Bank of Nova Scotia (BNS) Q3 2020 Earnings Call Transcript

Bank of Nova Scotia (NYSE: BNS) Q3 2020 earnings call dated Aug. 25, 2020

Corporate Participants:

Philip Smith — Senior Vice President of Investor Relations

Raj Viswanathan — Group Head and Chief Financial Officer

Daniel Moore — Group Head & Chief Risk Officer

Brian J. Porter — President and Chief Executive Officer

Ignacio Nacho Deschamps — Group Head, International Banking and Digital Transformation

Dan Rees — Group Head, Canadian Banking

Analysts:

Ebrahim Poonawala — Bank of America Securities — Analyst

Gabriel Dechaine — National Bank Financial — Analyst

John Aiken — Barclays — Analyst

Steve Theriault — Eighth Capital — Analyst

Scott Chan — Canaccord Genuity — Analyst

Paul Holden — CIBC — Analyst

Doug Young — Desjardins Capital Markets — Analyst

Darko Mihelic — RBC Capital Markets — Analyst

Mike Rizvanovic — Credit Suisse — Analyst

Mario Mendonca — TD Securities — Analyst

Sohrab Movahedi — BMO Capital Markets — Analyst

Presentation:

Philip Smith — Senior Vice President of Investor Relations

Good morning and welcome to Scotiabank’s 2020 Third Quarter Results Presentation. My name is Philip Smith, Senior Vice President of Investor Relations. Presenting to you this morning is Brian Porter, Scotiabank’s President and Chief Executive Officer, Raj Viswanathan, our Chief Financial Officer and Daniel Moore, our Chief Risk Officer. Following our comments, we will be glad to take your questions.

Also present to take questions are the following Scotiabank executives Dan Rees from Canadian Banking, Nacho Deschamps from International Banking, Jake Lawrence and James Neate from Global Banking and Markets; and Glen Gowland from Global Wealth Management.

Before we start and on behalf of those speaking today, I will refer you to slide 2 of our presentation, which contains Scotiabank’s caution regarding forward-looking statements.

With that I will now turn the call over to Raj Viswanathan.

Raj Viswanathan — Group Head and Chief Financial Officer

Thank you, Phil and good morning everyone. I’ll begin by discussing our financial performance starting on slide 4. I’ll then pass the call over to Daniel to discuss risk and Brian will conclude our presentation with some observations and comments.

The Bank’s results in Q3 were negatively impacted by a full quarter of COVID-19, which resulted in higher loan loss provisions and lower customer activity. Retail banking in Canada and across our international footprint saw lower revenue and higher loan loss provisions. At the same time, we had record results in Global Banking and Markets and solid growth in Wealth Management, both of which benefited from strong customer activity.

Adjusted net income was CAD1.3 billion and diluted EPS was CAD1.04 for the quarter, which is in line with the last quarter. On an adjusted basis, total PCLs of CAD2.18 billion increased CAD335 million quarter-over-quarter as we continue to add to allowances to capture the impact of COVID-19 and its future credit migration impacts.

The PCL ratio increased 17 basis points quarter-over-quarter and 88 basis points year-over-year. With this our have increased to CAD7.4 billion or approximately CAD2.3 billion in the last few quarters. Pre-tax pre-provision profit declined a more modest 3% on an adjusted basis. Adjusted revenue declined 3% from last year or in line excluding the impact of divestitures.

Net interest income excluding divestitures was flat, as higher contributions from asset liability management activities and loan growth was offset by the negative impact of foreign currency translation. Non-interest income, excluding divestitures was higher from strong trading and underwriting revenues that were partly 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 invested in lower yielding assets, which contributed 13 basis points of this decline. Margin compression was primarily driven by corporate and commercial loan growth, outpacing the retail loan growth this quarter that reduced margin by approximately 22 basis points.

Adjusted expenses were down 4% year-over-year or 1.5% excluding the impact of 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. The adjusted 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 of divestitures was positive 1.1%. Turning to slide 5, we provide an evolution of our Common Equity Tier 1 ratio over the quarter. The Bank’s Common Equity Tier 1 capital ratio improved to 11.3%, an increase of approximately 40 basis points from the prior quarter due primarily to lower risk-weighted assets and the internal capital generation partly offset by the impact of evaluation of the pension liability.

Risk weighted assets declined CAD15.6 billion or CAD11 billion net of foreign currency translation. The reduction was primarily due to lower organic growth. Business banking risk-weighted asset reduced by CAD10 billion, largely due to corporate repayments, while counterparty credit risk and CVA risk-weighted asset reduced by CAD4 billion from the prior quarter.

Credit migration increased risk-weighted assets by about CAD1 billion, business banking unfavorable migration of CAD4 billion was offset by favorable retail migration of approximately CAD3 billion. Retail risk weighted assets benefited from lower overall delinquency rates in each of the Bank’s portfolios. Lower delinquency resulted from the impact of the government stimulus and the Bank payment programs, while lower consumer spending also contributed to the lower revolving credit utilization rates.

The Common Equity Tier 1 ratio also benefited by approximately 17 basis points from OSFI’s transitional adjustment for the partial inclusion of increases in Stage 1 and Stage 2 expected credit losses relative to the pre-crisis baseline levels as of January 31, 2020. Turning now to the business line results, beginning on slide 6, Canadian Banking reported adjusted net income of CAD433 million, down 53% year-over-year and 10% quarter-over-quarter.

Higher provisions for credit losses and the full quarter impact of the pandemic on revenue, impacted earnings. The higher performing loan PCLs quarter-over-quarter was due to the impact of estimated future credit migration. The PCL ratio of 85 basis points increased by 57 basis points year-over-year and 8 basis points quarter-on-quarter. On an impaired basis, the PCL ratio of 36 basis points was flat quarter-over-quarter, but up 6 basis points compared to the prior year. Total revenues were down 6% year-over-year as net interest income declined 4% due primarily to margin compression. Total loans grew 5% with mortgages up 6% and commercial lending up 10%, while credit card balances declined 13%. Sequentially mortgages grew 1% and deposits grew a strong 10%.

The net interest margin was down 18 basis points year-over-year and 7 basis points quarter-over-quarter, driven by the full quarter impact of rate cuts and changes in business mix. Non-interest income was also down 13%, primarily due to lower insurance, banking and credit card fees. Expenses declined 2% year-over-year and 4% quarter-over-quarter, mainly driven by lower advertising and business travel costs and the impact of other cost control initiatives.

Turning to the next slide on International Banking, my comments that follow are based on results on an adjusted and constant dollar basis. Earnings of CAD53 million were down significantly due primarily to higher provisions for credit losses on performing loans and the impact of previously announced divestitures. Similar to Canadian Banking, International Banking revenues were also negatively impacted by a full quarter of the pandemic.

Excluding the impact of divestitures, pre-tax pre-provision profit was down a more modest 10% year-over-year. On an impaired basis, the PCL ratio was relatively stable, up 4 basis points quarter-over-quarter and 12 basis points versus a year ago. Total PCLs increased by $835 million from a year ago, primarily related to performing loans due to the pandemic and its impact on future credit migration. The PCL ratio increased by 208 basis points to 333 basis points.

Revenue declined 16% year-over-year. Excluding the impact of divestitures revenue declined 8% due to lower retail fees, 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% declined year-over-year due to excess liquidity and commercial loan growth outpacing retail loan growth, as well as the impact of interest rate reductions across the footprint.

Sequentially, commercial loans grew 8%, while retail loan growth was flat. Expenses declined significantly down 11% year-over-year or 6% excluding the impact of divestitures, driven by acquisition synergies and cost saving initiatives. Quarter-over-quarter expense was down 4%. Moving to slide 8. Global Banking and Markets, record net income this quarter of CAD600 million was up CAD226 million or a strong 60% year-over-year.

Quarter-over-quarter earnings were up 15%. Higher income was driven primarily by strong fixed income trading and higher underwriting and advisory fees. Corporate loans grew a strong 18% year-over-year, reflecting continued support to our customers as well as growth and repos and deliberative related assets and the impact of foreign currency translation. Strong income growth coupled with prudent expense management resulted in a positive year to-date operating leverage of 26% in this segment.

Turning now to our Global Wealth Management segment on slide 9. Earnings of CAD332 million were up 6% year-over-year, driven by stronger sales, higher trading volumes and market appreciation. This quarter we were ranked Number one in Canadian mutual fund net sales. Excluding the impact of divestitures, assets under management increased 4% year-over-year and assets under administration increased 6%, largely reflecting higher net sales and market appreciation.

Asset growth was robust across 1832 Asset Management, Jarislowsky Fraser and MD Financial Management.Adjusted expenses were down 3% year-over-year due to the impact of divested operations. The productivity ratio improved by 160 basis points quarter-over-quarter and a strong 190 basis points year-over-year to 60.3%.

Adjusted year-to-date operating leverage was 240 basis points, excluding divestitures, which makes us the third consecutive quarter with positive operating leverage. Wealth management results remained, supported by strong investment fund performance.80% of funds were in the top two quartiles for three-year and five-year returns.

I will now turn to the Other segment on slide 10, which incorporates the results of group treasury, smaller operating units and certain corporate adjustments. The results also include the gains and losses on divestitures and asset liability management activities. My comments that follow are an adjusted basis. The Other segment continued to see favorable contributions from asset liability management activities that include, net interest income.

Adjusted net income declined CAD33 million due to lower investment gains and higher operating costs related to COVID-19. I will now pass the call over to Daniel Moore to review risk.

Daniel Moore — Group Head & Chief Risk Officer

Thank you, Raj and good morning, everyone. I’ll begin my remarks on slide 12. The Bank reported total allowances for credit loss of CAD7.4 billion, that’s up from CAD5.1 billion two quarters ago, an increase of 45%. Over the same period performing ACLs increased 56%. To put this in context, total allowances provide robust coverage for our current estimates of future net write off, through to the latter half of 2021.

Turning to slide 13, the Bank reported provisions for credit losses of CAD2.18 billion in Q3, reflecting an increase of CAD335 million from the prior quarter. The PCL ratio increased 17 basis points from last quarter and 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 and related to the macroeconomic outlook and estimated impact on future credit migration.

Impaired PCL ratio at 58 basis points was stable. It was up only 2 basis points quarter-over-quarter and up just 6 basis points year-over-year. Moving to slide 14. Last quarter, we stated that the COVID-19 pandemic and higher provisioning was likely not a one quarter event, given its continued spread, its impact on the global economy and, of course, the resulting structural damage.

With that in mind, I think it’s important to understand what drove the quarter-over-quarter increase in total PCLs and the changes to our assumptions since the last quarter. First, our Q3 estimates reflect the increased economic impact from the later spread of the virus to Latin America and the Caribbean.

And second, many countries around the world, including Latin America had expected to reopen their economies but were subsequently delayed. This also impacted our macroeconomic outlook. In addition to these developments, we have also exercised significant export credit judgment to overlay model generated numbers in order to capture the impact of future credit migration.

Performing loan provisions increased CAD277 million over quarter, approximately 80% of this increase is related to international retail. And this reflects the items that we talked about earlier. More specifically, the increase in International retail provisions were related to unsecured lending exposures in Peru and in Colombia as shown on the next slide, and these have been appropriately provided for and based on our current estimates.

I will now discuss the status of our customer assistance programs on slide 16 and how they have been incorporated into our outlook. Our customer assistance programs are working effectively. We can see this as our balances are declining daily and payment activity is high for customers exiting the programs. Approximately 90% of the remaining customer systems balances are expected to exit the programs through Q4. It’s also important to note that participation in customer assistance programs is highly skewed to secured lending such as mortgages. Unsecured lending such as credit cards represents only 6% of customer assistance balances and these have been well provisioned. In Canada, approximately CAD42 billion or 13% of our retail portfolio was enrolled in our customer assistance programs in Q3. And this was mostly related to mortgages. In fact, only CAD200 million of the exposure is in our credit card book. Furthermore 96% of customers who would exited the program are current. The delinquency rate are well below pre-COVID levels.

Turning to international Banking. Approximately CAD18 billion or 25% of our international retail portfolio remain in customer assistance programs in Q3. The higher rates of participation in International are mostly explained by the directives from local regulators, while lockdowns, continued. More than half of our international customer assistance balances are mortgages which carry low LTVs of 48% on average.

Our remaining exposure is split between personal loans and credit cards, the performance of which is in line with our expectations. We’ve also doubled our collection capabilities to further mitigate any potential impact. Approximately 90% of customers in International Banking who have exited customer assistance programs are current on their payments.

We have incorporated the customer assistance programs participation rates and their estimated impact on our portfolio into the current outlook, which I’ll review in a moment. But, firstly, let’s look at the credit quality of the portfolio on slide 17. Our GIL ratio of 81 basis points, improved by 5 basis points year-over-year. Improvement was driven by International Banking. And our net formation ratio also improved sequentially and were stable year-over-year. These metrics demonstrate the strong credit quality of our portfolio.

Additionally, on slide 18 you can see our net write-off ratio has improved all bank and is at the lowest level relative to recent quarters. This positive performance has been driven by Canadian Banking and International Banking, which have been favorably impacted by the customer assistance programs. Net write-offs, our key factor in our ACL calculations. Hence, we’ve assumed elevated net write-off ratios through 2021, and these expectations have been incorporated into a CAD7.4 billion ACL balance.

Looking ahead we expect Q4 PCLs to decline below the levels reported in Q2 for the all bank. As I mentioned earlier, our allowances factor in both the current experience of customer assistance programs that have ended and the estimated delinquency of when the programs end, when we have good data underpinning our extra credit judgment given over half of our unsecured exposures have already exited customer assistance programs.

In addition, we have incorporated current macroeconomic outlook and its potential structural impact to our portfolios that are not part of customer assistance programs. By the end of fiscal 2020, almost all of our customer assistance programs will have expired and then we expect to see higher fixed pre-provisions offset by lower performing loan provisions.

Overall, we view this quarter’s total provisions for credit loss as the peak and we expect provisions to decline substantially. We are well-provisioned on the balance sheet to cover our current estimate of future net write-offs.

And now I’ll turn the call back over to Brian.

Brian J. Porter — President and Chief Executive Officer

Thank you, Daniel, and good morning everyone. To begin my remarks on slide 19, I would like to again thank our customers for their loyalty and understanding, and our employees for their continued hard work and dedication. I would also like to thank our shareholders for their support as we navigate this environment.

It has been a trying time for all that we are beginning to see some positive signs which provide cause for optimism as we look ahead. I would like to frame my comments on our results today by looking back to our Q2 earnings call in late May and focusing on what has changed. At that time the outlook was highly uncertain, lockdowns were strict, governments were introducing new policy actions almost daily, retail customer assistance programs were highly active and corporate customers had been actively drawing down on their loan facilities, which increased risk-weighted assets.

In this uncertain environment, the Bank was well prepared, we were operationally ready and transitioned quickly to remote work environments while 90 — while keeping 90% of our branch networks open. In addition, we had completed all divestitures, which were part of our strategic re-visit — repositioning. We were also well prepared for the sudden increase in market volatility by 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. That’s — that said, our outlook today is more positive and has improved. In Canada, progress in containing the virus has been steady with all provinces entering Stage 3 of the re-opening. A significant amount of COVID-19-related losses in economic output have already been reversed, household spending has returned to more normal levels. The housing market has experienced strong year-over-year increases in both sales and average sale price.

And Canadian auto sales posted a third straight month of recovery in July. In fact, just under half of the reduction in GDPs due to the virus has been reversed. We are seeing that improvement reflected in our day-to-day banking with solid 6% growth in mortgages and 10% growth in our commercial banking business. From a credit risk perspective, we are well positioned with our unsecured lending exposure being among the lowest of our peers.

Our current outlook is for the rebound in economic activity to continue for the balance of this year and for GDP growth to average 5.4% in 2021. In the Pacific Alliance, the delayed spread of the virus means a rebound in economic activity is more nascent at this stage, despite substantial policy actions by governments and central banks.

Chile has managed to flatten the COVID curve and the trend improve 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 of confirmed cases in the Pacific Alliance are comparable, or in some cases less than developed nations, including the United States. This is illustrated on Slide 20.

As we look ahead, the substantial stimulus provided by policy actions 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 the 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 a return to 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 the past.

Turning now to slide 22, across our business we are seeing positive trends in both retail and wholesale customer activity. For example, we have seen debit and credit card transaction volumes return to more normal levels in several of our core markets. As Daniel highlighted, we are experiencing a steady decline in customer assistance balances along with positive trends in payment activity. We are also provisioned conservatively to deal with potential delinquencies when customer assistance programs come to an end.

Utilization of corporate loan facilities has largely returned to pre-COVID levels as the bond market has normalized. We have assisted many corporate customers in taking advantage of record low rates to pay down corporate loan facilities and increase their available liquidity for future growth. The net result is a return to normal lending volumes and improved innovations.

I would 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 area is credit risk. I would strongly encourage everybody reviewing our results to focus on the balance sheet,where we are very well provisioned. As Daniel outlined our allowances for credit losses now stand at CAD7.4 billion, an increase of CAD2.3 billion over the last two quarters, and now represent 2.5 years of loan loss coverage. Roughly 90% of the increase in allowances is related to performing loans. Our forward-looking indicators are way towards pessimistic scenarios and our assumptions are very conservative and we have factored in possible delinquencies associated with customers exiting assistance programs, and government support programs moderate.

In summary, we believe Q3 was the peak for the Bank’s loan loss provisioning. The second area is Capital. As Raj mentioned, the Bank’s Common Equity Tier 1 ratio improved in Q3 from 10.9% to 11.3%, demonstrating the resiliency of our capital in a stressed operating environment and our prudent approach. It is now 230 basis points above the regulatory minimum.

The third area is expense management. In a challenging revenue environment featuring record low interest rates, strong in expense management is critical. As Raj highlighted expenses declined across the Bank quarter-over-quarter and year-over-year. Our productivity ratio of 51.4% is the lowest in ten quarters. This reflects our commitment to expense management, our 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 it’s capital and liquidity ratios. As a result, we are very well positioned for the economic recovery. With that I will turn it back to Phil for the Q&A.

Questions and Answers:

Philip Smith — Senior Vice President of Investor Relations

Thank you, Brian. We will now be pleased to take your questions. [Operator Instructions] Operator, can we have the first question on the phone please.

Operator

Thank you. [Operator Instructions]. And the first question is from Ebrahim Poonawala with Bank of America Securities. Please go ahead, your line is open.

Ebrahim Poonawala — Bank of America Securities — Analyst

Thank you, and good morning. I guess my question both for Brian and Dan is just around one, thanks for the story on the Pacific Alliance countries, but talk to us in terms of which country are you most cautious around when you think about credit, new — flat via unsecured portfolio this quarter. Just tell us where you — we should expect, or where you think the risk of being blindsided or highest level of risk on credit is in the four countries and if then you could just add some color to your guidance for lower PCLs, if there is some cadence in terms of what we should expect impaired versus performing in the magnitude of decline we should anticipate. Thank you.

Brian J. Porter — President and Chief Executive Officer

Hi, Ebrahim. Thank you for the question. I’m going to ask, Nacho to start off, and then Daniel or I might jump in after.

Ignacio Nacho Deschamps — Group Head, International Banking and Digital Transformation

Thank you Ebrahim. Look let me give you my perspective on where are we in the Latin American countries. As Brian mentioned as COVID started later than Canada, so there is a lag effect, but we are already seeing signs at the Pacific Alliance countries are in a recovering path and following the positive trends we’re seeing in North America. Let me give you an — some examples. In general, commodity prices are important for the region. And in Chile for example mining production is above last year, and copper prices are above pre-COVID level. So exports of mining in Chile are 13% year-over-year, which is very positive. In Peru and Colombia, a good way to see their recovery is the electricity consumption due to the lockdowns their electricity consumption went down significantly around 30% in both countries for more, and they are reaching pre-COVID levels. So this shows that their economy is coming back.

And in the case of Mexico. Mexico is [Indecipherable] manufacturing exporter in the world. So manufacturing is a very important industry and is really positive to see that half of the impact of sorry — of COVID has been recovered as the U.S. economy has reopened and reactivation value chains have reactivated. So I would like to highlight that this is due to the strong fundamental. These countries are managing comprehensive stimulus programs. They have the ability the [Indecipherable] to do it due to the low levels of GDP and they have had a very active monetary policy to support the recovery.

Other measures are also important to highlight. In Peru and Chile for example, governments have allowed workers who deserves up to 25% of their pension in Peru and 10% in Chile. This is a very material support of CAD20 billion in Chile and CAD10 billion in Peru. That is helping formal workers. So overall, and there is a lag effect, but we are going to see an improvement in the economy. Maybe Daniel who would like to answer also from a credit perspective.

Daniel Moore — Group Head & Chief Risk Officer

Yeah, Ebrahim, you asked about outlook where we go from here. I’d say in summary that we are at high watermark, and we’re seeing the tide go out from here. In fact, we’re going to see our total PCL declined significantly going forward, as I mentioned in my remarks, we see the total PCLs going below the number that we reported in the Q2 results. And that’s we’re confident that because over the last couple of quarters we’ve increased our performing reserves by 56%. We’ve gotten at that number by looking at both at our net write-off sort of bottom update led analysis as well as our top down macroeconomic forecast, which as we indicated remain skewed towards the pessimistic.

We’re getting that data from the expiry of our customers and the residual portfolio of our book being highly secured essentially mortgage book, gives us great confidence in that future outlook, notwithstanding the positive macroeconomic indicators that Nacho outlined. So, overall I’d say we know that structural damage has been done to the economy. It’s going to require a lot of quarters to clean-up from here, but we do view this quarter’s PCL as our high watermark. We see declines substantially from here and we’re well provisioned on the balance sheets to cover our current estimates of future net write-offs.

Operator

Thank you. The next question is from Gabriel Dechaine with National Bank Financial. Please go ahead.

Gabriel Dechaine — National Bank Financial — Analyst

Good morning. I want to thank you first of all for slide 16, there’s some good data in there. A couple of questions about it though. First, the percent of the people coming off of the deferrals that are current, 96% in Canada, 89% in International. Do you think that trend, or that number is representative of what we should expect as there is more expiries over the next few months?

And then second, in International, we see the percentage of deferral exposure that expired that was 27% in International. I thought that would have been higher, because a lot of the deferral there were for four month periods which probably would have got us into Q3. I’m wondering if there were any extension that you granted there or plan to in August?

Daniel Moore — Group Head & Chief Risk Officer

Okay, Gabriel let me take that question, starting I’ll hand over to Nacho for some more detail [Indecipherable]. First of all, if you look at where we stand on the outlook on the deferral customer assistance programs from here in Canada, I think the important thing the call out here is that the residual book that we have is 94% mortgages. So these are a high party mortgages with an average loan to value of 45%, high FICO scores effectively just super-prime book of business. So really we’re not very worried about that. The residual portion of that portfolio is effectively a small, as Raj [Phonetic] mentioned that was CAD200 million and then it’s prior model, and again we’ve got a very positive outlook on how that’s going to perform from here. So we’re actually — we’re relatively well positioned and optimistic on the Canada portfolio.

Your question on business mix, driving different deferral expiries in International Banking. Here I think it’s important to note that the deferrals were offered later.

Gabriel Dechaine — National Bank Financial — Analyst

Okay.

Daniel Moore — Group Head & Chief Risk Officer

In many of the geographies in International, and even within International there was a bifurcation between some of the countries in how they offered the programs. So if you look at Peru for instance, we had a material decline in our balances of 40% versus in the other countries which such as Mexico which entered later. I’ll let now Nacho to give some additional color there.

Gabriel Dechaine — National Bank Financial — Analyst

Sorry, the International — if you can comment as well on the August experience because more than half of those are expiring in August, and — or through most of the month. Just if you see what — tell me what’s going on now?

Ignacio Nacho Deschamps — Group Head, International Banking and Digital Transformation

Sure. Let me say, tell you that I’m quite encouraged with these payment levels, close to 90% of the CAD6.5 billion that have exited from the customer assistance programs because as Daniel mentioned large portion of that is Peru, which is mostly unsecured portfolio. So it showing quite resilience, and also I would like to highlight that those are not in deferral are paying CVR levels to pre-COVID. So we expect, as you can see in this slide in the schedule we are going to have in August and September, the bulk of the deferrals programs exiting. As you also highlighted regulators have extended the option for customers to participating the customer assistance programs as lockdowns also extended in the region.

Gabriel Dechaine — National Bank Financial — Analyst

I’ll probably have to follow-up offline here. Thanks.

Operator

Thank you. The next question is from John Aiken with Barclays. Please go ahead.

John Aiken — Barclays — Analyst

Good morning. Daniel, when I look at the macroeconomic scenarios on slide 25, obviously we’re seeing some improvements across the board in terms of the forecast for Canada and the U.S. in terms of the outlook, but 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 drive the increasing allowance of this quarter, please?

Daniel Moore — Group Head & Chief Risk Officer

Yeah. So other reference, in Canada of course and in the U.S. with all of those very closely we’ve seen macroeconomic data that’s better on accuracy basis, and you’ll see that reflected in somewhat in our forecast. Although I will note again here that we’ve overweighted our pessimistic scenarios versus our base case. We continue to have — we continue to have a negative perspective, so that we have conservative provisioning here. If you look at International, the change in macroeconomic forecast there has been driven by the longer and extended impact of the lockdown measures that we had in those countries. Those countries are now coming out of those lockdown measures. We’re seeing the positive return. Our fast-moving macroeconomic indicators are improving and we’re substantially back or an improving path on much more international footprint. But we were conserving our provisioning, and in our most effective countries took a negative outlook on these four GDPs projections.

John Aiken — Barclays — Analyst

Daniel, just so that I’m clear there was a move in the quarter, again towards the pessimistic scenario?

Daniel Moore — Group Head & Chief Risk Officer

We have maintained our overweight pessimistic scenario outlook. That is correct.

John Aiken — Barclays — Analyst

Understood. Thank you very much.

Operator

Thank you. The next question is from Steve Theriault with Eighth Capital. Please go ahead.

Steve Theriault — Eighth Capital — Analyst

Thanks. Thanks again for the disclosure on the customer assistance programs. I thought maybe I’d ask a question on International and cards in particular. Daniel, I’ve had lots of questions around the risk of PCL remaining elevated, for a protracted period of time, and I’m not a bad guess if that were to come to pass. This is a decent area of focus. So, two-thirds of the book, is that right two-thirds of the books under deferral? And there is CAD3.5 billion of exposure. I guess, maybe if you could give us a sense of how prudent you’re being there in terms of outlook, it looks like if the percent current following deferral expiries around 87%, does that imply 13% delinquencies or loss rate?

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 Stage 3 PCL, and how should we think about, I guess the — how conservative are you being and how should we think about that and how concerned should we be about that International credit card book going forward?

Daniel Moore — Group Head & Chief Risk Officer

Sure. So the unsecured portfolio as we highlighted is primarily in Peru and Colombia. Those are the two geographies in International where our four GDP and macroeconomic forecast have sequentially gotten worse and that reflects our pessimistic perspective, and again, we’ve got some data that indicates not just outlined an improving situation in some of their footprint, but we’ve intentionally taken a worst GDP forecast there. So kind of from a top down perspective — macro perspective, we’ve been conservative here.

As I said, that’s been driven by the longer lockdown. I’d say as a general matter, we are pretty broadly satisfied with the credit quality of our book. We had 27% of the portfolio is in deferral or is still in deferral process is performing in line with our expectations. 90% of the expired book as we said it to turn to current status. The residual portfolio is 55% mortgages, that’s got high loan to values of 48%. Many of the customers particularly in cards are still making payments to us even though they’re in those deferral periods. And we’ll have mentioned in those programs off the books by the end of October 31, we estimate. So as we’ve taking a look at this and we’ve benchmarked ourselves carefully to our peers.

And if we look at the PCL increase on a year-over-year basis what we’ve done versus local and international banks who operate in the same footprint. We’ve taken a PCL increase that’s in line with the peer group. And that’s notwithstanding the fact that we have a business here that’s more index to commercial and corporate business, which as you know, has a better experience in our lower default rate in these situations. So we think we’re very well provided for us. We look across the book. Maybe a different way to look at it and sort of [Indecipherable] envelope math for you. If you look at our total cards portfolio that in deferral across the all bank level today and you look at the allowances for credit loss that we have on that, we’re 50% covered, and that doesn’t include factoring the percentage of people that are currently payment or that will expect — that’s a very good coverage ratio.

Brian J. Porter — President and Chief Executive Officer

Yeah, Steve, it’s Brian, just to give you a context is that not all markets are created equally, and if you look at Chile and Mexico, for instance, the composition of our portfolio would look more like Canada in terms of big mortgage book, auto lending and less unsecured lending. Just in terms of the economic development and the progression of economic development in Peru and Colombia are different, you don’t have a big mortgage market. The mortgage market improves in its nascent stage, and so people rely on personal loans, which we adjudicate appropriately and the fees and the loss rates, the return on that business is a very good return, but it’s — you’re going to have some collateral damage in a pandemic like this, but my point is that people need that liquidity for their need to pay life. This is 40% of the economy improves, and form, so people in that time of crisis tend to sock away cash has been our experience put it under the mattress and it comes out and we’re seeing that in our repayments, here as people come out of the deferral. So we’re very encouraged about consumer behavior and our international book, and we expect that to continue.

Steve Theriault — Eighth Capital — Analyst

Thanks for the color to both.

Operator

Thank you. The next question is from Scott Chan with Canaccord Genuity. Please go ahead.

Scott Chan — Canaccord Genuity — Analyst

Good morning. Having two part question for Nacho on International. Yeah, I guess you called out the 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 how much of the commercial, I guess the lower margin, commercial versus retail impact of the NIM in the quarter versus liquidity?

Ignacio Nacho Deschamps — Group Head, International Banking and Digital Transformation

Thank you. Look let me give you my perspective on the performance of the quarter in general. As we have said our earnings were — mainly impacted by elevated PCLs and we have talked about that, but in terms of the top line, our revenues decreased 4% Q-over-Q, reflecting a full quarter of COVID. Most of the impact really you see is driven by retail, transactional and credit card fees that we expect will gradually increase, and we’re also seeing — experienced some margin compression, but I would like to highlight that this is mainly driven by CAD6 million of excess liquidity due to government funding of the COVID assistance programs. And also due to the business mix as you say commercial going much faster than retail, assets and deposit growth were strong Q-over-Q, and our loans increased 4%, driven by 8% growth in commercial and were flat in retail and deposit growth was 4% strong in all business lines. So this is a positive trend that will reflect in future earnings growth.

I would also would like to highlight that our expenses also reduce 4% in line with our revenue reduction and in fact, in the first past two quarters, we have reduced a CAD100 million in expenses and we continue to see many opportunities to improve our efficiency. If you put all together, including this low quarter, year-to-date, our pre-tax pre-provision is just 2% down and our operating leverage is flat. And I would like to leave you with three messages. First, that we have reshaped our footprint for — in our business. We feel we are in the right markets and we are committed to our International Banking strategy. Second, we expect this to be the quarter with the highest PCL in International Banking. And third, you will see our earnings improving in Q4 and beyond.

Raj Viswanathan — Group Head and Chief Financial Officer

Let me just make a comment on NIM since you asked about it. Overall, I think International NIM forecasting and trying to break it down this business is complicated. So number of diverse of economies we have inflation driven, pricing and so on. So a number of factors more than NIM even in normal times. Also, since it’s about 20% of the all Bank assets it actually doesn’t move the all Bank NIM as much, for example it’s 11 basis points impact this quarter and 7 basis points when you look at it quarter-over-quarter. But having said that, International Banking NIM compression is completely driven by liquidity, when I look at it quarter-over-quarter, of the 28 basis points compression that we had 20 basis points relates to the liquidity of the excess liquidity we have had to carry to support our customers and the rest like you pointed out is due to higher commercial and more secured retail growth compared to the previous quarter.

And even looking forward, we expect to see some level of margin compression in International Banking in Q4 as well certainly not as much as you’ve seen this quarter. And then we expect that to improve as a mix start shifting back from what we would call normal levels, where our retail growth will come back, once customer activities comes back across International Banking.

Scott Chan — Canaccord Genuity — Analyst

Very helpful, thank you very much.

Operator

Thank you. The next question is from Paul Holden with CIBC. Please go ahead.

Paul Holden — CIBC — Analyst

Thank you. Good morning. So I want to ask, I recognize your CET1 capital ratio, looks quite strong now. Wondering if you’ve done some additional work on the impact of credit migration over the coming 12 — 18 months on the ratio of the slide. Any guidance, or you want to quantify sort of the impact for us? That would be helpful.

Raj Viswanathan — Group Head and Chief Financial Officer

Sure, Paul. It’s Raj. So I’ll see if I can help you with that question. As you pointed out, the CET1 ratio was up 40 basis points quarter-over-quarter to 11.3%. Couple of factors, good internal capital generation although we had high loan loss provisioning and lower risk-weighted assets as we got pay downs from, particularly our corporate gross which used up about 47 basis points of capital in just last quarter. So we’ve seen some good come back of about 20 basis points this quarter to the reduction in RWA in our business banking book and counterparty credit risk also reduced because of — we had extreme levels of credit spreads that moved in Q2, those have come back as well. That gives us a what are all basis points back.

So part of that is, certainly as you look forward in this quarter, we absorbed migration of about CAD4 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 there are few factors that are influencing that. Lower delinquency rates in each of the Bank’s portfolios, whether you look at mortgages, credit cards, auto loans, the entire gamut, but also within the credit card portfolios, because you have credit scoring that comes into our models and so on, simply because of the government stimulus, the deferral programs that have been in place, particularly in Canada as well as lower consumer lending, sorry — consumer spending, I should say. It also contributed to lower revolving credit utilization rates.

So really the PDs on our retail book drop if you look quarter-over-quarter in our ARB 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 we talked about last quarter, we do multiple stress test, particularly in environments like this, you can call it the U-shape, V-shape recovery L-shape recovery and so on, but the most likely scenario we’ll see excluding this quarter’s migration which has already gone through on business banking, we think it will be around the 40 basis points range, and if you look at our capital ratio at 11.3% and it will continue to grow, because most of the write-off is really going to come in Q1, Q2, particularly in the retail book, we think it will be completely absorbed by the internal capital generation that we expect to see,since volume growth is going to be slightly lower compared to a normal growth rates, and that should help us.

And I keep this capital ratio, definitely above 11.3% we think as we look forward in Q4 and as we talk to you in Q4, we will give you a better understanding of how this might play out through Q1, Q2 and the rest of next year.

Paul Holden — CIBC — Analyst

That’s very helpful. Thank you.

Operator

Thank you. The next question is from Doug Young with Desjardins Capital Markets. Please go ahead.

Doug Young — Desjardins Capital Markets — Analyst

Hi, good morning. Just wanted to go back to the performing loan build this quarter and it seems like most of the build was related to migration. Doesn’t seem like a change of scenarios for your SLI. And so I just want to understand better how you went about looking at this migration, is just 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 kind of bring it back to today to what the ACL would be?

Daniel Moore — Group Head & Chief Risk Officer

Yeah. Thanks, Doug. So you’re absolutely right, the credit quality has driven a swing and PCLs on a quarter-on-quarter basis of about CAD350 million whereas in fact on a quarter-to-quarter basis, the macroeconomic or FLI was went — down about CAD50 million. So this quarter is really been all about seeing the impact, the structural impact of this portfolio, this impact on our retail portfolio and our corporate commercial banking business, where frankly it’s a good new story there.

And being able to incorporate that data on customer exits, as well as the remaining portfolio that we have in the quality of that into our estimates going forward. And you’re right in order to make that assessment we’ve had to execute significant extra credit adjustment in order to make that happen, because the macroeconomic factors we haven’t — we don’t have employment driving income levels in what we have government assistance programs in many cases driving income levels. So what you’ve said as an overlay, in terms of thinking about how we look at net write-offs moving forward, but from an overall perspective we have assumed a significant increase in net write-off levels versus pre-COVID levels and 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 are incorporating that top down data, that bottom-up real experience from our customers as well as particularly in IB looking at the outside in perspective from our peer group.

Doug Young — Desjardins Capital Markets — Analyst

Daniel is there any way to quantify that? I mean, when we look at what you’ve said in terms of your experience for stuff coming off deferral right now, I think it was the 89%, or 90% of same current after they come up in International and it was higher up in 90s in Canada. Is that what you’re expecting or you expecting it to actually get worse from here as you know build out these performing loan allowances?

Daniel Moore — Group Head & Chief Risk Officer

So two things. First of all, I’d expect that to be 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 expiries have related largely to the unsecured book of business, which has shorter deferral periods. So we’ve had about 60% of our two-third of our expiries in Canada related to the unsecured book of business now and cards were to down CAD200 million. So if you look at the impact of that on PCLs which is really what roll after here, we have a — I’d say, cautiously optimistic perspective on that experience going forward given the remaining quality of the book, as I said it’s effectively a super-prime remaining book of business in Canada, that’s got very low LTVs. So while we’ve taken appropriately pessimistic perspective on the overall provision, we have high confidence in that high watermark statement we made before.

Doug Young — Desjardins Capital Markets — Analyst

And then just lastly the credit card book CAD3.5 billion in international that’s on deferral. You said that there is a good chunk that’s still current and making payments. Can you quantify like how much of that is — how much of those clients are still making payment?

Daniel Moore — Group Head & Chief Risk Officer

Yeah, so in International, the current payment rate is — remains significant, and we’re tracking that very, very closely.

Doug Young — Desjardins Capital Markets — Analyst

But you haven’t quantified that.

Brian J. Porter — President and Chief Executive Officer

One thing about your customer in deferrals, is your question? Yes, we’ve seen it around one-third of our customers — that’s — remain — continue to pay even when they are in deferral.

Doug Young — Desjardins Capital Markets — Analyst

Okay, great. Thank you.

Operator

Thank you. The next question is from Darko Mihelic with RBC Capital Markets. Please go ahead.

Darko Mihelic — RBC Capital Markets — Analyst

Hi, thank you. I’m going to stick with Dan and just follow-up here on your answer just now to at least as good, which is a little surprising to me. And your slide 16 is very useful. Thank you again for this — slide, and it will help me frame my question. So if I look at Canada, for example, and I look at the — last call, the current quality of deferral expiry, and if I think about mortgages, somebody who is off expiry has come off early. So they probably didn’t need the deferral anyway. When I think about credit cards and personal loans, I mean you’ve got a high current following deferral, but those are smaller payments and many of the people are probably getting served payments. So the issue, Dan, 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 if they’ve got a mortgage, and they are still unemployed and serve is being wound down. Could you provide some insight as to how many people in that mortgage book are unemployed have served, and potentially other loan balances were 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 saying they are current but how many are actually making full payment versus minimum payments?

Daniel Moore — Group Head & Chief Risk Officer

Yeah. So, on the current portfolio — the end of your question there, we still have about 70% of our portfolio maintaining current position on the card balances in Canada and that’s consistent with our experience through this — since the start of this. So the quality of that remaining credit card portfolio, although as I said were down CAD200 million, has remained consistent from a payment perspective. Your question really revolves Darko around what happened 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 transition into the revise — the EI assistance programs that we have in Canada now that we’re recently announced, and there is a significant CAD37 billion of assistance in Canada, and here significantly that has been extended not only to those in the sick leave for instance, but also to those that only have a 120 hours of employment in the last year, that’s a material piece of the assistance that we have in Canada.

So we think that will that addresses many of the questions we had prior about some of the challenges about transition of those served payment going forward. You’re right that the bigger portion of the payment amount is in the mortgage portfolio, but here again,I know it will come back to, I think what we’re all focused on today is the provision for credit loss outlook and when we’re dealing with the mortgage portfolio, that’s super-prime effectively another 45% LTV we don’t see a significant impact.

Dan Rees — Group Head, Canadian Banking

And Daniel, maybe I’ll just follow. Darko, it’s Dan Rees from Canadian Banking here. Clearly a 99.4% current following deferral expiries is a tremendous result so far. For those still in deferral, the FICO score, is close to those that are not in deferral. So in general, our mortgage book sits around 800, and those in deferral are above 750 or higher. We have identified in June based on seeing served data and EI 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 prepayment and are working with them on a case-by-case basis and we’re encouraged by what we saw through the month of August.

Darko Mihelic — RBC Capital Markets — Analyst

And what would the proportion be of those that are vulnerable, Dan? And could do you have a similar statistics for the international?

Dan Rees — Group Head, Canadian Banking

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, whilst significant is not in comparison with the rest of their credit capability. So when we look at that KLP, like we get comfort,especially to Daniel’s point around LTV, should the consumer decide that they’re are not capable of continuing, the mortgage will move in we will exercise our right, but that is a possibility on the mortgage side and in International, Nacho?

Ignacio Nacho Deschamps — Group Head, International Banking and Digital Transformation

What I would say in International is, it does — the customers are also similar — this is an option, it’s encouraged for regulators broadly. And I would like to highlight that this is in the memory of our customers, major events in our region like earthquakes in Chile, Mexico, hurricanes in the Caribbean have allowed us to provide massive support similar to what we are seeing. So what I can tell you is that this level of payments that we are seeing on the exited portfolios on the assistance programs are on target, and these are quite encouraging, and we hope we have now an important exit in the fourth quarter that they continue at the same pace. We have increased our allowance for performing loans CAD1 billion in two quarters in International Banking, and our ACL today is more than two times our net write-offs of last year. So we feel we’re well-provisioned with information we have today.

Brian J. Porter — President and Chief Executive Officer

Darko, it’s Brian. Just one thing that Nacho in answering another question from somebody else earlier and it doesn’t get a lot of color here. But the release that the Chilean government and the Peruvian government have 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 closer to the government of Canada, saying you can take a CAD100,000 tax rate out of your RSP to get on with your — these are big, big programs for these countries, and will bode well for consumers, in terms of how they handle it. I think I — so I just wanted to emphasize that.

Ignacio Nacho Deschamps — Group Head, International Banking and Digital Transformation

Yes. That represent 2 times to 3 times of monthly income of our average work in these countries on.

Darko Mihelic — RBC Capital Markets — Analyst

Okay, thank you.

Operator

Thank you. The next question is from Mike Rizvanovic with Credit Suisse. Please go ahead.

Mike Rizvanovic — Credit Suisse — Analyst

Hi, good morning. Probably a question for, Nacho. Just wanted to go back a couple of quarters on the guidance that was provided,the earnings power of International business post dispositions, I think the number was CAD525 million, and obviously it’s a much different environment now, but is that something that you could potentially get back to maybe by the end of fiscal 2021 or is that more of a fiscal 2022 story, when we think about that segment’s earnings power without the noise from elevated PCLs?

Ignacio Nacho Deschamps — Group Head, International Banking and Digital Transformation

Look. Thank you for your question. And I’m quite confident that post-COVID these countries will show another cycle of very high growth and this is because of the structural characteristics of the countries at 250 million population, low levels of banking penetration, fundamentals matter and they have managed and weather well COVID. So, for sure 2021 is going to be a transition year, but I have no doubt that the banking industry will resume double digit growth post-COVID, and I’m quite confident of these targets for International Banking as a medium term target, of course, highlighting that we are still going through difficult months, and we still have to see, let’s say, a consistent recovery and growth.

Mike Rizvanovic — Credit Suisse — Analyst

Okay, thanks for that color. How do — really quick numbers question is a follow-up on the customer assistance programs slide. So in the footnote, it says the Canadian payments percentage includes accounts that have not yet completed first billing cycle since expiring. So what I’m wondering is that 96.3% in the right column that’s quoted, how would that be — how much lower would that potentially be if you excluded or if you only included the accounts that have come off deferral that have actually gone through a first billing cycle since the deferral expiry?

Dan Rees — Group Head, Canadian Banking

Hi, it’s Dan Rees here from Canadian Banking. I don’t have that number at hand, but it’s not a significant difference. We’re simply sharing that footnote for being to reflect the point that’s when the loan expires it takes a full 30 days for the payment to become due in most circumstances, that’s all. I wouldn’t read much into that.

Mike Rizvanovic — Credit Suisse — Analyst

Okay, Thanks very much. Appreciate it.

Operator

Thank you. The next question is from Mario Mendonca with TD Securities. Please go ahead.

Mario Mendonca — TD Securities — Analyst

Good morning, Dan. If we could go back to the comments you made around credit. You said that the estimated future credit migration — you’ve built in estimated future credit migration out to the latter half of 2021. I would have expected with that kind of credit migration contemplated, that it would have had a similar effect on book quality, specifically what I’m getting at is that, what — expected the probability of default to have moved materially higher across your loan book including consumer, but there does appear to be a disconnect than between what you’re building in from a credit perspective and what we’ve seen so far in terms of book quality. I guess my question is, is that still to come, like updates to your probability of defaults across all your loan books, corporate, commercial and consumer, are those still to come in subsequent quarters or are you done?

Raj Viswanathan — Group Head and Chief Financial Officer

Hey, Mario, it’s Raj. I think you’re referring to book quality, which we put out as part of our regulatory sub back correct?

Mario Mendonca — TD Securities — Analyst

Yes.

Raj Viswanathan — Group Head and Chief Financial Officer

Okay. Yeah. So, yes, the capital will lag, like I mentioned earlier, because of these deferral programs it started as far as business lending goes. Like I mentioned, we took CAD4 billion of 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 book is coming in much earlier because of IFRS-9 performing loans requirements and the capital impact of it will be delayed as write-off start coming in Q1, Q2 and these portfolios actually migrate to a higher or lower PD I should say, at a higher PD and a lower quality as well as they have entered the impaired, and that will reflect in the capital, which is why I said about 40 basis points could be the impact of migration to an earlier question, but that will come through, I would say early part of 2021 as these programs plays off, but you’re right, it’s a large effect.

Mario Mendonca — TD Securities — Analyst

So would I be correct in saying that the probability of default those numbers have been updated for corporate and commercial and retail is, just as you suggested will come through later. Is that correct?

Raj Viswanathan — Group Head and Chief Financial Officer

Completely correct, Mario. That’s why I referred to the retail PDs if you look at ARB portfolio and the Bank sub-back has dropped from 91 basis points to 78 basis points and that will come back to 91 being a more normal and perhaps might go higher to depending on how these portfolios might bid in future quarters.

Mario Mendonca — TD Securities — Analyst

[Speech Overlap] Sorry, go ahead.

Daniel Moore — Group Head & Chief Risk Officer

Mario, Daniel here. We’ve gone through and we’ve taken a full bottom up position in the whole corporate commercial portfolio and re-rated everything that’s in there as necessary. We found frankly only 4% of our portfolio needed re-rating and of that 80% was only one credit notch. So that shows the resiliency of our portfolio, which is you know is 85% investment grade. So that’s performed very well. We’re very pleased with that.

Mario Mendonca — TD Securities — Analyst

And Dan your comments there specifically related to corporate and commercial? Okay, thank you.

Operator

Thank you. The last question will be from Sohrab Movahedi with BMO Capital Markets. Please go ahead.

Sohrab Movahedi — BMO Capital Markets — Analyst

Okay, thanks. I just wanted to go back to Nacho. To get a sense, Nacho as to what if any changes that have been made to risk appetite towards the business in the region where the growth is likely to come and whether or not there has been a shift and does Dan — Dan’s forward looking and expert judgment, assume a skew towards more of a secured book or is it more of the same and whether or not from business perspective, the trends in expense management that you have highlighted can persist or are they — as to how much lower expenses can go from here in the International segment particularly? Thank you.

Ignacio Nacho Deschamps — Group Head, International Banking and Digital Transformation

Thank you very much, Sohrab for your question. Well, and I — it’s already happening and I expect that in the first — in the next few months, we will have more opportunities to grow in commercial and there are few retail secured business. They have — they are more resilience of the recession and the economies are back to a growth path, but eventually as we have mentioned before, eventually we expect that both segment will start to grow in a much more balanced way and our risk appetite has been adjusted accordingly taking some lessons from this event, but we remain highly confident on our strategy and the risk appetite will gradually adapt also to the conditions of the markets. I would like to say that there is a significant de-acceleration, we have been able to help our customers experiencing a very difficult circumstances accessing their bank, their accounts remotely, and therefore, this is helping us invest and assist a lot of engagement in digital channels, and therefore we continue to see as we have seen significant opportunities to improve our efficiency and continue these trends and the track record we have in solid expense management, Sohrab.

Daniel Moore — Group Head & Chief Risk Officer

And Sohrab, just on your question on factoring and the changes in strategy that Nacho was looking at the margin going forward, we’ve not factored any of that into our extra credit judgment, we’ve run it off the current portfolio as it is.

Sohrab Movahedi — BMO Capital Markets — Analyst

So just Daniel to be crystal clear on that at least for the foreseeable future, growth in commercial and better — call it secured step would be an improvement so to speak relative to where your book quality estimates are?

Daniel Moore — Group Head & Chief Risk Officer

Yeah, we’re prudent versus base case estimates today. That is correct.

Sohrab Movahedi — BMO Capital Markets — Analyst

Okay, thank you.

Brian J. Porter — President and Chief Executive Officer

Okay, thank you everyone for participating in our call today. On behalf of the entire management team, we want to thank our investors and analysts for participating in our call. I also want to thank all of our employees for their continued focus and hard work to deliver to all our stakeholders and our customers and shareholders for their loyalty and support. We look forward to speaking with you again at our Q4 2020 call on December 1, 2020. Have a great day.

Operator

[Operator Closing Remarks]