Royal Bank Of Canada

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 Arndt, Head of Investor Relations. Please go ahead, Nadine.

Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer, Rod Bolger, Chief Financial Officer, and Graham 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 INTS, and Derek Nelner, 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 could 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 review. With that, I'll turn it over to Dave.

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 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 has 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 the 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 reopen 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 $3.2 billion, our strong pre-provision, pre-tax earnings of over $4.7 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 $1.5 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 CT1 ratio of 12% now provides a $16.5 billion buffer over the current regulatory minimum of 9%. This is in addition to over $6 billion in allowances for credit losses. Our internal stress testing suggests that even under a severe pandemic scenario, our capital levels will remain well above the 10% minimum set by OSFI prior to the pandemic. It's important to remember that our businesses have already experienced a stress event 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 cardholders 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 resilience, partly reflecting pent-up demand and low interest rates. We recorded 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 is 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 emphasis on the quality of the borer, 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 3 million job losses since or seen in March. We've outperformed the U.S. 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 programs 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 helpful. 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. Graham 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 continued to open following the extraordinary intervention by Global Central Bank last quarter, we supported significant client financing demands, 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 Company's $1.8 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 marked 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 businesses maintain their number one position in Canada, and RBC Global Asset Management surpassed $500 billion in assets under management for the first time as our clients continue to trust us with their assets throughout the cycle. And our U.S. wealth management also performed well, with assets under administration rising to a near record high in U.S. dollar terms. Citi National continued to see very strong loan growth, with loans nearing $50 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 and 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 the 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 multi-year investments in digital and analytical capabilities in our custody business. We are seeing increased client deposits as mid-sized global asset managers face challenging conditions. To sum up, we are pleased with our results this quarter. Our strong performance has its origins in 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 the global financial crisis, we exited a branch-heavy U.S. footprint and instead focused on consolidating our lead in Canada and growing our U.S. 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 and 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 a creative 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 decisions. And knowing our clients well is also of great value 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 U.S., where we are well-positioned to capitalize on our investments and the synergies across our capital markets, wealth management, and Citi National platforms. In the U.S., wealth management platform, including Citi National, we expect to benefit from the growth of our jumbo mortgage portfolio, our recent expansion into new geographies, and the 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 in 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 make 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 addresses 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 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 FTSC-4 Good Index, which measures the performance of companies demonstrating strong ESG practices. This year, our percentile ranking among the banking sector rose to the 98th percentile. And with that, I'll pass it over to Rod.

Thanks, Dave, and good morning, everyone. Starting on slide seven, we reported earnings of $3.2 billion and EPS of $2.20, while absorbing $675 million of provisions for credit losses. Pre-provisioned pre-tax earnings of $4.8 billion were up 6% from last year, largely driven by significant strength in capital markets with solid growth in our insurance and our non-U.S. 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 8 and 9, we reported strong CE2 on ratio of 12% of 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 paydowns 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 and 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 and our credit portfolios. This quarter, we recorded a further $2 billion of credit downgrades. adding to the over $9 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 downgrades flowed materially this quarter. We did see a slight deterioration in our Canadian commercial portfolios, and we expect the 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 CEQ1 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 a further meaningful economic downturn, we expect our CEQ1 ratio to remain at approximately 12% by the end of the first quarter of 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 points shock would have a negative impact to our revenue of over $600 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 $146 billion from last year. Our elevated LCR translates into a surplus of $127 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 on deposit margins was the largest driver of the depression 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 looming 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 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. 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 Citi National, where NIM was down 33 basis points relative to last quarter, the impact of lower interest rates on low yields was more pronounced given the structure of the balance sheet where 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, and we'd 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 costs added over $90 million of expenses in the quarter to from special compensation costs for certain employees and increased cleaning. In contrast, marketing and travel costs were down $90 million as part of a 16% reduction in discretionary expenses from last year. On a segment basis, Canadian banking limited expense growth to less than 2% year over year. Excluding COVID-specific costs, Canadian banking expenses would have declined 2% from last year. Both insurance and INCS expenses were down 6% from last year, And despite higher variable compensation, both capital markets and our non-U.S. wealth management businesses reported positive operating leverage. U.S. wealth management expenses were up 12% year-over-year in U.S. dollars, or less than 3%, excluding the impact of our U.S. share-based compensation plan. And we expect Citi National's expense growth to continue to slow over time following 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 in 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 and commercial banking reported earnings of $1.4 billion. Canadian banking net income was $1.3 billion with pre-tax, pre-provision earnings of $2.3 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 $562 million. Pre-provisioned pre-tax earnings of $803 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 U.S. institutional and Canadian retail flows and constructive equity and bond models. Canadian retail 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 Citi National was more than offset by lower interest rates, Loan balances increased $11 billion, a 29% year-over-year in U.S. dollars. Loan growth, excluding the impact of Triple P loans, was still up a very strong 17%. City national deposits were up $17 billion, or 38% from a year ago. We also saw strong growth in our U.S. private client group with AUA up $28 billion in terms of U.S. from a year ago. The revenue benefits for very strong volume growth in our U.S. 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 in Citi National, mark-to-market team capital gains in global asset management, and our deferred compensation plans in U.S. wealth management, a partial reversal of last quarter's losses. On slide 13, we discussed our insurance segment, which provides an important diversified source of earnings that is less exposed to spread revenue and credit risk. Net income of $216 million increased $12 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 $76 million. As we guided in May, results were particularly challenged 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 results do not reflect our expected run rate going forward. In contrast, our asset services custody business had a solid quarter as FX revenue benefited from increased client activity resulting from volatility in FX markets and lower expenses driven by disciplined cost management initiatives. Turning to slide 15, capital markets reported record earnings of $949 million. Pre-provision, pre-tax earnings of $1.3 billion were 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 $1.1 billion, partly due to recoveries in loan underwriting marks as we were able to sell off yields 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 sheets and the stability of their operations, we have seen debt underwriting activity begin to slow. We have also seen material paydowns of previously drawn credit facilities. Global markets also had a very strong quarter with revenue up 60% from last year to $1.8 billion. Record performance in FIC was underpinned by strong credit trading, which benefited from narrowing credit spreads. Race 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 Graham. 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 forecasts that were generally unchanged from last quarter, so we did see some improvement in our equities, oil, and housing price forecasts. 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 as a number of government support and payment deferral programs roll off. Overall, our ECL 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 and 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 and 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 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 U.S. wealth management, including the write-off of one account at City National in the industrial product sector. Turning to slide 19, growth-impaired loans of $3.9 billion was up $328 million, or six basis points from last quarter, reflecting higher impairments 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 staples 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 utilities and oil and gas sectors and higher rate-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 unimpaired loans and 46% of impairment 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 acceptance is outstanding. This segment remains under pressure due to ongoing physical distancing measures and the rise of online activity. Due to headwinds that predate 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 rent collections continue 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 five to 10 years. Again, our underwriting standards have been strong, with less than 2% of our profit portfolio, having both an LPV 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 LPVs, 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 have 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 provides 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 resumed regular payments, 19% have extended their deferral period for an additional two to three months, generally not exceeding a six-month deferral period, and only 1% have become delinquent. Additionally, we have seen clients continue to make payments during their deferral period. When we view this as 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 will 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 lost 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. With a 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 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 58% to 1.7 billion, it contributed to a steady decline in VAR through the quarter. To conclude, our PCL and 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 and 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.

Certainly. Thank you. If you have a question and you're using a speakerphone, please lift your hands up prior to making your selection. If you have a question, please press star one on your device's keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while the participants register. Thank you for your patience. The first question is from John Aiken with Barclays. Please go ahead.

Good morning. Rod, in your commentary, you discussed the enterprise-wide liquidity to a fair extent. 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?

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 Bank of England and ECB continue to flush liquidity. 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 will 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 you don't expect this 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. Thanks for the call, Rod. I'll read to you.

Thank you. The next question is from Ibrahim Punawala with Bank of America Securities. Please go ahead. Good morning.

Good morning. I guess just a question for Graham around outlook on the impact if I heard you correctly. You mentioned expectations that these will go higher as delinquencies rise. Just talk to us. You mentioned 19% of the deferrals were, again, renewed in terms of deferral. What was the process of granting that additional deferral and your level of confidence that those borrowers, because of this second deferral, We'll go back to current just in terms of there's obviously a lot of concern around a cliff event when these deferrals 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.

Sure. Thanks for the question. I think there's a few pieces there. One is kind of around the deferral programs and then two and how that's translating into expectations next year. I think there's 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 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 is open and continues to be open until, I believe, the end of September, and I'll ask Neil to jump in here after I finish if he's got any further comments. 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 proportion of those where they've extended their deferrals, again, that was really an option of the client's 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 something similar. Then the program changes in a very dramatic way, and further deferrals or further actions with respect to the client will very much be based on an individual conversation with the client, will be very much based on their circumstances. And so the future deferrals that may happen there will be very different than kind of the pieces that we've seen re-up to date. So I would really differentiate kind of what we saw in this quarter in the early cohorts versus what we will see when we go into Q4 and the broad-based program comes to an end. And that's really tied to, you know, as we roll 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 needs. their financial profile, you know, 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 pieces. When you look at delinquencies and impairments, you know, certainly these referral programs and the government support programs have have suppressed delinquencies and impairments in this quarter. And I think that was something we kind of had indicated last quarter. That was our expectation. In Q4, I would say you'll start to see delinquencies increase as these deferral programs end. But I think, you know, impairments will really start to kind of fall in a more material way kind of 90 days 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 all contingent on, you know, this is based on kind of the current forecast we have out there, which are highly uncertain. And so that's going to give you a bit of background on what we've got to date versus what and why we're expecting kind of a timeline that we put forward. But maybe I'd invite Neil to add any further comments on that.

Yeah, thanks, Ben. Maybe just to put some color on the point about the 19% that Graham 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 efficiency to allow customers to go online and then self-select a one or two-month deferral on these products digitally. And so with those short-term deferrals, a couple things we saw. We saw because of the ease of it, some customers just did it out of abundance and prudence, sort of, you know, making sure they had as much cash flow 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 a shorter term. So when those shorter-term deferrals came up and they did requirements, then that would have counted 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, You know, this is a top priority for us. We're reaching out to both our retail and our commercial clients. We're getting a 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 Q4. And Graham mentioned October really being the peak in which the deferrals will start to expire or when the majority of referrals will expire.

Thank you.

Thank you. The next question is from Steve Carrier with 8 Capital. Please go ahead.

Thanks very much. I think for 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 Citi 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's strong mortgage growth, do you expect that to weigh in any meaningful way in terms of mix on the Canadian margin? So, thanks for the question. Rod will talk about NIMS, and Neil will talk about the mortgage growth.

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 last And when 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 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, but we will 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 Citi 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. Yes, it 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?

Yeah, in terms of mortgage growth, we had pre-pandemic, we had an awful lot of momentum. We'd made, I think, some really foundational changes last year, and that really had a great start to the year. So in terms of our 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. You know, we're seeing good demand across the country. Some of that we'd say 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 D.C., Two markets where, you know, we have a really good footprint, really strong team. So I think those would be, you know, kind of the outlook and I guess really just sort of the shape of that demand curve, which was, you know, really strong in terms of our originations and commitments up until April. And then, you know, pandemic just put everything to a screeching halt. And now we've seen that slingshot back to really take up some of that demand. Thanks for that, Colin. I guess, Neil, while I 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 quarters it's accelerating. Is there anything you can offer up there in terms of what's hurting that? Yeah, I mean, it's just really client advice in terms of as rates have come down, more and more clients are saying, you know, they want to lock into those lower rates. And so, you know, our advisors are talking to clients about that choice. And, you know, it has accelerated to your point. And we think it's good advice and makes that client that much more sticky. Gotcha. Just more fixed versus floating. That's right. Thanks for that.

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

Good morning. I want to rotate back to the deferral stuff. 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 periods, as I understand it, were three months, not six months. What's going on there? Are you providing a lot more extensions and then You know, in any cohort, I guess, that's coming off deferral, do you have any stats on how many are current versus extensions versus impaired?

Yeah, thanks for the question. It's Neil. I'll start. Yeah, our deferrals for our commercial book were six-month deferrals. Okay. 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, you know, some really good trends there. You know, and the other point I would make, I think, qualitatively, as we 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, you know, ask if they can catch up on the payments they had deferred, and generally just more, a little bit more strength than we would have anticipated as we started to follow up. But I don't know, Graham, any more?

No, I think that's the critical piece is that the program nature is such that that's why we haven't seen the material decline there. You know, 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, the kind of the early cohort that we have there that is less than six months, which is much smaller here than was in retail. You know, we saw, again, very similar – well, there wasn't anyone that re-upped in the deferral sense, but 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 or operating lines that they had, and so That was largely a three-month program for us. We do have the read on that. While it was a small program, almost all of that has now been repaid, and clients have either didn't use it and no longer need it or have paid down that incremental access. So, again, that's just another data point there that gives us that 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.

Thanks. And my next question for Derek.

Can we ask you to re-queue? Yeah, okay. We probably won't go over, so we're going to give you some more time given the length of our speeches today. Thank you. So please re-queue. We'll try to get back to you.

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

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 other levers do you have to pull here, maybe on the NICS or expense side, to kind of support pre-tax, pre-provision earnings? Because obviously modeling out PCLs is a crapshoot, so I'm just trying to figure out what other levers you have to support this. Thanks.

Well, maybe 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. That's going to be, obviously, the biggest driver of the NIM decrease, and it's going to be 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 returns on the mortgage volumes we're booking. 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 it 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 are starting to see that pick up. Our card services revenue has been impacted quite a bit. Obviously, as clients aren't spending, we're not creating that interchange, that credit card service fee revenue. So we still have a couple categories, like travel, obviously, that are way down, dining is way down, but 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 they're obviously just volumes. I think we're feeling really good about our ability to capture deposits and have clients make RBC their choice, and whether that's on a core deposit account or, again, on the strength of the mortgage business. And then the last one would be, Rod mentioned, where we are on our cost. And 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 had negative NIE year over year. So cost at today's point will continue to be another lever.

And can you just quantify the credit card reduction cost? in rate, and as that comes off, it'll have a positive impact. Can you quantify how much that weighed on NIMS? Is it possible?

Yeah. If we look at the credit card as a category, both inclusive of the lower rate from the treatment plans as well as the business mix, so just having lower balances, and we have seen a lower revolve rate with more liquidity in client accounts. That made up over six basis points of the NIMS decline. Great. Thank you. Thanks, Doug.

Thank you. The next question is from Manny Grumman with Special Bank. Please go ahead.

Yeah, hi. Good morning. Just a question on capital. Assuming no further spike in COVID, do you expect your CT1 to climb from here? How do you see the flight path?

It's Rod. I'll take that, Manny. Thanks. So I would expect us to have – absent the downturn, as you mentioned, if you will, I would expect this to be on an upward trajectory with the exception of Q1 next year as the OSPI modification on the Stage 1, Stage 2 bill 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's no modification. It's an immediate hit. for either the 70% this year or the 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 the 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.

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 you entered this crisis with just too much capital? Would you agree with that statement?

No. I would say we're appropriately reserved. There was a lot of learning from the first crisis that we went through 10 years ago. We needed more liquidity, more capital in the system. I think the investment we've made in risk management has helped, but But we still have uncertainty ahead of us. We're not out of this yet. We've got the fall to get through. We have pre-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, and all our businesses that will consume some capital. To Rod's point, even with our normal growth perspectives and the momentum we have, we will likely have surplus capital that we'll build and we'll be very careful with it. And therefore, if you carry excess capital for a couple years and it depresses ROEs, I think that's a good thing. I think the overall kind of perspective is we're going to remain somewhat defensive and careful through still what I think will be a fairly challenging year.

Thank you. The next question is from Mario Mandanca with GD Securities.

Please go ahead. 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 all trying to do in asking the questions about the deferrals is make an estimate of where impaired PCLs could be. Graham, could you offer an outlook, perhaps a range, if you will, of where impaired loan PCLs could be over the next few quarters?

Thanks, Mario. So, just a few comments. I'll reiterate a bit of, I think, some of the commentary I've provided. You know, I think certainly we're facing a lot of uncertainty, and so I think, you know, in the face of all that uncertainty, we're not inclined to provide a very specific forecast at this point in time. I think there's just too many factors that go into that. You know, I think the general guidance I would provide, and just to confirm what I said before, you know, certainly the impaired loan situation and the PCL that come with that this quarter is you know, trended down in large part because of all the deferral and government support programs that are out there. And, you know, I think that was kind of our view as to how this would play out last quarter. And we 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 ramp up through the first half and peaking kind of in the middle of 2021 next year. But it's all very much contingent on you know, again, that the macroeconomic forecast plays out consistent, or the reality plays out with the forecast that we're operating under, that 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 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 hopefully a better conversation with that at that time.

Let me just go real quickly to, I think, Raj, you made the comment about one-third of a review of probability of default was completed. I didn't follow you there. What did you refer to when you said one-third?

So we were talking about credit migrations, and so if you break that up into three broad chunks, The capital markets portfolio, because of the kind of real-time information we get there on our clients because they're public, you know, 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, our mid-market, our smaller clients, that's a more difficult assessment to make. We don't have real-time information on those clients. We don't have financial statements every quarter or Bloombergs to give us kind of the insights there. It's not the longer process that we go through with our clients, and so we're working through that now, and so that's the piece I say is about one-third done. To give you context, we think RWA in that space could increase by, you know, $7 to $9 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 that that's kind of built into that plan and the forecast and the capital side. And then the retail piece, the retail piece has been the side that's been interesting. Well, certainly on one hand, we're seeing You know, 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 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 comments, We expect that to be much more readily absorbed through ongoing earnings.

Thank you. Thank you.

Thank you. The next question is from Surabh Mulvahedi with BMO Capital Markets. Please go ahead.

Yeah, thanks. Graham, 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 of the origination of those mortgages. And whether or not the 1% that you say have gone delinquent, if that also follows the same kind of pattern, or is there something a bit more specific for the geography of your origination?

Thanks. 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 look at... Yeah, I think a few things we're trying to make sure people are traveling with here is, on one hand, you know, appreciating that this large balance of $57 billion, that because of the open nature of that program, that we really do expect that to compress to a much smaller, much more manageable number. And, you know, we provided the proof point there around the early cohorts and what we're seeing on that. When you look at the – you asked about the regional segmentation on that, you know, the – you would see a bit of what you would expect kind of where parts of the economy are affected. So kind of the highest referral 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. GPA 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 know, you'd see Quebec and some of the other parts of Ontario outside of the GTA. You know, other segments that we would look at, when you look at kind of investor versus homeowner segmentations, we don't really see a differential there in deferral rates, 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 the non-condos. right now. So those are some of the dimensions, you know, 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.

Yeah, I think just like 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 a place we take a lot of comfort in in terms of the underlying risk. You know, LTVs in sort of the mid-50s, 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 is just how long have we known these clients, and 75% of the clients with a mortgage deferral have been clients for more than 10 years, and 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 history in terms of repayment from the FICO score. So I think that may be the only other things I'd add to Graham's comment.

So just to clarify, Neil, about 5%, if 75 is 10 plus 20, I guess it's 3 to 10, then about 5% is less than three-year relationships. Okay. That's right. And the percentage that have gone delinquent, they would follow the same geographic pattern as well, the 1% that you say have gone delinquent.

I don't have that breakdown at hand, so we'd have to follow up with you on that.

Okay.

Thank you very much.

All right. We've got a couple 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 Rezanovich with Credit Suisse Canada. Please go ahead.

Hi. Good morning. I had a two-part question on the mortgage deferrals. More of a high-level question, but correct me if I'm too pessimistic here, but What if that 12% of balance is currently in deferral? What if that settles somewhere in the 3% or 4% range in the next few months? How would you do 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 there were legitimate concerns Should we even be thinking about a cliff design or should we maybe be thinking about the likelihood that maybe the banks get together with the government and perhaps figure out a way for a more gradual unwind of those problematic loans?

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 clients on this to the next phase. You know, 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, you know, as Neil said, they have a very high FICO, which indicates just a strong willingness to pay, and they have a very low LTV on average. So we have an LTV in the kind of mid-50%. And so, you know, clients 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 if it is diminished, to make sure that we can reset and reprofile kind of a lending situation that works for them, but is also still consistent with our lending standards and appetite, you know, really is going to be critical to helping prevent kind of the pieces I think you're really worrying about and concerning yourself with, which I think we all worry 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's a whole lot of tools in our toolkits and there's a whole lot of, you know, liquidity, cash, equity, an income that 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 and the housing market that I think that you're pointing to.

And that three to four percent 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?

It's an algorithm that I'm traveling with directly, so I'd have to think about that more specifically. But certainly, you know, the expectations that we've built in our macros, you know, don't put us in a spot that we think the scenario you're describing is one that we're immediately worried about.

We're going to move on.

Yeah. Okay, that's helpful. Thanks.

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

Good morning. Graham, you offered some advice on perhaps the impaired loan 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 pure high right now, but any guidance on that for the next few quarters would be helpful. Sure.

Sure, Scott. Thanks for the question. Yeah, so I think, you know, what you've seen to date and kind of what you should expect going forward, just a few comments there. So certainly, you know, we 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 as COVID-19 came into play. And, you know, 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 our analytics and our models to make sure that they were capturing kind of unique features and elements of the macroeconomic situation we're facing, you know, reflective of, too, and including aspects like the CERB and the government support programs, the deferral pieces, et cetera. And so, you know, we reset that in Q2. As we moved into Q3, I would say, you know, we didn't take nearly the same level of provisions, and that's a factor of a number of things. You know, the macroeconomic situation and our forecast were largely consistent with what we laid out in Q2. We did increase our weight a little bit, so that goes the opposite direction. 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 just the credit side of it and how we factored that into our provisions this quarter. It's really that last piece that caused us to take any further provisions this quarter. I guess that plus the, you know, the scenario we're waiting. And that was really just us kind of, I would say, fine-tuning and reflecting the, you know, the impact these government programs and deferral programs have had on effectively suppressing some of the delinquencies. And so we wanted to make sure we continued to reflect that in our reserves, particularly on retail programs. 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 and performing loans in a significant way. And as you roll out further over time, as we get much more certain in that economic recovery, assuming we're 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 that's really going to depend on how the macroeconomic situation and how the COVID situation plays out over 2021. Thank you very much.

Thank you, Operator. We're going to turn it back over to Dave now. We're running out of time. Thanks, everyone, for your time.

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 GCM volumes. We saw very strong volumes on the lending and deposit side. in Citi National 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've increased our channel capabilities. We've increased our risk capabilities, our analytics capabilities. And that investment in technology is playing through all our capabilities and has really started to, I think, show the benefits, particularly this quarter. The strength and resilience of our balance sheet and our reserving and our risk management capability, I think, was strongly represented this quarter. We're being very prudent. As I said, we've seen strong recovery so far in whatever is a checkmark or swish 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 it may take one 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 know the responses Graham and Neil gave, with the ability to work with clients and be patient, the amount of equity clients 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, It's 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 are, our 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 wanted 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.

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.