outlook on the for GDP projections.
Daniel just just so that I'm clear 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, probably would ask a question on international and cards in particular.
Daniel no lots of questions around the risk of PC, all remaining elevated for a protracted period of time.
And.
Not a bad gas such that it's that were to come to pass.
Yeah. This is a decent area of focus so two thirds of.
The book.
Right two thirds of the books under the referral and <unk>.
There's three and a half billion of exposure I guess, maybe if you could give us a sense of how prudent.
You are being there in terms of.
Look it looks like you know if the precise 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.
Impaired or stage three PCL, how should we think about I guess, the Oh Conservative <unk> 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 you know the unsecured portfolio as we highlighted a is primarily in Peru, and Colombia. Those are the two geographies and his asphalt where our fourk TV a macroeconomic forecast of sequentially gotten worse.
That reflects on the optimistic perspective, and again, we've got some data that indicates indulge us altland in a prudent situation GE or in some of the footprint but.
We've been testing taken a worst GDP forecast there. So that's on the 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, we were pretty broadly satisfied with the credit quality of our book you know, we had we had to 27% of the portfolio.
It is a isn't deferral.
Or cylinder fro process is performing in line with expectations, 90% expired book as we said it turned to current status the residual portfolios, 55% mortgages that Scott hi loan to values of 48% you know many customers between cards are still making payments to us even though they are in those deferral period and well.
I have not just on those programs off the books by the end of October 31, we estimate.
So as we've taken a look at this with benchmark 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 offered in the same footprint.
We've taken a peafiel increased that's.
In line with <unk>.
And that's notwithstanding the fact that we have they business there that's more index to commercial corporate business, which as you know as a a better experience in a lower default rate in these new situation.
So we think we're very well provide a fourth we look across the book or maybe a different we look at it and that sort of from talking to all of that 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 lost some have on that.
Were 50% covered I know that doesn't include factoring the percentage of people that are currently payment or that was the expects to exit so that's a very good coverage ratio.
Steve It's Brian just to give me a context is that not all markets are created equally and then 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 in terms of the economic development.
Oh, and the progression of economic development in Peru, and Colombia are different.
You don't have that big mortgage market, the mortgage market crews and its nascent stage and so people rely on personal loans.
Which we adjudicate appropriately enter and the season and the loss rates of return on that business is a very good return but.
No, it's you're going to have some some collateral damage in a 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 and warm. So so people in that time, a crisis tend to Soc away cash that's been our.
Experienced put it under the mattress and it comes out and we're seeing that in our repayments here as people come out a deferral. So we're very encouraged about a consumer behavior in our international book and we expect that to continue.
Thanks for the color people.
Thank you. The next question is from Scott Chan with Canaccord Genuity. Please go ahead.
Hi, Good morning, HM two part question for Nacho on International.
Yes. It gets you called that 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 my perspective on the performance for the quarter in general.
As we have said I already is worried at all mainly affected by elevated pcls than we have talked about that.
In terms of and Daisy so from our revenues decreased decreased 4% during Q, reflecting a full quarter of coffee most of the fact really if you see is driven by retail transaction on credit card fees that we expect will gradually increase and we also see in.
We experienced some margin compression, but I would like to highlight that he sees mainly driven by seeks medium daughter cells excess liquidity due to government funding off the call you'd see some programs and also due to the business makes sense, you say commercial green last march faster than retail.
Since I deposit growth were strong during Q already knows increased 4% driven by 8% growth in commercial and were flocking retail and the policy grow less 4% strong in all business lines. So she said policy trends that will reflect the futures future earnings.
I would also would like to highlight that our expenses also reduced 4% in line with our revenue reduction.
I'm fighting to fast pass the word we have reduced 100 meeting in Barcelona expenses, and we continue to see many opportunities to improve our our efficiency.
If you put all together, including these dope our year to date, our pretax pre provision is just 2% down on operating leverage these for that.
I would like to leave you with three messages first and we have to be shaped our footprint for four in our in our business. We feel very there right markets and we are committed to our international banking strategy second we expect these to be they partner with the highest PCL can you turn national pack biking, and third you will see our earnings improving.
In Q4 and the young.
Let me just make a comment on NIM since you asked about it.
Well I say international and then you know forecasting and trying to break known this business is complicated.
The number of they most of the economies, we have its nation driven pricing and so on.
A number of factors more than them even in normal times also since it's about 20% up the all bank assets. It actually doesn't move the all bank NIM as much for example, 11 basis points impact this quarter on seven basis points, you know when you look at quarto quota.
But having said that international banking NIM compression is completely driven by liquidity when I look bad quarter over quarter off at 28 basis points compression that we had 20 basis points on nature that liquidity on the excess liquidity there Patrick carried to support our customers and divest like you pointed out is due to higher combustion and most of that killed reintegra, let's come back to the previous quarter.
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 mixed up shifting back to what we would call normal levels, but I'll begin group and come back once customer Dr. Reddys comes back across internationally.
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 in now.
If you've done some additional work on the impact of.
Credit migration over the coming 12 18 months.
The Oh the ratio of inside.
Any guidance on.
Good morning quantify sort of the fourth that'd be helpful.
Sure Paul its ride so I'll see if I can help you with that question.
As you pointed out the Cetone ratio was up 40 basis points quarter over quarter up 11.3% couple of fact goes good internal capital generation. Although we had you know high loan loss provisioning and lower risk weighted assets as we got Paydowns from.
But no doubt author 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 to the reduction in our to do in business banking book and counterparty credit. This also reduced because of.
BB had extreme level so you.
Okay and my credit.
Spreads that moved in Q2 of those I'll come back as well that give us and what 12 basis points back.
So part of that is.
Suddenly as you look forward in this quarter to be absorbed migration of about $4 billion relating to our business banking book and we actually saw some positive or favorable credit migration. When you look at the retail book and then a few factors that Oh, you know influencing dock.
Lower delinquency rates in each of the bank portfolios, whether you look I'd always as credit cards to auto loans the entire gamut.
But also within the credit card portfolios because you have you know credit scoring that comes into our models and so on simply because of the government stimulus that definitely programs that have been in place, but particularly in Canada as well as lower consumer lending as sort of catch consumer spending I should say it also contributed to lower revolving credit utilization rates.
Today, the PD is on our retail booked under off if you look quarter over quarter now a army 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 I think learning environments. Like this you know you can call to be U shaped V shaped recovery l. shaped Cody and so on the most likely it's an audio we see excluding this quarter's migrations has already gone so on business banking, we think its.
Vietnam, the 40 basis points for age I feel good about capital ratio 11, why Anthony wasn't I did you continue to grow because most of that I don't really want to comment 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.
Great and that should help US you know and keeps us capital ratio definitely about 11.3%. We think as we look forward in Q4 and as we've talked in Q4, they give them better understanding of how this might play out of Q on Q2 in the restaurant next year.
That's very helpful. Thank you.
Thank you. The next question is from Doug Yeah, 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 change your scenarios, where you're at a light.
And so I just want to understand better.
How you went about looking at this migration is mostly a management overlay is this 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 would be.
Yeah. Thanks, Doug So you're absolutely right you know the credit quality has driven a swing pcls kind of quarter to quarter basis of about 350 million, whereas in fact on a quarter quarter basis. The.
The macroeconomic rough a lot I was in fact down about 15 million. So this this quarter is really going all about.
Simi impact the structural and talk to this portfolio a this impact on our retail portfolio and our corporate commercial.
Banking business, where frankly, it's a good news story, there and being able to incorporate that data on kutsor 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 that was anymore. We have gotten assistance programs in many cases driving.
Net 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.
Overall perspective.
We have assumed a significant increase in net write off levels versus pre cobot levels. We've looked out five quarters ahead, making that 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'd be looking at the outside in perspective, our peer group.
That 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 for all right now I think it was 89 or 90% of staying current after they come up in international and it was.
<unk> nine eastern Canada is that what you're expecting or are you expecting it to actually get worse from here as you 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 sort of for all periods. So we've had about 60% about two third of our expirees.
In Canada relate to the unsecured book of business now encourage we're down to 200 million. So if you look at the impacted on Pcls, which is really what role after here a we'd have a.
You know what say cautiously optimistic perspective on that experience going forward given the remaining quality the book as I said, it's effectively.
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 I. Just lastly, the credit card book, Trina, Billy and and international that for all you said that yeah. 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 payment.
Yeah.
So international the current payment rate is remains significant.
And we're tracking that very very closely.
But you haven't talked to fight that sorry.
Customers in the for all his your question, yes, we've seen at around one third of our customers that they remain remaining continued to pay even when the R&D for okay. Great. Thank you.
Your next question is from Darko Milicic with RBC capital markets. Please go ahead.
Hi, Thank you are 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.
Moving to slide and it will help me frame my question. So if you if I look at Canada for example, and I look at the the last call.
Current well for all expiring.
I think about mortgages somebody who is off expirees come off early so they probably didnt need that the deferral anyway, I 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 certain 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 Q4.
When they come off deferral that they've got a mortgage and there's still unemployed and serve as being wound down.
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.
Yeah, so on the on the part.
On the cart before the end of your question there, we thought 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 it started that so they put the quality of that remaining card portfolio. Although as I said were down 200 million has remained has remained consistent from a payment for sector.
You know your personality revolve talk around what happens on transition.
Some of these government assistance programs roll off and what is now October given the additional extension that we've had in Canada and transitioning to the revised the I assistance programs that we haven't Canada now that were recently announced amounted to a significant 37 billion of assistance in Canada and you know here significantly that has been extended not only to those any sick leave.
Since but also to to those that only have 120 hours of employment the last year.
That's 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.
You're 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.
When we're dealing with a mortgage portfolio that's super Prime effectively.
The 45% LTV, we don't see significant back.
Daniel maybe I'll just follow Darko I stand recent Canadian banking here.
Nearly at 99.4% current following deferral expire is a tremendous results so far for those still in deferral. The FICO score it's close to those that are not under for us. So in general our mortgage book sits around 800 and dose in deferral or above 750 or higher we have identified in June based on.
Seeing serve data and data the 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.
August.
And what was the proportion the those that are vulnerable Dan and can do you have is similar to this for 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 roster their credit capability. So when we look at that.
Well, if you like we get comfort, especially to Daniels point around the LTV should that consumers decide that they're not capable of continuing the mortgage will move and we will we will exercise or right that that is.
A possibility on the mortgage side and international notch up one of what I would say in international game you that customers are also seem in R&D, 70% option leasing cars for regulators broadly.
And I would like to highlight that a decreasing the memory apart customers.
Major events in our region like earthquakes in Chile, Mexico hearing to see the Caribbean.
And how allows us to provide massive support similar to what we're seeing so what I can try that come tell you eat that these level no payments that we're seeing on the execution portfolios on the Assistarm programs are on target and the on these are quite encouraging and we hope we have now these imports and execute in the fourth.
Word that they continue to the same pace, we have increased our our allowance for for performing loans $1 billion into orders and international banking on our Hcl to the east more than two times, our NAND rifles on last year. So we feel we're well probably should we be formation, we have to be Darko, it's Brian.
Just one thing that not show.
And answering another question from somebody else earlier, and it doesn't get a lot of color here, but the release that the Chilean government in approve 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 handle.
I think I know I've so.
I just wanted to emphasize that.
They represent two to three times the monthly income our average working these countries quite mature.
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 not show.
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 in.
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 2022 story.
When we think about that segment earnings power without the noise from from elevated Pcls.
Okay. Thank you for your question and.
I'm quite confident that also called the these countries we show unknown at another cycle of very high growth.
This is because of the structural characteristics of the countries at 200 on CTCL population load enables from banking penetration fundamentals matter on they kept manasion, whether well coffee. So a poor short 2020 why he's 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 caution medium term target of course, the highlighting that we are still going through difficult launch and we still have to see a they'd 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 program slide. So in the footnote is set to keep Canadian payments percentage includes accounts that have not yet completed first billing cycles since expiring. So what I'm wondering is about 96.3% in the right column that's quoted.
How would that be 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 cycle since the deferral expiry.
Hi, It's Henry Chen from Canadian banking, I don't have that number at hand, but it's not a significant difference were simply sharing that footnote proving 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 with TD Securities. Please go ahead.
Good morning, Dan if we could go back all 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 might 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 is 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 from a credit perspective on what we've seen so far in terms of book quality.
I guess my question is is that fills the common like updates tier probability we felt across all your loan books corporate commercial and consumer are those still.
To come in subsequent quarters or are you done.
Hey, Marriotts tried I think it a funding to book quality, which we did see put out as far enough on regulatory stopped buying correct.
Yep.
Okay. Yeah. So yes, the the capital will lag like I mentioned earlier because of these definitely programs, it's talking to as part of the business lending those I mentioned be $4 billion on risk weighted assets. So that would 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.
Why a lot as nonperforming loans requirement and the capital impact off at 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 if they have entered to embed indefinite reflecting the capital which is why I said about 40 basis points could be the impact from 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 would I be 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 that crop.
Complete you're correct Mariano that's why I referred to the retail Bdcs get about a RV portfolio that makes up back as drop from 91.
Basis points of 78 basis points and that'll come back to 91, being a more normal and perhaps Michael Ohio, depending on how these portfolios Mike there in future quarters.
Thanks, Mike.
Sorry go ahead.
All right we've got to her we've gone through and we've taken a fall 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 re 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 grade so that's performed very well very pleased 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, just wanted to go back to not show.
And get a sense my choice as to what.
[laughter] any changes have been made to risk appetite towards.
Business.
In the region, where the growth is likely to come and and whether or not there has been hit shape.
Does Dan Dan's forward looking for an expert judgment assume.
Skewed towards more upside.
The book or is it more if the same and whether or not.
Business perspective.
The trends in expense management, you have done the highlighted.
Persist or are there minutes as to how much more expenses can go from here and international segment in particular, thank you.
Thank you. Thank you very much tariff for your question, well and I keep already happening and I expect that in the first thing if you knew for next few months.
We will have more opportunities to grow in commercial and the rig cute retail secure business. They have they are more recipients of the recession onto the economies are back to a growth factor for growth path. When eventually us as we have mentioned before eventually we expect that both segment will start to growing.
A much more balanced way and our risk appetite has been our adjusted accordingly take taking some lessons from DC from DC beds, but we remain in a highly confident on our strategy on on risk Copycatting gradually out that also to be condition something markets.
Yeah, I I like to say that nurses significant detail next generation, we have been able to help our customers experiencing a very difficult circumstances accessing their back direct counts remotely.
And and therefore, DC, helping us invest and she's a lot of and engagement in detail channels.
And therefore, we continue to see yes, we have seen significant opportunities to improve our efficiency and and I continue these trends on the track record, we haven't even solid expense management Sarah.
Thanks.
Question on factoring in the the changes in strategy that I'm not just looking out at margins going forward, we've not factored any of that into our extra credit judgment, we bought it off the current portfolio as it is.
[noise] since just danielle to be to be crystal clear on that.
At least for the foreseeable future.
Growth in commercial and.
Hi, good or bad call. It secured stuff would be an improvement so to speak relative to where youre quality estimates are that we are proven versus base 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 on investors and analysts for participating in our call.
I also want to thank all of our employees for their continued focus and hard work, though until all our stakeholders and our customers and shareholders for their loyalty and support we look forward to speaking with you again in Q4 Twentytwenty call on December the push 2020, how great day.
Thank you. The conference has now ended please disconnect your lines at this time. Thank you for your participation.
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