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The Bank of Nova Scotia (NYSE:BNS)
Q3 2020 Earnings Call
Aug 25, 2020, 8:15 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Philip Smith

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’s 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’ll 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 ViswanathanChief Financial Officer

Thank you, Phil. 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 the 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 $1.3 billion and diluted EPS was $1.04 for the quarter, which is in line with the last quarter.

On an adjusted basis, total PCLs of $2.18 billion increased $335 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 allowances have increased to $7.4 billion or approximately $2.3 billion in the last two quarters. Pretax pre-provision profit declined to 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. Noninterest 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 to 13 basis points of this decline. Margin compression was primarily driven by corporate and commercial loan growth, outpacing 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 a 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 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 internal capital generation partly offset by the impact of revaluation of the pension liability. Risk-weighted assets declined $15.6 billion or $11 billion net of foreign currency translation. The reduction was primarily due to lower organic growth. Business banking risk-weighted assets reduced by $10 billion, largely due to corporate repayments, while counterparty credit risk and CVA risk-weighted assets reduced by $4 billion from the prior quarter.

Credit migration increased with weighted assets by about $1 billion. Business banking unfavorable migration of $4 billion was offset by favorable retail migration of approximately $3 billion. Retail risk-weighted assets benefited from lower overall delinquency rates in each of the bank’s portfolios. Lower delinquency resulted from the impact of the government stimulus and the bank payment deferral 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 $433 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 over 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. Noninterest 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 $53 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 to more modest 10% year over year. On an impact 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 as the impact on future credit migration.

The PCL ratio increased by 208 basis points to 333 basis points. Revenue declined 16% year over year. Excluding the impact of divestitures, revenue declined 8% due to lower retail sales, given the 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 expenses were down 4%.

Moving to Slide 8, Global Banking and Markets. Record net income this quarter of $600 million was up $226 million or a strong 60% year over year. Quarter-over-quarter earnings were up 15%. 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 in repos and derivative-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 $332 million were up 6% year over year, driven by stronger sales, higher trading volumes and market appreciation.

This quarter, we were ranked No. 1 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 this the third consecutive quarter with positive operating leverage. Wealth management results remain supported by strong investment and 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 set follow are on an adjusted basis.

The other segment continued to see favorable contributions from asset liability management activities that improved net interest income. Adjusted net income declined $33 million due to lower investment gains and higher operating costs related to COVID-19. I will now pass the call over to Daniel Moore to review this.

Daniel MooreChief 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 $7.4 billion. That’s up from $5.1 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-offs through to a latter half of 2021. Turning to Slide 13. The bank reported provisions for credit losses of $2.18 billion in Q3, reflecting an increase of $335 million from the prior quarter.

The PCL ratio increased 17 basis points 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 estimate impact on future credit migration. The 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.

Tuning 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 structure 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 expert credit judgment to overlay model generative numbers in order to capture the impact of future credit migration. Performing loan provisions increased $277 million quarter over quarter.

Approximately 80% of this increase is related to international retail, and this reflects the items that we talked about earlier. More specifically, the increase 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’ve been incorporated into our outlook.

Our Customer Assistance Programs are working effectively. We can see this as our balances are declining delay and payment activity is high for customers exiting the programs. Approximately 90% of the remaining customer assistance balances are expected to exit the program 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 $42 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 $200 million of this exposure is in our credit card book. Furthermore, 96% of customers who have exited the program are current.

The delinquency rates are well below pre-COVID levels. Turning to international banking. Approximately $18 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 our 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 the rectifications. We have also doubled our collections capability to further mitigate any potential impact.

Approximately 90% of customers in international banking, who have exit 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.

The improvement was driven by international banking. And our net formations ratio also improved sequentially and was 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 are a key factor in our ACL calculations. Hence, we assumed elevated net write-off ratios through 2021, and these expectations have been incorporated into our $7.4 billion ACL balance. Looking ahead, we expect Q4 PCLs to decline below the levels supported 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. And 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 the 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 Stage 3 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. I’ll now turn the call back over to Brian.

Brian PorterPresident 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 prime time for all, but 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 keeping 90% of our branch network open. In addition, we had completed all divestitures which were part of our strategic repositioning. We are 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 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 reopening. 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 sales price. And Canadian auto sales posted a third straight month of recovery in July. In fact, just under half of the reduction in GDP due to the virus has been reversed. We are seeing that improvement reflected in our day-to-day banking with a 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 activities to continue for the balance of this year and for GDP growth to average 5.4% in 2021. In the Pacific Alliance, the delay 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 in Peru and 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 undeveloped 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 for the outlook in the Pacific Alliance. Slide 21 summarizes policy actions in our economic outlook for the Pacific Alliance.

Our current outlook which was updated after Q3 is for our returning deposited 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 returned 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 and taking advantage of record low rates to pay down corporate loan facilities and increased their available liquidity for future growth. The net result is a return to normal lending volumes and improved new issuance. I would now like to close my remarks by focusing on a few key areas from today’s presentation, which highlights the strengths 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 $7.4 billion, an increase of $2.3 billion over the last two quarters and now represent two and a half years of loan loss coverage. Roughly 90% of the increase in allowances is related to performing loans.

Our forward-looking indicators are weighed toward 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 moderating. In summary, we believe Q3 was the peak for the bank’s loan loss provision. 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 proven 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 expense management is critical.

As Raj highlighted, expenses declined across the bank quarter over quarter and year over year. Our productivity ratio of 51.4% is the lowest in 10 quarters. This reflects our commitment to expense management, our positioning in digital and our substantial investments in technology. In a very challenging environment, the bank has supported our customers, provisioned conservatively, demonstrated strong expense management and increased its 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.

Philip Smith

Thank you, Brian. We will now be pleased to take your questions. Please limit yourself to one question and then rejoin the queue to allow everyone the opportunity to participate in the call. Operator, can we have the first question on the phone, please?

Questions & Answers:

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 PoonawalaBank of America Securities — Analyst

Thank you. Good morning.

Brian PorterPresident and Chief Executive Officer

Good morning.

Ebrahim PoonawalaBank of America Securities — Analyst

I guess, my question both for Brian and Dan is just around, on one hand, on the Pacific Alliance countries. But talk to us in terms of which country are you most cautious around when you think about credit? You flagged the unsecured portfolio this quarter. Just tell us where we should expect a way you think the risk of being blindsided, our highest level of risk on credit is within the four countries? And if then, you could just add some color to your guidance for lower PCLs? Is there some cadence in terms of what we should expect impaired versus performing in the magnitude of the client we should anticipate? Thank you.

Brian PorterPresident 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.

Nacho DeschampsGroup Head, International Banking and Digital Transformation

Thank you, Ebrahim. Look, let me give you my perspective of where are we in the Latin American countries. As Brian mentioned, their economy started later than Canada. So there is a lag effect.

But we are already seeing clear sign that the Pacific Alliance countries are in a recovering path and following the positive trend we’re seeing in North America. Let me give you 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 levels.

So exports of mining in Chile are 13% year over year, which is very positive. In Peru and Colombia, a good way to see the recovery is the electricity consumption due to the lockdowns. There, electricity consumption went down significantly around 30% in both countries for more and they are reaching pre-COVID levels. So this shows that the economy is coming back.

And in the case of Mexico, Mexico is the ninth manufacturing exporter in the world. So manufacturing is a very important industry. And it’s really positive to see that half of the impact of COVID has been recovered as the U.S. economy has reopened and reactivation — the 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 physical muscle 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 to disperse up to 25% of their pension in Peru and 10% in Chile, which is a very material support of $20 billion in Chile and $10 billion in Peru that is helping former workers. So overall, there is a lag effect, but we are going to see an improvement in the comp. Maybe Dan, if you would like to answer also from a credit perspective.

Daniel MooreChief Risk Officer

Yeah, Ebrahim, you asked about outlook, where we go from here. I’d say in summary that we are at the high watermark, and we’re seeing the tides go out from here. In fact, we are going to see our total PCL decline significantly going forward. As I mentioned in my remarks, we see the total PCLs going below the number that we report in the Q2 results.

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 both at our net write-offs, sort of bottom-up data lead analysis. As well as our top-down macroeconomic forecast, which, as we indicated, remains skewed toward a 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 indicates that natural outline.

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 that came up from here. But we do view this quarter’s PCL as our high watermark. We see it decline substantially from here, and we’re well provisioned on the balance sheet to cover our current estimate of future net levels.

Ebrahim PoonawalaBank of America Securities — Analyst

Thank you.

Operator

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

Gabriel DechaineNational 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 people coming off of the deferrals that are current: 96%, Canada; 89%, International. Do you think that trend or that number is representative of what we should expect as there’s more expiries over the next few months? And then, second, in international, we see the percentage of deferral exposure that expired at 27% in International. I thought that would have been higher because a lot of the deferrals there were for four-month periods, which probably would have got us into Q3. Wondering if there were any extensions that you granted there or planned to in August?

Daniel MooreChief Risk Officer

OK, Gabriel, let me take that question and start it off, I’ll hand this over to Nacho for his view on IB. First of all, if you look at where we stand on the outlook on the deferral customer systems programs from here in Canada, I think the important thing to call out here is that the residual book that we have is 94% mortgages. So these are high-party mortgages with an average loan-to-value of 45%, high FICO scores is effectively a super prime of the business. So really, we are not very worried about that.

The residual portion of that portfolio is effectively a small piece of current, you mentioned that that was $200 million. And then, it’s prime auto. 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 in many of the geographies in international. And even within international, it was a bifurcation between some of the countries and how they operate the programs. So if you look at Peru, for instance, we’ve had a material decline in our balances of 40% versus some other countries, which such as Mexico, which entered later.

I’ll let Nacho give some additional color there.

Gabriel DechaineNational Bank Financial — Analyst

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

Nacho DeschampsGroup Head, International Banking and Digital Transformation

Sure. Let me tell you that I’m quite encouraged with these payment levels, close to 90% of the $6.5 billion that have exited from the Customer Assistance Programs because as Daniel mentioned, a large portion of that is Peru, which is mostly an unsecured portfolio. So it’s showing quite residues. And also, I would like to highlight that those that are not in deferral are paying at similar levels to pre-COVID.

So we expect, as you can see in this slide in the schedule, we’re going to have in August and September, the bulk of the deferrals program exiting. As you also highlighted, so regulators have extended the option for customers to participate in the Customer Assistance Programs as lockdown’s also extended in the region.

Gabriel DechaineNational Bank Financial — Analyst

I will probably have to follow-up off-line here. Thanks.

Operator

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

John AikenBarclays — 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 in the U.S. in terms of the outlook.

Can you give us some sense in terms of what changed on the international side between the two quarters? Obviously, part of that is what drove the increase in performing loans, but also commentary around how much that actually did drive the increase in cases this quarter, please?

Daniel MooreChief Risk Officer

Yeah. So as I referenced, in Canada, of course, and in the U.S., we follow those very closely. We’ve seen macroeconomic data that’s better on a q-over-q basis, and you’ll see that reflected somewhat in our forecast. Although I will note again here that we’ve overweighted our present scenarios versus our base case.

We continue to that. We continue to have a negative perspective so that we have conservative provisioning here. If you look at international, the change in the macroeconomic forecast there has been driven by the longer and extended impact of the 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 are substantially back or on an improving path to much of our international footprint.

But we were conservative in our provisioning and in our most affected countries took a negative outlook on these four GDP’s projections.

John AikenBarclays — Analyst

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

Daniel MooreChief Risk Officer

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

John AikenBarclays — Analyst

Understood. Thank you very much.

Operator

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

Steve TheriaultEight Capital — Analyst

Thanks. Thanks again for the disclosure on the Customer Assistance Programs. I may had asked 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 not a bad guess that 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 book that’s under deferral? And there’s $3.5 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 expiry is 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 compared the Stage 3 PCL. I mean, how should we think about, I guess, how conservative are you being? How should we think about that? And how concerned should we be about that international credit card book going forward?

Daniel MooreChief 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 forward GDP and macro economic forecast have sequentially gone worse. And that reflects our optimistic perspective.

And again, we’ve got some data that indicates and Nacho’s outlined, an improving situation in some of their footprint. But we’ve intentionally taken a worse GDP forecast. So this 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’re pretty broadly satisfied with the credit quality of our book. We had 27% of the portfolio is in deferral or still in deferral process. It’s performing in line with our expectations. 90% of these expired book as we started 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 90% of those programs off the books by the end of October 31, we estimate.

So as we’ve taken a look at this, we benchmarked ourselves carefully to our peers. And if we look at the PCL increase on a year-over-year basis, what we’ve done versus local and international banks were operating the same footprint. We’ve taken a PCL increase that’s in line with the group. And that’s not the sense of the fact that we have a business there that’s more indexed to commercial and corporate business, which, as you know, has a better experience and a lower default rate in new situations.

So we think we’re very well provided for as we look across the book. Maybe a different way to look at it and sort of impact the envelope math for you. If you look at our total credit portfolio that’s 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 a percentage of people that are currently payment or that will be expected to exit. So that’s a very good coverage ratio.

Brian PorterPresident 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 the economic development in Peru and Columbia are different.

You don’t have a big mortgage market. The mortgage market in Peru is in its nascent stage. And so if people rely on personal loans, which we adjudicate appropriately and the feeds 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 day-to-day life. This is — 40% of the economy in Peru is in informal. So people in a time of crisis tend to suck 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 deferral. So we are very encouraged about consumer behavior in our international book, and we expect that to continue.

Steve TheriaultEight Capital — Analyst

Thanks for the color to you both.

Operator

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

Scott ChanCanaccord Genuity — Analyst

Good morning. Two-part question for Nacho on international. I guess, you called out 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 is in the NIM in the quarter versus liquidity? Thanks.

Nacho DeschampsGroup Head, International Banking and Digital Transformation

So thank you. Look, let me give you my perspective on the performance of the quarter in general. As we have said, our earnings were low, mainly impacted by the elevated PCLs, and we have talked about that. But in terms of the soft 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 transaction and credit card fees that we expect will gradually increase. And we also experienced some margin compression, but I would like to highlight that this is mainly driven by $6 billion of excess liquidity due to government funding of the COVID assistance programs. And also due to the business mix, as you say, commercial growing much more faster than retail. Asset as deposit growth were strong q over q, our loans increased 4% driven by 8% growth in commercial and were flat in retail, and deposit growth was 4% strong in all the business lines.

So this is a positive trend that will reflect in future earning growth. I would also would like to highlight that our expenses also reduced 4% in line with our revenue reduction. And in fact, in the past two quarters, we have reduced $100 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 operating leverage is flat.

And I would like to leave you with three messages. First that we have to shape our footprint 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 ViswanathanChief Financial Officer

Let me just make a comment on NIM since you asked about it. Overall, I think say international NIM forecasting and trying to break it down this season is complicated. The number of diverse economies, we have inflation-driven pricing and so on. So a number of factors more than 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, in fact this quarter and 7 basis points when you look at it quarter over quarter. But having said that, international banking and 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 interest liquidity they’ve 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 the mix starts shifting back to what we would call normal levels where our retail growth will come back once customer activities comes back across the international banking footprint.

Scott ChanCanaccord Genuity — Analyst

That’s very helpful. Thank you very much.

Operator

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

Paul HoldenCIBC — Analyst

Thank you. Good morning. So I want to ask, I recognize your CET 1 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 side.

Any guidance or go on and quantify sort of the path forward, that would be helpful.

Raj ViswanathanChief 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 at 11.3%.

A couple of factors, good internal capital generation, although we had high loan loss provisioning and lower risk-weighted assets as we’ve got paydowns from particularly our corporate draws, which used up about 47 basis points of capital just last quarter. So we’ve seen some good come back about 20 basis points this quarter through the reduction in RWA in our business banking book and counterparty credit is also reduced because of — we had extreme levels of credit spreads that moved in Q2. Those have come back as well. That gave us about 12 basis points back.

So part of that is, certainly, as you look forward, in this quarter, we absorbed migration of about $4 billion relating to our business banking book. And we actually saw some positive or favorable credit migration when you look at the retail book. And there are a few factors that are influencing that. Lower delinquency rates in each of the bank’s portfolio.

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 seated programs that have been in place, particularly in Canada as so is global 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 tests, 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 see, excluding this course of migration, which has already gone from business banking. We think it would 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-offs are really going to come in, 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 our normal growth rate. And that should help us and 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’ll give a better understanding of how this might play out until Q1, Q2 and the rest of next year.

Paul HoldenCIBC — Analyst

That’s very helpful. Thank you.

Operator

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

Doug YoungDesjardins 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 you changed your scenarios or your FLI. And so I just want to understand better how you went about looking at this migration? Is this 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 MooreChief Risk Officer

Yeah, thanks, Doug. So you’re absolutely right. The credit quality has driven a swing in PCLs on a quarter-to-quarter basis of about $350 million. Whereas in fact, on a quarter-to-quarter basis, if the macroeconomic or FLI was, in fact, down about $50 million.

So this quarter has really been all about seeing the impact the structural impact of this portfolio — of this impact on our retail portfolio and our corporate and 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 and the quality of that into our estimates going forward. And you’re right, in order to make that assessment, we’ve had to execute significant extra credit judgment in order to make that happen because the macroeconomic factors, we haven’t — we don’t have employment driving income levels anymore, we have Customer Assistance Programs, in many cases driving income levels. So what we use that as an overlay in terms of thinking about how we look at net write-offs going 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 by incorporating that top-down data that bottom-up real experience of our customers, as well as particularly in IB, looking at the outside perspective from our peer group.

Doug YoungDesjardins Capital Markets — Analyst

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

Daniel MooreChief 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 are related largely to the unsecured book of business, which have shorter deferral periods. So we had about 60%, about two-thirds of our expiries in Canada relate to the unsecured book of business.

Now in cards, we’re down to $200 million. So if you look at the impact of that on PCLs, which is really what we’re all 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 very low LTVs. So while we’ve taken appropriate pessimistic perspective on the overall provisions, we have high confidence in the high watermark statement we made before.

Doug YoungDesjardins Capital Markets — Analyst

And then, just lastly, the credit card booked $3.5 billion in international that’s on deferral. You said that there’s a good chunk that’s still current in making payments. Can you quantify like how much of that is — how much of those clients are still making payments?

Daniel MooreChief Risk Officer

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

Doug YoungDesjardins Capital Markets — Analyst

But you haven’t quantified that.

Daniel MooreChief Risk Officer

Sorry, what?

Brian PorterPresident and Chief Executive Officer

You are talking about customers in deferrals is your question. Yeah, we’ve seen around one-third of our customers that remain — continue to pay even when they are in the deferral.

Doug YoungDesjardins Capital Markets — Analyst

OK, great. Thank you.

Operator

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

Darko MihelicRBC Capital Markets — Analyst

Hi. Thank you. I’m going to stick with Dan. And just follow-up here in 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, when I look at the last — the current fall in the thorough expiry.

If I think about mortgages, somebody who’s off expiry has come up early. So they probably didn’t need the deferral anyway. When I think about credit cards and personal loans, and you’ve got a high current fall in 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’re still an employed and service being wound down, can you provide some insight as to how many people in that mortgage book are unemployed, have served and potentially other loan balances where they would have difficulty making those payments once that big deferral of the mortgage comes due. And maybe perhaps provide some data on this credit card, you say they’re current, but how many are actually making full payment versus minimum payments? Thank you.

Daniel MooreChief Risk Officer

Yeah, so on the card report at the end of your question there, we still have about 70% of our portfolio maintaining current position on the current balances in Canada. And that’s consistent with our experience through this since the start of this. So the quality of that remaining card portfolio, although, as I said, we are down to $200 million, has remained consistent from the payment perspectives. Your questions really revolves around what happened on the transition.

Some of these government assistance program roll off in late now October, given the additional extension that we’ve had in Canada and transitioning into the revise the I assistance programs that we have in Canada now that were recently announced, and that a significant $37 billion of assistance in Canada. And here significantly, that has been extended not only to those on sick leave, for instance, but also to those that only have 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 addresses many of the questions we had prior about some of the challenges about transition off those certain payments going forward.

You’re right that the bigger portion of the payment amount is in the mortgage portfolio. But here again, I know it’ll come back to — I think what we’re all focused on today is the provisions prevalence outlook. And when we’re dealing with a mortgage portfolio that’s super prime effectively and is a 45% LTV, we don’t see significant impact.

Dan ReesGroup 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 deferrals.

So in general, our mortgage book sits around 800, and those in deferral are about 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 repayment 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 MihelicRBC Capital Markets — Analyst

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

Dan ReesGroup 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, while significant, is not in comparison with the rest of their credit capability. So when we look at that tail, if you like, we get comfort, especially to Daniel’s point around LTV, should the consumer decide that they’re not capable of continuing, the mortgage will move and we will exercise our right. That is a possibility.

On the mortgage side in international, Nacho?

Nacho DeschampsGroup Head, International Banking and Digital Transformation

Well, what I would say in international is that 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.

A 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 asset portfolios from the assistant 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, $1 billion in two quarters in international banking.

And our ACL today is more than two times our net rise of last year. So we feel we’re well provisioned with the information we have today.

Brian PorterPresident 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 give a lot of color here, but the relief 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 a good policy or bad policy. But that’s close to the government of Canada saying you can take $100,000 tax-free out of your RSP to get on with your life.

These are big, big programs for these countries and will bode well for consumers in terms of how they handle it. I think — so I just wanted to emphasize that.

Nacho DeschampsGroup Head, International Banking and Digital Transformation

Yeah, they represent two to three times the monthly income of average working in these countries, so they’re quite material.

Darko MihelicRBC Capital Markets — Analyst

OK, thank you.

Operator

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

Mike RizvanovicCredit 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 the international business post dispositions, I think the number was $525 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.

Nacho DeschampsGroup Head, International Banking and Digital Transformation

Look, thank you for your question. 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, a 250 million of population, lower 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 that these targets for international banking, has 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 RizvanovicCredit Suisse — Analyst

OK, thanks for the color. I had a really quick numbers question as a follow-up. On the Customer Assistance Program 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 ReesGroup Head, Canadian Banking

Hi. It’s Dan Rees here from Canadian Bank. 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 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 RizvanovicCredit Suisse — Analyst

Thanks very much. Appreciate it.

Operator

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

Mario MendoncaTD 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 that that kind of credit migration contemplated that it would have had a similar effect on book quality.

Specifically, what I’m getting at is, I would have expected the probability of default to have moved materially higher across your loan book, including consumer, but there does appear to be a disconnect then between what you’re building in from a credit perspective 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 and defaults across all your loan books, corporate, commercial and consumer, are those still to come in subsequent quarters? Or are you done?

Raj ViswanathanChief 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 pack, correct?

Mario MendoncaTD Securities — Analyst

Yes.

Raj ViswanathanChief Financial Officer

OK, yeah, so yes, the capital will lag, like I mentioned earlier, because of these different programs. It started as far as business lending goes. I mentioned we took $4 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 requirement. 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 a lower PD, I should say, or a high PD and a lower quality, as well as if they’ve entered the impairment, and that will reflect in the capital, which is why I said about 40 basis points could be the impact on migration to an earlier question, but that will come through, I would say, early part of 2021 as these programs play. But you’re right, it’s a large effect.

Mario MendoncaTD Securities — Analyst

So what I’d 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 to later. Is that correct?

Raj ViswanathanChief Financial Officer

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

Daniel MooreChief Risk Officer

And this is Dan here —

Mario MendoncaTD Securities — Analyst

And you wouldn’t expect much — sorry. Go ahead.

Daniel MooreChief Risk Officer

No, Daniel here. We’ve gone through it, and we’ve taken a full bottom-up position in the whole corporate commercial portfolio. And we raised everything that’s in there and necessary. We found, frankly, only 4% of our portfolio needed rerating and all that 80% was only one credit notch.

So that shows the resiliency of our portfolio, which as you know, is 85% investment grade. So that’s performed very well. Very pleased with that.

Mario MendoncaTD Securities — Analyst

And Dan, your comments there, specifically related to corporate and commercial?

Daniel MooreChief Risk Officer

Yes.

Mario MendoncaTD Securities — Analyst

Thank you.

Operator

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

Sohrab MovahediBMO Capital Markets — Analyst

OK, thanks. Just wanted to go back to Nacho. Get a sense, Nacho, as to what — if any changes have been made to risk appetite toward business in the region where the growth is likely to come, and whether or not there has been a shift? And does Dan’s forward-looking for an expert judgment assume a skew toward more of a secured book? Or is it more of the same and whether or not, from a business perspective, the trends in expense management that you have highlighted can persist or are they in there to test to how much lower expenses can go from here in the international segment, in particular? Thank you.

Nacho DeschampsGroup Head, International Banking and Digital Transformation

Thank you. Thank you very much, Sohrab, for your question. Well, 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 the retail secured business. They are more resilient to the recession.

Since economies are back to a growth path. But eventually — as we have mentioned before, eventually, we expect that both segments 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 risk appetite we gradually adapt also to the conditions of the markets.

I would like to say that there is a significant digital acceleration. We have been able to help our customers experience in a very difficult circumstances, accessing their bank, their accounts remotely. And therefore, this is helping us invest and achieve 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 this trend and the track record we have in solid expense management, Sohrab.

Daniel MooreChief Risk Officer

And so on your question on factoring in the changes, the strategy that naturally looking at margins going forward. We’ve not factored any of that into our extra credit judgment. We’ve run it off the current portfolio as is.

Sohrab MovahediBMO 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 stuff would be an improvement, so to speak, relative to where your quality estimates are.

Daniel MooreChief Risk Officer

Yes. The improvement versus base case estimates today. That is correct.

Sohrab MovahediBMO Capital Markets — Analyst

OK, thank you.

Raj ViswanathanChief Financial Officer

OK, 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 signoff]

Duration: 77 minutes

Call participants:

Philip Smith

Raj ViswanathanChief Financial Officer

Daniel MooreChief Risk Officer

Brian PorterPresident and Chief Executive Officer

Ebrahim PoonawalaBank of America Securities — Analyst

Nacho DeschampsGroup Head, International Banking and Digital Transformation

Gabriel DechaineNational Bank Financial — Analyst

John AikenBarclays — Analyst

Steve TheriaultEight Capital — Analyst

Scott ChanCanaccord Genuity — Analyst

Paul HoldenCIBC — Analyst

Doug YoungDesjardins Capital Markets — Analyst

Darko MihelicRBC Capital Markets — Analyst

Dan ReesGroup Head, Canadian Banking

Mike RizvanovicCredit Suisse — Analyst

Mario MendoncaTD Securities — Analyst

Sohrab MovahediBMO Capital Markets — Analyst

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