Categories Earnings Call Transcripts, Finance

Royal Bank of Canada (RY) Q3 2020 Earnings Call Transcript

RY Earnings Call - Final Transcript

Royal Bank of Canada  (NYSE: RY) Q3 2020 earnings call dated Aug. 26, 2020

Corporate Participants:

Nadine Ahn — Head of Investor Relations

David McKay — President & Chief Executive Officer

Rod Bolger — Rod Bolger Chief Financial Officer

Graeme Hepworth — Chief Risk Officer

Neil McLaughlin — Group Head, Personal & Commercial Banking


John Aiken — Barclays — Analyst

Ebrahim Poonawala — Bank of America Securities — Analyst

Steve Theriault — Eight Capital — Analyst

Gabriel Dechaine — National Bank Financial — Analyst

Doug Young — Desjardins Capital — Analyst

Meny Grauman — Scotiabank — Analyst

Mario Mendonca — TD Securities — Analyst

Sohrab Movahedi — BMO Capital Markets — Analyst

Mike Rizvanovic — Credit Suisse Canada — Analyst

Scott Chan — Canaccord Genuity — Analyst



Good morning, ladies and gentlemen, welcome to RBC’s Conference Call for the Third Quarter 2020 Financial Results. Please be advised that this call is being recorded.

I would now like to turn the meeting over to Nadine Ahn, Head of Investor Relations. Please go ahead, Ms. Ahn.

Nadine Ahn — Head of Investor Relations

Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer; Rod Bolger, Chief Financial Officer; and Graeme Hepworth, Chief Risk Officer. Then we’ll open the call for questions. We also have with us in the room Neil McLaughlin, Group Head, Personal and Commercial Banking; Doug Guzman, Group Head, Wealth Management Insurance and I&TS; and Derek Neldner, Group Head, Capital Markets.

As noted on slide one, our comments may contain forward-looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results to differ materially. I would also remind listeners that the Bank assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance.

To give everyone a chance to ask questions, we ask that you limit your questions and then re-queue.

With that, I’ll turn it over to Dave.

David McKay — President & Chief Executive Officer

Thanks, Nadine, and good morning, everyone. Thank you for joining us today. We hope you and your loved ones are keeping safe and well in this period of uncertainty. Our main focus remains in ensuring the health and well-being of our employees and standing by our clients and communities in these challenging times. Against the pandemic backdrop, we are actively supporting our clients through numerous relief options, through financial advice and proactive client outreach to meet their needs. Since the onset of the pandemic, we have enabled over 500,000 clients globally through our various payment deferral programs.

At the end of July, the outstanding exposure that’s been deferred has reduced significantly, as many of our clients rolled off the deferral programs during the quarter. Many clients took deferrals as a precaution, and we expect most to resume payments when deferrals expire. We had noticed last quarter that Canada’s finances were well positioned should further actions be required, and since then, we have seen an extension of federal income support programs. The combination of these government and client support programs, strong equity in homes and elevated savings rates, along with strong bank balance sheets provide us with comfort around transition to the next phase of the economic recovery.

In Canada, in addition to client relief programs, we are also committed to supporting recovery in the small business sector, which is critical to the broader economic recovery. Through the launch of Canada United we’re bringing together government business associations, and more than 50 of Canada’s leading brands to rally consumers and give local businesses the support they need to re-open during these uncertain times.

We also launched points for Canada, a program to help stimulate local economies by giving increased RBC rewards to our clients, as they dine and shop in Canadian restaurants and stores. We are optimistic the strength and breadth of our market leading rewards proposition coupled with strong partnerships will provide value to clients and support businesses at the heart of our communities.

I will now speak to our Q3 financial performance in the context of the macro environment and client activity. Today, we reported earnings of CAD3.2 billion, a strong pre-provision pre-tax earnings of over CAD4.7 billion added to our capital buffer this quarter, while absorbing the impact of higher PCL and lower interest rates.

Our resilient earnings continue to support dividend payments, a commitment we have upheld throughout our 150 year history. This quarter, we paid CAD1.5 billion in dividends or nearly half of our net income to our over 1 million retail and institutional shareholders, the majority of whom are based in Canada.

Our CET1 ratio of 12% now provides a CAD16.5 billion buffer over the current regulatory minimum of 9%. This is an addition to over CAD6 billion in allowances for credit losses.

Our internal stress testing suggests that even under a severe pandemic scenario, our capital levels remain well above the 10% minimum set by OSFI prior to the pandemic. It’s important to remember that our businesses have already experienced the stressed events over the last five months, and our allowance, capital and liquidity ratios are all consistent or better than they stood at the end of January.

And looking at economic drivers, as the Canadian economy slowly opens up, we are seeing signs of recovery in Canadian consumer spending. As stores continue to open, we have seen our over 9 million cardholder spend more this July than last year, the first year-over-year positive trend since mid-March. We are also seeing strong activity in housing markets across North America. In Canada, home sales, house prices and housing starts have shown surprising resilient, partly reflecting pent-up demand and low interest rates.

We reported very strong mortgage growth of 10% year-over-year picking up from similarly robust levels at the start of the year. Our e-signature solution is helping our mortgage specialists in the field, and our clients are benefiting from investments we made in digital tools to allow for self-serve renewals. While it’s too early to comment on the sustainability of these trends, we will continue to help Canadian homeowners, while supporting balanced growth in the market.

As always, we place the emphasis on the quality of the Board, and we will not compromise our risk profile to add mortgage volumes. Although, labor markets remain soft relative to the beginning of the year, they are showing a positive trend. The Canadian job market has recovered over half of the three million job losses since or seen in March, but outperformed the US recovery on a relative basis.

From a macro perspective, we’ve also seen rising oil prices and signs of recovery in the manufacturing sector. The combination of these factors have contributed to the rise of equity markets to record levels and the normalizing of credit spreads towards pre-pandemic levels. While we are seeing early and encouraging signs of an economic rebound from the depths of March, uncertainty remains over the timing and shape of the recovery. The real test of the recovery will come once government support program start to wind down.

We anticipate the fall will be a challenging time and that’s why we’re proactively reaching out to clients to see how we can continue to be help. In addition, we are cognizant of the potential economic threat of a second wave of COVID. Given these and other risks, we took prudent action in updating our economic scenario weightings to put a greater emphasis on downside scenarios under IFRS 9. Graeme will speak to our assessment of our allowance for credit losses.

Let me now shift to what we’re seeing in the corporate and institutional markets. This quarter, capital markets benefited from continued robust client activity at the end of Q2 resulting in record earnings for this segment this quarter. As credit markets continue to open following the extraordinary intervention by global central bank last quarter, we supported significant client financing demand resulting in strong debt underwriting.

Our commitment to our clients resulted in RBC Capital Markets winning Best Investment Bank in Canada for the 13th year in a row according to Euromoney magazine. This quarter, we also saw strong equity underwriting activity, which continued into early August with RBC Capital Markets serving as an active book runner on Rocket Companies CAD1.8 billion IPO.

Our strong trading performance, which highlights the counter-cyclical nature of some of our revenue streams benefited from elevated client activity in this period of market stress. In much contrast, M&A activity generally remains muted, as the macroeconomic and political uncertainty are giving CEOs pause in most sectors outside of healthcare and technology.

Our wealth management business has maintained their number one position in Canada, and RBC Global Asset Management surpassed CAD500 billion in assets under management for the first time, as our clients continue to trust us with their assets throughout the cycle. And our US wealth management also performed well with assets under administration rising to a near record high in US dollar terms. City National continue to see very strong loan growth with loans nearing CAD50 billion, and also saw very strong deposit growth. While our core franchise continues to grow and add clients, the current low interest rate environment negatively impacted results this quarter. This impact was exacerbated by a shift in asset mix, the material increase in enterprise-wide liquidity, which Rod will speak to.

We’ve been a source of strength and stability for clients during this period. This is reflected in a significant 16% year-over-year growth in average deposits across our segments. Our retail and business clients are not only depositing government support payments in their checking accounts, but have seen a drop in cumulative cash outflows due to the bank support programs and social distancing requirements. These higher savings rates have positive implications for credit quality. Furthermore, we are seeing the benefits of our multiyear investments in digital and analytical capabilities in our custody business. We are seeing increased client deposits, as mid-sized global asset managers faced challenging conditions.

Sum up, we are pleased with our results this quarter. Our strong performance has its origins and deliberate decisions made well before the start of the pandemic. The resiliency of our balance sheet is underpinned by our focus on strong underwriting standards and maintaining a high quality portfolio in both Canada and the United States. Also following our global — the global financial crisis, we exited a branch at the US footprint and instead focused on consolidating our lead in Canada and growing our US wealth management, private banking and capital markets franchises. Despite the challenging interest rate outlook, we are not changing our long term strategy, which we highlighted at our last Investor Day.

In Canadian banking, we continue to execute our growth in technology strategy to capture a larger portion of personal checking accounts and residential mortgages. These are important anchor products, and they are an important driver of our premium ROE. Our leading wealth management platform adds to our continuum of offerings to our retail clients, while also being accretive to ROE.

Our deep relationships with our clients provide us with data insights that allow us to better understand their needs and help advise them on important financial decision. And knowing our clients well is also a great vote for the purposes of risk management. And on this point, 85% of our mortgage clients had an existing relationship with us before requesting mortgage funding.

Nearly 95% of our mortgage clients have more than one product with RBC with the majority having a checking account, and 19% of our clients have all four transaction accounts, credit cards, investments and boring products with RBC. Our strategy also remains unchanged in the US, where we are well positioned to capitalize on investments and the synergies across our capital markets, wealth management and City National platforms.

In the US wealth management platform including City National, we expect to benefit from the growth of our jumbo mortgage portfolio, our recent expansion into new geographies and a hiring of experienced private bankers and financial advisors. Our global capital markets franchise provides yet another source of fee-based revenue, as we increasingly emphasize deepening client relationships to drive growth in non-lending revenue. While we remain focused on creating the bank of the future, cost management will be an increasing priority, as we look to deliver long term sustainable value.

I wanted to close by sharing some perspectives on how RBC is living our purpose of helping clients thrive and communities prosper in a time of social and economic disruption. There’s no question the health crisis has put a spotlight on many challenges that makes society less resilient and more vulnerable. Finding ways to build a stronger society from the crisis provides all of us with a once in a lifetime opportunity to reimagine tomorrow.

We have every intention to seize the moment and continue to transform our company for those we serve creating meaningful and long lasting value. This focus includes our recently launched action plan to tackle the fact that Black, Indigenous and people of color have been disproportionately disadvantaged for far too long. Our plan to address these significant factors impeding the ability of these communities to compete equally in opportunities for economic and social advancement. As part of this plan, we will increase our staffing targets for BIPOC executives from 20% to 30%.

Another critical area is climate, we continue to push forward with RBC’s Climate Group Blueprint. And just this month, we became the first Canadian bank to sign a long term renewable energy power purchase agreement.

And finally, for the 19th consecutive year, RBC has been named to the FTSE for Good Index, which measures the performance of companies demonstrating strong ESG practices. This year our percentile ranking among the banking sector rose to the 98 percentile.

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

Rod Bolger — Rod Bolger Chief Financial Officer

Thanks, Dave, and good morning, everyone.

Starting on slide seven, we reported earnings of CAD3.2 billion and EPS of CAD2.20, while absorbing CAD675 million of provisions for credit losses. Pre-provision pre-tax earnings of CAD4.8 billion were up 6% from last year, largely driven by significant strength in capital markets with solid growth in our insurance and our non-US wealth management businesses.

Before I turn to the segment results, I will discuss three key topics of interest, capital, net interest margins and expenses. Moving to slides eight and nine, we reported strong CET1 ratio of 12%, up 30 basis points from last quarter. Our capital build was underpinned by strong internal capital generation adding 37 basis points to our CET1 ratio this quarter. In addition, we saw pay downs of credit facilities and capital markets in contrast to last quarter.

We have also seen Canadian commercial lending utilization levels trend lower from last quarter in nearly all sectors. And as credit spreads continue to normalize from their elevated peak in March, we saw a partial recovery in the unrealized losses we recorded in OCI last quarter. These positives were partially offset by higher market risk RWA underpinned by an update to the historical period used to compute stress VAR to more reflect the market volatility seen earlier this year.

I will now spend some time on RWA migration in our credit portfolios. This quarter we recorded a further CAD2 billion of credit downgrades adding to the over CAD9 billion we recorded last quarter. The downgrades have largely been in our corporate portfolios and capital markets with over half related to COVID-19 vulnerable sectors. Following a detailed review of the corporate portfolio last quarter, the rate of corporate credit downgrade slowed materially this quarter. We did see a slight deterioration in our Canadian commercial portfolios, and we expect a gradual impact of credit migration in these portfolios to continue in the coming quarters.

Given government and bank support programs and the high quality profile of our clients, we have yet to see any significant negative ratings migration in our Canadian retail portfolios. To provide some additional color, we stress tested our retail portfolios under client support programs to levels well beyond our expectations and current loss estimates. Even if our retail accounts under our deferral programs become delinquent at a 10% rate, the incremental impact to our CET1 ratio from RWA inflation would be manageable at less than 10 basis points.

And as seen this quarter, our strong recurring earnings stream will continue to act as the primary absorber of any deterioration. So absent of further meaningful economic downturn, we expect our CET1 ratio to remain at approximately 12% by the end of the first quarter 2021, as capital generation is offset by risk migration and the reduction in OSFI’s transitional capital modification for ECL provisioning.

Now moving on to net interest margins on slide 10, our enterprise NIM declined 12 basis points quarter-over-quarter, largely due to the impact of both the Bank of Canada and the Federal Reserve cutting interest rates by 150 basis points in March. Recall, we had previously disclosed an immediate and sustained 100 basis point shock would have a negative impact to our revenue of over CAD600 million over a 12-month period as of Q1, 2020. The impact to our NIM this quarter from such an interest rate shock was increased by elevated liquidity levels at the enterprise level with low yielding cash and investment balances up CAD146 billion from last year. Our elevated LCR translates into a surplus of CAD127 billion over the regulatory minimum.

At a segment level, Canadian Banking NIM declined 12 basis points quarter-over-quarter or 14 basis points over the last two quarters due to three main factors. First, the impact of lower interest rates and deposit margins was the largest driver of the compression in NIM. Our current mix of personal deposits has a greater proportion of non-interest bearing, low beta checking accounts, which do not reprice in parallel with movement in benchmark interest rates. Another headwind this quarter was the change in asset mix underpinned by the decline in higher yielding credit card balances, as well as strong growth in lower spread Canadian mortgages to a lesser to — extent.

In contrast, deposit growth had a positive impact, very strong double digit growth in higher margin checking accounts and business deposits far surpassed solid growth in interest bearing GICs, which themselves were still up 9% year-over-year. Although, our strong weighting to checking accounts and credit cards, resulted in a drag to our NIM this quarter, both these products provide important strategic benefits and continue to underpin our leading Canadian Banking net interest margin.

Moving to City National, where NIM was down 33 basis points relative to last quarter, the impact of lower interest rates and low yields was more pronounced, given the structure of the balance sheet with the majority of our loans are variable rate. This was partially offset by lower deposit and wholesale funding costs. On an enterprise level, we expect liquidity to remain elevated over the near term. We would expect lower wholesale funding needs in the coming months given our strong deposit growth.

Now moving to expenses, which were up 6% year-over-year, largely due to higher variable and stock-based compensation. Excluding these and foreign exchange, all bank expense growth would have been relatively flat to last year. Furthermore, COVID specific cost added over CAD90 million of expenses in the quarter from special compensation costs for certain employees and increased cleaning. In contrast, marketing and travel costs were down CAD90 million, as part of a 16% reduction in discretionary expenses from last year.

On a segment basis, Canadian Banking limited expense growth less than 2% year-over-year. Excluding cCOVID specific cost, Canadian bank — banking expenses would have declined 2% from last year.

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Both insurance and I&TS expenses were down 6% from last year. And despite higher variable compensation both capital markets and our non-US wealth management businesses reported positive operating leverage. US wealth management expenses were up 12% year-over-year in US dollars or less than 3% excluding the impact of our US share based compensation plan.

And we expect City National’s expense growth to continue to slow over time following the elevated growth in our back office technology and regulatory costs in recent periods. We also expect to slow our recent accelerated hiring growth strategy. We remain diligent managing our all bank cost base, as we continue to balance project prioritization with our commitment to creating long term value for our clients.

Moving to our business segment performance beginning on slide 11, personal commercial banking reported earnings of CAD1.4 billion. Canadian Banking net income was CAD1.3 billion with pre-tax pre-provision earnings of CAD2.3 billion, down 8% from a year ago.

Net interest income was lower year-over-year, as solid loan growth of 6%, and very strong deposit growth of 18% were offset by the impact of significantly lower interest rates. Fee-based revenue was also affected by the impact of COVID-19, as lower transactional activity resulted in lower service charges. Also the decline in cross-border travel impacted FX fees.As we see a reopening of economies over time, we expect to see these revenue streams start to recover.

Turning to slide 12, wealth management reported earnings of CAD562 million. Pre-provision pre-tax earnings of CAD803 million were down 5% year-over-year largely due to lower interest rates.

Canadian wealth management revenue declined 2% from last year, as lower client transactional activity and lower interest rates, offset higher average AUA.

Global Asset Management revenue increased 7% year-over-year with AUM up 13% from last year to record levels, mainly due to a combination of strong US institutional and Canadian retail flows, and constructive equity and bond markets.

Canadian retail net — net sales were strong in short term money market strategies in May, and then long term fixed income mandates in June and July. Very strong volume growth at City National was more than offset by lower interest rates. Loan balances increased CAD11 billion, a 29% year-over-year in US dollars.

Loan growth, excluding the impact of PPP loans was still up a very strong 17%. City National deposits were up CAD17 billion or 38% from a year ago. We also saw strong growth in our US private client group with AUA up CAD28 billion in terms of US from a year ago.

The revenue benefits from very strong volume growth in our US wealth management businesses were more than offset again, by the impact of lower interest rates. This quarter saw favorable accounting volatility on interest rate swaps and City National, mark to market seen capital gains in Global Asset Management and our deferred compensation plans in the US wealth management, a partial reversal of last quarter’s losses.

On slide 13, we discuss our Insurance segment, which provides an important diversified source of earnings that is less exposed to spread revenue and credit risk. Net income of CAD216 million increased CAD12 million or 6% from a year ago, mainly due to higher favorable investment-related experience and improved claims experience. These factors were partially offset by the impact of longevity reinsurance contracts in the prior year.

Onto Investor and Treasury Services on slide 14, where net income declined to CAD76 million. As we guided in May, results were particularly challenge this quarter. Our funding and liquidity business was most impacted by the servicing of the bank’s elevated liquidity position. In addition, lower revenue reflected the unfavorable impact from the prior period interest rate movements, partially offset by tightening credit spreads towards pre- COVID levels. These do not — these results do not reflect our expected run rate going forward.

In contrast, our asset services custody business had a solid quarter, and that as FX revenue benefited from increased client activity, resulting from volatility in FX markets and lower expenses driven by disciplined cost management initiatives.

Now turning to slide 15, capital markets reported record earnings of CAD949 million. Pre-provision pre-tax earnings of CAD1.3 billion was also the highest level on record, reflecting the strength of our global franchise. Corporate investment banking revenue was up 12% year-over-year to a near record CAD1.1 billion, partly due to recoveries in loan underwriting marks, as we are able to sell off deals following the thawing of leveraged loan markets. The narrowing of high-yield credit spreads also helped in this regard. Also contributing were strong debt and equity underwriting fees, which benefited from low interest rates and constructive equity markets, respectively. These more than offset what remains a muted M&A advisory environment.

As our corporate clients feel increased comfort around their own balance sheet, and the stability of their operations, we have seen debt underwriting activity begin to slow. We have also seen material pay downs of previously drawn credit facilities.

Global markets also had a very strong quarter with revenue up 60% from last year to CAD1.8 billion. Record performance in FICC was underpinned by strong credit trading, which benefited from narrowing credit spreads. Rates trading continued to benefit from client demand in the midst of continued global central bank actions.

Equity trading was also robust benefiting from continued market volatility, and a recovery in our structured products business following severe market dislocation last quarter. However as volatility subsides, we would expect the trading performance to moderate.

And with that, I’ll turn it over to Graeme.

Graeme Hepworth — Chief Risk Officer

Thank you, Rod, and good morning, everyone.

Starting on slide 17. This quarter we continue to build our allowance for credit losses on loans to 6.1 billion, up 200 million from last quarter. The increase in our reserves is mainly attributable to provisions on performing loans in our retail portfolio, reflecting the ongoing uncertainty related to the COVID-19 pandemic.

Our ACL is based on macroeconomic forecast that were generally unchanged from last quarter. So we did see some improvement in our equities, oil and housing price forecast. Also, the actual Canadian unemployment rate in calendar Q2 was better than we had forecast last quarter.

We also updated our scenario weights to put greater emphasis on our downside scenarios to reflect the increasing uncertainty about how the economy will perform through the fall with a number of government support and payment deferral programs roll off. Overall, our ACL represents 0.89% of all loans outstanding, up from 0.53% six months ago. This represents 4.3 times our net write-offs over the last 12 months and positions us well for an expected rise in impairments.

Let me now discuss PCL on impaired loans on slide 18. Provisions of 398 million or 23 basis points were down 14 basis points from last quarter, largely reflecting lower provisions in capital markets and personal commercial banking. In capital markets, provisions were down 199 million from last quarter. While we continue to incur provisions in some of our more vulnerable sectors due to the pandemic, we took fewer provisions in our oil and gas and consumer discretionary sectors this — this quarter compared to last.

In Canadian Banking, provisions were down 75 million from last quarter, reflecting lower provisions across our retail portfolios, mainly due to the impact of payment deferral and government programs. This was partially offset by higher provisions in our commercial portfolio.

In Wealth Management, provisions were up 28 million from last quarter, largely reflecting higher provisions in US wealth management, including the write-off of one account at City National in the industrial product sector.

Turning to slide 19, gross impaired loans of 3.9 billion was up 328 million or six basis points from last quarter, reflecting higher impairment across our major lending segments. In Wealth Management, we had higher impairments on a couple of investment accounts. In our Canadian Banking commercial portfolio, we had higher new formations, mainly in our real estate, other services and consumer discretionary and staple sectors, and fewer loans returning to performing.

In our small business portfolio, we had higher new formations in sectors most vulnerable to the impact of COVID-19, mainly in the greater Toronto area. Most of these loans are government guaranteed. And in our retail portfolio, we had lower new formations in our personal lending portfolio and fewer write-offs in our cards portfolio.

In Capital Markets, we had lower new formations in the oil and gas sector, partially offset by higher repayments in the utilities and oil and gas sectors and higher write-offs in the industrial product sector.

Turning to slide 20, our exposure to sectors most vulnerable to the impact of COVID- 19 decreased by 7% from last quarter due to the pay-downs of credit facilities by our clients. Overall, our exposure to the most vulnerable sectors represents only 7% of RBC’s total loans outstanding. This quarter, 27% of PCL on impaired loans and 46% of impairments pertain to these sectors.

We also saw a slowdown in credit migration related to COVID- 19, as credit rating assessments in our Capital Markets portfolio mainly occurred throughout Q2.. The credit rating assessment in our Canadian Banking commercial portfolio is over one-third complete, and we expect to have substantially completed our review by the end of the year.

On slide 21, we have provided some additional information in relation to the commercial real estate portfolio. Overall, this portfolio is well diversified across geographies and industry segments, and has been underpinned by strong underwriting standards. The retail property segment represents 1.6% of our total loans and acceptances outstanding. This segment remains under pressure due to ongoing physical distancing measures and the rise of online activity.

Through the headwinds at pre-COVID-19, we have long been cautious in our client strategy and underwriting standards for this segment. A significant portion of this book is comprised of Class-A malls with strong backing from investment grade clients, as well as grocery-anchored retail properties, which have performed well during the pandemic.

In the office property segment, strong — strong rent collections continued for both large and small landlords. We expect that any impact of the work from home trend on this segment will play out gradually, and our clients will have time to adapt given the typical term of an office lease is 5 years to 10 years. And again, our underwriting standards have been strong with less — with less than 2% of our office portfolio having both an LTV greater than 75% and debt service coverage ratio of less than 1.25 times.

Overall, we believe the impact of COVID-19 on our commercial real estate portfolio is mitigated through prudent underwriting and sound loan structures, including a combination of low LTVs, guarantees and debt service coverage requirements built to withstand high vacancy rates.

Let me now provide some color on our client payment deferral programs across Canadian Banking’s retail and commercial portfolios starting on slide 23. As I noted earlier, we expect to experience lower delinquencies and impairments this quarter, as clients had the ability to defer certain payments for up to six months. Overall, client demand for new deferrals has largely abated, and overall active deferral balances have declined, as our broad client support programs come to an end.

Slide 24 provide some context around both the performance and risk profile of our Canadian Banking retail deferral program to-date. Of the nearly 23 billion in retail deferrals that ended their deferral term since March, 80% have resume regular payments. 19% have extended their deferral period for an additional two months to three months, certainly not exceeding a six month deferral period, and only 1% will become delinquent.

Additionally, we have seen clients continue to make payments during the deferral period. While we view this is credit positive and consistent with our expectations, the level of payment activity is materially driven by factors, such as operational ease, the economic cost of deferral for the client, and the nature of the product.

Substantially, all of the remaining 39 billion in retail deferrals are set to expire by November. Based on the deferral performance to-date, along with the insights we have around the level of client cash balances and the degree of income disruption, we are confident that we’ll continue to see the majority of our clients with active deferrals resume regular payments.

However, there will be clients, who are unable to resume regular payments due to loss employment or income. And so we do anticipate an uptick in delinquencies and insolvencies once these deferrals expire given the significant impact COVID-19 has had on the labor market and many businesses. The significant level of security and guarantees supporting our deferred loan balances, we are well positioned to address this expected increase in delinquencies and impairments. Looking at our residential real estate portfolio, as an example, only 0.2% has a deferral, is uninsured and has an LTV greater than 80%.

Let me now discuss market risk on slide 25. Overall, market volatility and credit spreads have improved since the last quarter, which has helped reduce the risk profile of both the fixed income and equity portfolios. When combined with a reduction in our active loan underwriting commitments this quarter of — by 58% to 1.7 billion. It contributed to a steady decline in VaRthrough the quarter.

To conclude, our PCL on impaired loans and associated losses were muted this quarter, given the continuation of deferrals and other client relief programs. As these programs roll off, we do anticipate PCL on impaired loans to trend higher in Q4, and through the first half of 2021. At this time, we believe our allowances for credit losses, prudently reflect our current view of the difficult economic outlook as well as the quality of our portfolio.

However, as I noted earlier, there is great uncertainty, which we reflected by putting greater emphasis on our more pessimistic scenarios. For context, our primary pessimistic scenario has the Canadian unemployment rate elevated at around 10% until June 2022 and house prices declining by 8% and remaining depressed until mid-2023. Should a scenario like this play out, we could see our ACL on performing loans increase by approximately 25%.

However, our history of prudent underwriting, the prime nature of our retail portfolios, and the diverse nature of our wholesale portfolios serve as strong mitigants against the deteriorating macroeconomic conditions that have arisen, as a result of the COVID-19 pandemic.

And with that, operator, let’s open the lines for Q&A.

Questions and Answers:


Certainly. Thank you. [Operator Instructions] The first question is from John Aiken with Barclays. Please go ahead.

John Aiken — Barclays — Analyst

Good morning. Rod, in your commentary you discussed the enterprise wide liquidity to a fair extent and wanted to find out, you gave us an indication that you were expecting the liquidity remain fairly high, but you also talked about the wholesale funding necessarily rolling off. Can we expect the liquidity level to stay at this balance on a relative basis? And then going forward, what would you need to see in order to actually reduce the liquidity level and try to ease some of the burden that’s having on the margins?

Rod Bolger — Rod Bolger Chief Financial Officer

Thanks John for your question. I mean part of this is the liquidity that’s in the system, and RBC is going to take its fair share of that liquidity. And I think that will remain in the system, as long as the Bank of Canada and Federal Reserve and other — and Bank of England and ECB continue to flush appropriate liquidity into the system to help with the economic turmoil caused by the pandemic. So I would expect that to continue for some time.

And then as clients both retail and commercial and corporate start to utilize that cash and spend that cash and invest it and that cash starts to come down, then I would think some of that liquidity would come down.

Obviously, we would like to replace it with good client assets, but we’re not going to change our risk appetite to accommodate that. And so, we’ll accept a little bit of margin compression. Again this is not costing us a lot of money, a lot of these deposits are low cost deposits. So the P&L impact is muted. The NIM impact just because of the math is higher because the denominator is greater. But we don’t expect us to exit the system anytime soon certainly not over the next 12 months. But we do expect to reduce our wholesale funding, and then we expect margin to improve a little bit on the heels of our asset mix as well. But that said, the liquidity compression on our NIM is going to continue.

John Aiken — Barclays — Analyst

Thanks for the color, Rod. I’ll re-queue.


Thank you. The next question is from Ebrahim Poonawala with Bank of America Securities. Please go ahead.

Ebrahim Poonawala — Bank of America Securities — Analyst

Good morning. I guess, just a question for Graeme around outlook on the impaired PCL. If I heard you correctly, you mentioned the expectation that these will go higher, as delinquencies rise. Kust talk to us, you mentioned 19% of the deferrals were again renewed in terms of deferrals. What was the process of granting that additional deferral, and your level of confidence that those borrowers because of this tech in deferral will go back to current. Just in terms of — there’s obviously a lot of concern around a cliff event when these deferrals difference come to an end. And want to get some perspective on what led to that additional deferral, and your thought process around the state of the consumer once the deferrals come to an end.

Graeme Hepworth — Chief Risk Officer

Sure. Thanks for the question. I think there is a few pieces there. One is counted on the deferral programs, and then two, kind of how that’s translating into expectations next year. I think there is a key piece to understand in terms of the deferral program or what we call the client treatment plan and how that was executed and rolled out to-date versus what we would expect after that program comes to an end.

And that’s certainly why I referenced kind of the — some of the operational pieces around that. And so the program we rolled out starting back in March was really a broad based program that was really there to support clients. It was not intended to really put a lot of friction into the system, and just really made it very much widely available. And that program on the retail side, as open and continues to be open until, I believe, end of September, and certainly ask Neil to jump in here after I finish, if he has got any further comment.

On the commercial side, that program came to an end in June. And so when we look at things like the early cohorts that we referenced here, and how there’s a portion of those were, they have extended their deferrals, again, that was really an option of the client discretion. So there wasn’t a lot of friction when it came to that. When the program comes to an end and the broad majority of these deferrals will come to conclusion in Q4.

On the retail side, I think the number there is 83% of them will conclude by the end of Q4 and commercial it’s — it’s something similar, then the program changes in a very dramatic way. And further deferrals or further actions with respect to the client will be very much be based on an individual conversation with the client, will be very much based on their circumstances. And so the future deferral that may happen there will be very different than kind of the pieces that we’ve seen up to date.

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So I would differentiate kind of what we saw in this quarter, in the early cohorts versus what we’ll see when we go into Q4 and the broad based program comes to an end. And that’s really tied to as we go into the next stage of this, we really want to get to that point, where we’re having a very deep conversation with our clients, we’re understanding their financial profile, what income they have, what their assets are, and how we can work to develop solutions for them and really keep them in a solid position to the extent possible.

The second part you kind of referred to is then what does this mean kind of going forward. I would again break that up into a couple of pieces. There is — when you look at delinquencies and impairments, certainly these deferral programs and the government support programs have suppressed delinquencies and impairments in this quarter. And I think that was something we kind of have had indicated last quarter. That was our expectation. I mean in Q4, I would say, you’ll start to see delinquencies increase, as these deferral programs end, but I think impairments will really start to kind of fall in a more material way kind of 90 days after — after the deferrals come to an end.

And so when we kind of look forward, we do see impairments really starting to rise in 2021, and so kind of peaking out kind of mid 2021. I’m saying this is all contingent on, this is based on kind of the current forecast we have out there, which are highly uncertain. And so that’s kind of give you a bit of background on what we’ve got to-date versus what and why we’re expecting kind of the timeline that we put forward. But maybe I’d invite Neil to add any further comments on that.

Neil McLaughlin — Group Head, Personal & Commercial Banking

Yeah. Thanks, Graeme. Maybe just to put some color on the point about the 19% that Graeme mentioned that had opted for a second deferral. Operationally what we did early on in the pandemic is, we created online tools just for ease of use and sort of operational efficiencies to allow customers to go online and then self-select a one month or two month deferral on these products digitally.

And so with those short term deferrals, the couple of things we saw, we saw because of the ease of it, some customers just did it out of abundance and prudence sort of making sure they had as much cash flow, as they — as they could, just given the uncertainty. And the other reality was some of these customers, they could have walked into a branch or called the contact center had a conversation qualified obviously for a six month deferral, they chose not to do that and went online for shorter term.

So when those shorter term deferrals came up and they did required it, then that would have counted as a — as opting for a second deferral. So I think some of that was operational. And I would just reiterate Dave’s point in his opening comments that this is a top priority for us. We’re reaching out to both our retail and our commercial clients. We’re getting really good response from both of them in terms of the support they’re getting and the advice they’re getting and we’ll continue to do that through the fall. And in Q4 and Graeme mentioned October really being the peak in which the deferrals will start to expire — when the majority of deferrals will expire.

Ebrahim Poonawala — Bank of America Securities — Analyst

Well, thank you.


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

Steve Theriault — Eight Capital — Analyst

Thanks very much, and thanks for Rod. Rod, thanks for the additional disclosure on the NIMs. Could you give us a little bit of an outlook to the extent possible in terms of both Canadian Banking and City National, and in particular, do you expect a very strong mortgage growth, which I expect you would tell us is going to continue at least in the short term despite the uncertainty if that strong mortgage growth. Do you expect that to weigh in any meaningful way in terms of mix on the Canadian margin?

David McKay — President & Chief Executive Officer

So thanks for the question. Rod will talk about NIMs, and Neil will talk about the mortgage growth.

Rod Bolger — Rod Bolger Chief Financial Officer

Sure. Thanks. Thanks Steve for that. So yeah, I would expect the impact to be muted going forward. I think the biggest drop was this quarter because we had the full three months of the interest rate cuts in the results. And when you think — you think through what the impacts are going to be going forward, the asset mix has certainly weighed on us this quarter in Canadian Banking. That should improve as credit card spending improves the balance of credit card, as a percent of total should improve, which would benefit the NIM.

Also I’ve mentioned the less wholesale funding, as our wholesale funding rolls down, we wouldn’t need to replace it with more expensive wholesale funding, given the strength in our deposits that we see over the medium term. So all of those factors should benefit us. And but we’ll see on a year-over-year basis, we’ll still see continued NIM compression. But on a quarter-over-quarter basis, it should be much more muted.

Same thing with City National. The biggest impact was this quarter. The next few quarters, we would expect it to stabilize as well. So I think looking at all things considered, such as that the wholesale funding should benefit us, the asset mix should benefit us. But on a period-over-period basis, the mortgage repricing is going to bring it down a little bit. So the impact should be muted. Neil on mortgage growth?

Neil McLaughlin — Group Head, Personal & Commercial Banking

Yeah. In terms of mortgage growth, we had — pre-pandemic, we had an awful lot of momentum. We’ve made I think, some really foundational changes last year and that really had a great start to the year. So in terms of outlook, yeah, high single digit for the rest of 2020. We do see that starting to soften next year, more sort of falling down into the mid single digit. We’re seeing good demand across the country. Some of that we’d say was — was really delayed from very low volumes in April, May, beginning of June. So some of that I would say, has been pushed back. But we see, I think a real productive market. We’re seeing really strong in Ontario, really strong in BC, two markets, where we have a really good footprint, really strong team.

So I think those would be kind of the outlook, and I guess, really just sort of the shape of that demand curve, which was really strong. In terms of our originations and commitments up until April and then pandemic just put everything to a screeching halt. And now we’ve seen that slingshot back to really take up some of that demand.

Steve Theriault — Eight Capital — Analyst

Thanks for that color. I guess, Neil, have you — you’re clearly taking share in real estate secured lending, but the decline in HELOC started a few years ago, and I noticed the last couple of quarters, it’s accelerating. Is there anything you can offer out there in terms of what’s driving that?

Neil McLaughlin — Group Head, Personal & Commercial Banking

Yeah. I mean it’s just really client advice in terms of — as rates have come down more and more clients are saying they want to lock into those lower rates. And so our advisors are talking to clients about that choice. And it’s we — it has accelerated to your point, and we think it’s good advice and makes that client that much more sticky.

Steve Theriault — Eight Capital — Analyst

Got you. Just more fixed versus floating.

Neil McLaughlin — Group Head, Personal & Commercial Banking

That’s right.

Steve Theriault — Eight Capital — Analyst

Thanks for that.


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 rotate back to the deferral stuff and on one hand, we see a pretty big decline in the mortgage balances that are deferring payment, but commercial was up a bit. I would have expected that to be down because the deferrals as I — periods as I understand they were three months not six months. What’s the — what’s going on there? Are you providing lot more extensions. And then in any cohort, I guess that’s coming off deferral, do you have any stats on how many are current versus extensions versus impaired?

Neil McLaughlin — Group Head, Personal & Commercial Banking

Yeah. Thanks for the question. It’s Neil. I’ll start. Yeah. Our — our deferrals for our commercial book were six months deferrals.

Gabriel Dechaine — National Bank Financial — Analyst


Neil McLaughlin — Group Head, Personal & Commercial Banking

And they were — yeah. So that’s what’s driving that. We have seen about 25% of the clients already roll off of those deferrals. Again, the bulk of those will come in October. Now of those clients, who are on deferrals, we have seen almost 30% of them still make payments. So we’re still seeing, I think some really good trends there.

And the other point I’d make, I think, qualitatively, as we’ve mentioned, we’re reaching out to these clients, I think we’re quite encouraged by the feedback we’re getting from clients and their ability to resume these payments. So whether it’s on mortgages and having clients ask if they can catch up on the payments they had deferred. And generally just more — little bit more strength than we would have anticipated as we started to follow up. But I don’t know, Graeme anymore –.

Graeme Hepworth — Chief Risk Officer

No. I think that’s the critical piece is that the program nature and such that — that’s why we haven’t seen the material decline there. But just to give context, again, some of the early proof points we have that we do expect those balances to dramatically shrink in Q4. Similar to retail, we’ll be kind of the early cohorts that we have that it is less than six months, which is much smaller here than was in retail. We saw it again very similar. There wasn’t anyone that re-opt in the deferral sense. But the deferral — the delinquency component of that was very small.

And then the second piece outside of deferral programs, which is what everyone is very focused on in a market context, we did have other parts of our client support program. And so one of those was we did provide clients with temporary increases to operating facilities — operating lines that they had. And so that was largely a three month program for us. We do have the read on that. Well, it was a small program. Almost all of that has now been repaid and clients have either didn’t use it, they no longer need it or paid down that — that incremental access — excuse me..

So — so again that’s just another data point there that gives us the comfort and confidence that these programs, these client support programs we put in place back in March are kind of meeting back down to much more manageable balances that we can now engage with clients on a more effective basis with.

Gabriel Dechaine — National Bank Financial — Analyst

Thanks. And my next question for Derek —

David McKay — President & Chief Executive Officer

We ask you to re-queue and we’ve got a bunch of –.

Gabriel Dechaine — National Bank Financial — Analyst

Yeah. Okay. All right.

David McKay — President & Chief Executive Officer

[Indecipherable] probably still over. So we’re going to give you some more time given the length of our speeches today.

Gabriel Dechaine — National Bank Financial — Analyst

Thank you.

David McKay — President & Chief Executive Officer

But so please re-queue, and we’ll try to get back to you.


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

Doug Young — Desjardins Capital — Analyst

Hi, good morning. Just back to Canadian Banking, and I guess, this is probably for you Neil. Pre-tax pre-provision basis earnings down 8%. We talked about the NIM compression and Rod talked a bit — about the outlook. Just wondering, what are the levers, do you have to pull here maybe on the mix or expense side to kind of support pre-tax pre-provision earnings because obviously modeling out our PCLs is a crapshoot. So just trying to figure out what are the levers you have to support this? Thanks.

Neil McLaughlin — Group Head, Personal & Commercial Banking

Well, I mean, I’ll speak a little bit in terms of some of the trends that are really impacting NIM and which ones we expect to stick around and which ones will be more transient. Rod mentioned interest rates. So we don’t — that’s going to be, obviously, that’s a big — biggest driver of the NIM decrease. And it’s going to be the — a factor that’s going to be in the book for quite a while.

On the pricing side, and we talked about our mortgage book and just mortgage growth there. We’re feeling better about the returns and the mortgage volumes of our bookings. So we’d say as that kind of rolls on, and if that market stays it’s still competitive, but we’d say a lot more constructive than it was that would help.

In terms of I think Rod mentioned in his opening comments, but definitely a transitory part of what’s impacting NIM is the credit card business. So as part of our client treatment plan, we also did offer all those balances that went into the cards treatment plan, a 50% reduction in the rate that they pay, as those credit card treatment plans roll off, that margin will reset and go back.

And then the other part Dave mentioned in his opening comments just about the velocity of spending by the consumer. So we’re starting to see that pick up. Our card services revenue has been impacted quite a bit. Obviously, as we — as clients aren’t spending, we’re not creating that — that interchange that credit card service fee revenue. So we still have a couple of categories like travel as an — obviously that are way down, dining is way down. We’re starting to see the everyday spend pick up and now we’re into a positive territory year-over-year.

So I think those are some of the things that — and then obviously just volumes. I think we’re feeling really good about the — our ability to capture deposits and and how clients make RBC their choice and whether that’s on — on the core deposit account or again, on the strength of the mortgage business.

And then the last one would be Rod mentioned, where we’re on our cost. We have had COVID costs in the quarter, which we think are mostly behind us, some incremental compensation costs. And then if we take out those COVID-related costs, we would actually have — have had negative NIE year-over-year. So cost is to Dave’s point will continue to be another lever.

Doug Young — Desjardins Capital — Analyst

And can you just quantify the credit cards reduction in rate and as that comes off that will have a positive impact on NIMs. Can you quantify how much that weighed on NIMs. Is it possible?

Neil McLaughlin — Group Head, Personal & Commercial Banking

Yeah. It was — if we look at that the credit card as a category both inclusive of the lower rate from the treatment plans, as well as the business mix, so our — having lower balances, and we’ve seen a lower revolve rate with more liquidity in clients accounts that made up over six basis points of the NIM decline.

Doug Young — Desjardins Capital — Analyst

Good. Thank you.

Neil McLaughlin — Group Head, Personal & Commercial Banking

Thanks, Doug.


Thank you. The next question is from Meny Grauman with Scotiabank. Please go ahead.

Meny Grauman — Scotiabank — Analyst

Yeah. Hi, good morning. Just a question on capital assuming no further spike in COVID, do you expect your CET1 to climb from here.How do you see the flight path?

Rod Bolger — Rod Bolger Chief Financial Officer

It’s Rod. I’ll take that Meny. Thanks. So I would expect us to have absence the downturn as you mentioned — if you will. I would expect this to be an upward trajectory with the exception of Q1 next year as the OSFI modification on the Stage 1, Stage 2 build starts to go back from a 70% relief to a 50% relief that would impact us, as would any migration from Stage 1, Stage 2 into Stage 3. As soon as it goes into Stage 3, there is no modification. It’s an immediate hit for either the 70% this year, 50% next year.

But absent that, our internal capital generation has been quite strong, and we expect it to continue to be strong. We saw a slight uptick in market risk. RWA this quarter as I mentioned in my comments, we would expect a little bit of relief next quarter on that and everything else should be equal. We took a big hit on pension with discount rate, I’m not sure how much lower the pension discount rate can go. So that shouldn’t have a big impact.

And I don’t see a whole lot of RWA migration, we took our big increase in Q2 with a modest one this quarter. Obviously, we’re planning for it, and we’re taking into our capital forecast, but it’s not going to be dramatic. So I would see a slight uptick in just about every quarter with the exception of the first quarter next year.

Meny Grauman — Scotiabank — Analyst

Thanks for that Rod. And just as a follow-up. So we’ve seen the biggest stress test ever and you’re at 12%. So what lessons do you draw from that. Is it reasonable to say that I mean, you entered this crisis with just too much capital. Would you agree with that statement?

David McKay — President & Chief Executive Officer

No. No. I would say no. We’re appropriately reserved that therefore — there was a lot of learnings from the first crisis that we went through 10 years ago. We needed more liquidity and more capital in the system. I think are — the investment we’ve made in risk management has helped, but we still have uncertainty ahead of us, right. We’re not out of this yet. We’ve got the fall to get through. We have re-contagion and therefore — the capital is not burning a hole in our pocket, so rest assured that we will allocate capital judiciously.

We have strong growth opportunities as you see with strong momentum in all — all our businesses, that will consume some capital. To Rod’s point even with our normal growth perspective and the momentum we have, we will likely have surplus capital that will build and we’ll be very careful with it.

And therefore if we carry excess capital for a couple of years and it depresses ROEs, I think that’s a good thing. I think the overall kind of perspective, as we’re going to remain somewhat defensive and careful through still what I think will be a fairly challenging year.

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Meny Grauman — Scotiabank — Analyst

Thanks for that.


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

Mario Mendonca — TD Securities — Analyst

Good morning. I want to sort of try to get to the heart of the matter on impaired credit losses. I think what we’re — we’re all trying to do is in asking the questions about the deferrals is make an estimate of where impaired PCLs could be. Graeme could you offer an outlook perhaps a range if you will, where impaired loan PCLs could be over the next few quarters?

Graeme Hepworth — Chief Risk Officer

Thanks, Mario. So maybe just a few comments. I’ll reiterate a bit of, I think some of the commentary I provided. I think certainly we’re facing a lot of uncertainty. And so I think in the face of all that uncertainty, we’re not inclined to provide a very specific forecast at this point in time is, I think there’s just too many factors that go into that.

I think the general guidance, I would provide and just to confirm what I said before, certainly the impaired loan situation and the PCL that come with that this quarter have trended down in large part because of all the deferral and government support programs that are out there. And I think that was kind of our — our view as to how this could play out last quarter, and I — we would expect a good part of that to continue to play out in Q4.

And that’s why we kind of really see the impaired situation really starting to kick in, in 2021 and really seeing it, it ramp up kind of through the first half and peaking kind of in the middle of 2021 next year. But it’s all very much contingent on again that the macroeconomic forecast plays out consistent or the reality plays out with the forecast that we’re operating under. But certainly, we don’t see kind of future downturns associated with COVID. And that the translation kind of that we have expected off the back of the macroeconomic situation is consistent with what we’re looking at.

So really difficult to put a forecast out there at this point in time and something certainly, as we work through Q4 and — and kind of get better transparency on the transition into delinquencies and impairments that I think we can have, let’s say say better conversations with that at this time — at that time.

Mario Mendonca — TD Securities — Analyst

Okay. Let me just go real quickly through. I think Rod you made the comment about one third of a review of probability of default was completed. I didn’t follow you there. What — what did you referred to when you said one-third?

Rod Bolger — Rod Bolger Chief Financial Officer

So we’re just — we’re talking about credit migrations. And so if you break that up into three broad chunks, the capital markets portfolio because of the kind of the real time information we get there on our clients because they’re public, we were certainly able to really reassess our credit ratings largely in Q2 to be consistent with the COVID-19 kind of environment.

Our commercial or mid market are smaller clients that are — that’s a more difficult assessment to make. We don’t have real time information on those clients. We don’t have the financial statements every quarter or Bloomberg’s to give us kind of the insights there. So that’s a longer process we go through with our clients. And so we’re working through that now, and so that’s the piece I said it’s about one-third done. To give you a context, we think RWA in that space could increase by CAD7 billion to CAD9 billion range, but we would expect that to happen kind of over the next six months. And so that kind of feeds back to Rod’s comments, but that’s kind of built into that — that plan in the forecast on the capital side.

And then the retail piece, the retail piece has been the side — it’s been — it’s been interesting. Well, certainly on one hand, we’re seeing those more distressed and challenged clients and then the downgrades happening there in our rating models. The flip side is the broader client base is seeing an upgrade there. And that’s just reflective of these cash balances and the lower spend that’s really improving their credit ratings. And so that’s really offset that piece of it.

And so over time, we would expect, there’ll be — to be some ratings migration and some RWA inflation on the retail side. But we really are seeing that play out over a much longer horizon now than we had originally expected. And so again to Rod’s comment, we expect that to be much more really absorbed through ongoing earnings.

Mario Mendonca — TD Securities — Analyst

Okay. Thank you.


Thank you. The next question is from Sohrab Movahedi with BMO Capital Markets. Please go ahead.

Sohrab Movahedi — BMO Capital Markets — Analyst

Yeah. Thanks. Graeme. I don’t know if you could give us some color on the deferrals maybe pick the mortgages as to geographic breakdown, number one, and vintage year the origination of those mortgages. And — and whether or not the 1% that you see have gone delinquent if that also follows the same kind of pattern or is there something a bit more specific for geography or your origination? Thanks.

Graeme Hepworth — Chief Risk Officer

Sure. Thanks for the question, I’ll provide a few dimensions. I don’t have all the pieces, you were asking about on that. But if you — if you look at — I think few things, we’re trying to make sure people are traveling with here is on one hand, appreciating that this — this large balance is 57 billion that because of the opening to that program that we really do expect that to compress to a much smaller, a much more manageable number, and we provided the proof point there around the early cohorts and what we’re seeing on that.

When you look at — you asked about the regional segmentation on that. The — you would see a bit of what you would expect kind of where — what we call we’re affected. So kind of the highest deferral rates would be in Alberta consistent with the kind of macroeconomic the kind of dual impact that Alberta is facing both with the pandemic and the impact on the oil and gas environment.

GTA would be next highest there, and again, that’s a reflection of two things, I would say. One is kind of a lot of the service economy that comes out of Toronto, but also kind of the higher level of home prices. And then on the lower side, you’d see Quebec and some of the other parts of Ontario outside of the GTA.

Other segments that we would look at, when you look at kind of investor versus — versus homeowner segmentations, we don’t really see a differential there in deferral rate, so that’s not really been a risk indicator at this point in time. And then you look at say condo and non-condo, condos, we’re seeing a lower deferral rate on. So those are skewing better from a risk perspective than non-condos right now. So those are some of the dimensions, I think we’re seeing. I might invite Neil though if he’s got any other kind of aspects he would want to call out here.

Neil McLaughlin — Group Head, Personal & Commercial Banking

Yeah. I think just two other points, I’d make is, if we look at the LTVs and the FICO scores on the uninsured book, I think that’s — that’s the place we take a lot of comfort in, in terms of the underlying risk. LTVs in the sort of the mid 50 — mid 50, sort of 56%, and then average FICO at 758. I mean these are strong credit clients with a lot of absorption capability.

The other thing we look at it just how long we know these clients and 75% of the clients, he would pay mortgage deferral have been clients for more than 10 years, another 20% somewhere between 3 and 10 years. So we know these clients well. There’s a lot of capacity in these transactions. And we have a good our history in terms of repayment from the FICO score. So I think that maybe the only other thing that I’d add to Graeme’s comment.

Mario Mendonca — TD Securities — Analyst

So just — just to — just to clarify, Neil, about 5% if 75 to 10 plus 20, I guess it’s 3 to 10, then about 5% is less than three year relationships?

Neil McLaughlin — Group Head, Personal & Commercial Banking


Sohrab Movahedi — BMO Capital Markets — Analyst


Neil McLaughlin — Group Head, Personal & Commercial Banking

That right.

Sohrab Movahedi — BMO Capital Markets — Analyst

Okay. And — and that the percentage that have gone delinquent they would follow the same geographic pattern as well the 1% that you say up on delinquent.

Neil McLaughlin — Group Head, Personal & Commercial Banking

I don’t have that breakdown at hand. So we’d have to follow-up with you on that.

Sohrab Movahedi — BMO Capital Markets — Analyst

Okay. Thank you very much.

David McKay — President & Chief Executive Officer

Thanks, Sohrab. We’ve got a couple of more to get to before we have to break here. So we’ll try to get a couple more in.


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

Mike Rizvanovic — Credit Suisse Canada — Analyst

Hi, good morning. I have two part question on the mortgage deferrals more of a high level question, but correct me if I’m too pessimistic here but. What is that 12% of balances currently in deferral. What is that settle somewhere in the 3% or 4% range in the next few months. How would you view that with respect to just the broader risk to the Canadian housing market if you get a lot of potentially foreclosed properties coming to the market.

And my follow-up to that is, if there was a perceived risk and things were — and there were legitimate concerns, should we be thinking about a cliff event or should we maybe be thinking about the likelihood that may be the banks get together with the government and perhaps figure out a way for a more gradual unwind of the problematic loans?

Graeme Hepworth — Chief Risk Officer

Yeah. Thanks for the question. I think just maybe to kind of level set on, I think some key pieces here that. There’s a lot of focus on a big cliff event here, but to me this is more just a transition from kind of one phase of how we’re going to manage with our — do with our clients on this to the next phase.

I think Neil brought up a pretty critical stat in his last comment there around the LTV. And so when we look at those deferral clients, they also, they have a very high FICO, which indicates a strong willingness to pay, and they have a very low LTV on average, So we have a LTV in the — in the kind of mid 50%. And so clients having — being distressed is going to be a critical challenge.

But our ability to work with them and work with the equity that they have in their homes, work with the income they have even it is diminished to make sure that we can reset and re-profile kind of a lending situation that works for him — them. But it’s also still consistent with our lending, standards and appetite really it’s going to be critical to helping prevent kind of the pieces I think you’re really worrying about and concerning yourself, which I think we all read about at the end of the day.

And so this isn’t really kind of a cliff event that goes from deferrals into some broad based set of foreclosures that there is a whole lot of tools in our tool kits and there is a whole lot of liquidity, cash, equity and income the clients have to work with that we can really extend this out over a much longer period of time and really not create that cliff event for the economy in a housing market that I think that you’re pointing to.

Mike Rizvanovic — Credit Suisse Canada — Analyst

And the — sorry the 3% to 4% that I mentioned is that something that you would see realistic, and I’m just trying to get a sense of at that level, would there be concerns on your end for just the overall sort of health of the housing market and confidence levels.

Graeme Hepworth — Chief Risk Officer

— one that I’m traveling with directly. So I have to think about that more specifically. But certainly the expectations that we’ve built in our macros don’t put us in a spot that we think the scenario you’re describing is one that we’re immediately worried about.

Mike Rizvanovic — Credit Suisse Canada — Analyst

Yeah. Okay. that’s helpful. Thanks.


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

Scott Chan — Canaccord Genuity — Analyst

Good morning. Graeme, you offered some advice on the perhaps impaired loans trajectory over the next few quarters. What about performing loans. Can you maybe kind of talk about some of the stuff that we should think about, and I don’t know if you have any guidance. I know, your coverage ratios are probably peer high right now, but any guidance on that front over the next few quarters would be — would be helpful?

Graeme Hepworth — Chief Risk Officer

Sure. Thanks for the question. Yeah. So I think what you’ve seen to-date and kind of what you expect going forward just a few comments there. So certainly, we took a substantial — took a substantial increase in our provisions and reset our ACL at a much higher level on performing loans in Q2. And that was really just reflecting the step change that we saw COVID- 19 came into play.

And to do that we undertook a lot of work to kind of reset the scenarios to make sure they were reflective of the COVID-19 world. We did a lot of work with our data and analytics and our model to make sure that they were capturing kind of the unique features and elements of the macroeconomic situation we’re facing reflective of two and including aspects like the serve and the government deferral program, the deferral pieces, et cetera.

And so we reset that in Q2. As we moved into Q3, I would say we — we didn’t take nearly the same level of provisions, and that’s a factor of a number of things. One, the macroeconomic situation in our forecast were largely consistent with what we laid out in Q2. We did increase our weights a little bit, so that goes the opposite direction, and it — it just reflects the uncertainty of how long this recovery could take. We did see a decline in balances, which would again influence the ACL down. And then the fourth factor was it’s just the credit side of it, how we factor that into our provisions this quarter.

It’s really that last piece that caused us to take any further provisions this quarter or let me get that, plus the — the scenario we’re weighting. And that was really just — that’s kind of, I would say fine tuning and reflecting the impact, these government programs and deferral programs have had on effectively suppressing some of the delinquencies. And so we want to make sure we continue to reflect that in our — in our reserves, particularly on retail.

And so when you go forward though, again, absent a real material change in one of those factors, we wouldn’t see us having to materially change our ACL on performing loans in a significant way. And as you roll out further over time, as we get much more certain of that economic recovery, assuming we are traveling along the path that we forecast now, we would expect that ACL to come down over time, but the timing of that is really difficult to kind of project. And then that’s really going to depend on how — how the macroeconomic situation and how the COVID situation plays out over 2021.

Scott Chan — Canaccord Genuity — Analyst

Thank you very much.

Nadine Ahn — Head of Investor Relations

Thank you, operator. We are going to turn it back over to Dave now. We are running out of time. Thanks everyone for your questions.

David McKay — President & Chief Executive Officer

Thanks, Nadine. Maybe I’ll summarize some of the key themes, some of which came out in our speeches, but not necessarily in the Q&A. One is, diversification of our business. Again, through a challenging time we saw the benefits of our diversified model. We had exceptionally strong results in our capital markets operation. We didn’t get to touch on that in the Q&A, but again helped us provide — our earnings buffer against any uncertainty around our credit position.

We saw very strong client volumes across our businesses, as you saw from the retail bank, mortgages, core banking, capital markets, institutional, trading, equities, credit trading, great DCM volumes. We saw very strong volumes on the lending and deposit side in City National and then — and very strong wealth management Canada performance.

So client activity remains strong. We continue to take a prudent market share, and it’s really the investment in technology, we’ve made. We have increased our channel capabilities. We’ve increased our risk capabilities, our analytics capabilities. And that investment in technology is playing through all our — all our capabilities, and it’s really started to, I think show the benefits particularly this quarter.

Strength and resilience of our balance sheet and our reserving and our risk management capability, I think was — was strongly represented this quarter. We’ve been very prudent. As I said, we’ve seen strong recovery so far in whatever it is a Checkmark or Swiss or whatever recovery scenario, you’re planning for. We’ve seen strong recovery, but we’re not all the way back to where we were pre-COVID obviously. And therefore, we’re taking a prudent view and that it may take one years or two years for us to get back to where we were before and recover all the jobs. And therefore with that uncertainty, with the uncertainty of re-contagion, we are being cautious.

We’re being cautious with the strength of a strong balance sheet, strong liquidity. And as a number of you asked, and the responses Graeme and Neil gave with the ability to work with clients and be patient. Amount of equity Canadians have in their homes is quite significant particularly those who have deferred payments with us. And therefore the ability for us to be patient and work with them, help them through this is a significant asset.

And therefore that combined with appropriate reserving for those situations that may not work out, we feel very good about where we’re, ability to continue to grow the business, continue to manage our franchise in uncertain times. So I think those are some of the themes that I want to reinforce. We really appreciate your questions and your comments. Thank you for attending our Q3 call, and we look forward to talking to you again in Q4. Thanks, operator. We’ll close the call.


[Operator Closing Remarks]


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