Royal Bank of Canada

TSX:RY

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, ladies and gentlemen. Welcome to RBC's Conference Call for the Second Quarter 2020 Financial Results. Please be advised that this call is being recorded. I would now like to turn the meeting over to Nadine Ahn, Head of Investor Relations. Please go ahead.

[Nadine Ahn]

Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer; Rod Bolger, Chief Financial Officer; and Graeme Hepworth, Chief Risk Officer. Then we'll open the call for questions. [Operator Instructions] We also have with us in the room: Neil McLaughlin, Group Head, Personal and Commercial Banking; Doug Guzman, Group Head, Wealth Management, Insurance and IMCS; and Derek Neldner, Group Head Capital Markets. As noted on Slide 1, 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 performance on a reported and adjusted basis, and considers both to be useful in assessing underlying business performance. With that, I'll turn it over to Dave.

[David I. McKay, President, CEO & Director]

Thank you, Nadine, and good morning. Thanks for joining us in what is unprecedented and challenging times. We do hope you and your loved ones are keeping safe and well. Before I move into my comments on the macroeconomic environment, I do want to say how proud I am of our employees for all they've been doing throughout the crisis to bring our purpose to life by supporting our clients and our communities. We moved quickly to support our clients, including granting payment relief to over 490,000 clients so they could redirect their money to where it's most needed. Our various client relief programs represent over $76 billion of loans outstanding. Graeme will speak more on these programs later in the call. As the situation evolves, the regulatory, monetary and fiscal actions taken by policymakers globally has helped provide stability and support to the economy and to the financial system. As Canada's largest financial institution, we also have an important role to play in helping lessen the financial impact of the crisis on our clients while helping to restart our economies. In Canada, we've been working closely with the government in implementing various federal programs, and we provided access to $4.5 billion in available funding to over 115,000 clients through our CEBA program. And given Canada's relatively strong fiscal position, the country's finances are well positioned should further actions be required. In the U.S., we provided over USD 3.5 billion of funding to our clients through the Paycheck Protection Program. I'll now provide some highlights of our financial performance. Today, we reported earnings of $1.5 billion in the quarter, where we recorded a provision of $2.8 billion, which I will speak to shortly. We carried our strong momentum from the last quarter into Q2, and North American equity markets hit all-time highs in late February. However, as the COVID-19 pandemic spread, expanding public health crisis led to increased concerns around the global economic outlook, culminating in elevated market uncertainty in March. We supported our clients through these volatile markets as they drew down in their credit facilities in light of liquidity concerns. The severe correction in global markets and widening credit spreads in particular negatively impacted our results this quarter, including unrealized mark-to-market losses in a number of portfolios. This was partly offset by elevated client activity related to significant volatility across asset classes. In contrast, macro outlook concerns, low equity valuations and elevated volatility meant companies largely sat on the sidelines when it came to mergers and acquisitions. As credit markets opened up in April, following a significant intervention by central banks, we saw a significant uptick in investment grade debt issuance. Since mid-March, Capital Markets has been a book run on over USD 150 billion of global investment-grade issuance and has led over 80% of corporate debt transactions in the Canadian market. Our source of strength and stability for clients is reflected in the significant growth of consumer and business deposits and strong volume growth in our wealth franchises in Canada and the U.S. particularly at City National. We've also seen an acceleration of digital banking adoption, including all-time high volumes in direct investing. Rod will speak more to these trends later in the call. More recently, we've started to see a cautious reopening of certain economies, including those in Canada. However, significant uncertainty remains on the severity and duration of the global economic downturn as a result of elevated unemployment, low oil prices and disrupted supply chains. With that background, I want to focus my comments on the strength of RBC's financial position. Our balance sheet remains strong, giving us a solid foundation to face these risks head on. We have confidence in our prudent risk management and diversified business model. We have a proven ability to organically generate capital, averaging over 17% return on equity over the last 3 fiscal years. And in a quarter of significant external stresses, we generated pretax pre-provision earnings of $4.6 billion, the second highest in our 150-year history. We also paid $1.5 billion in dividends to our shareholders while growing our book value. While the economic downturn caused by the outbreak of COVID-19 was unexpected, we've been preparing for the potential of a recession for the shorter term. Our focus in the last few years has been on driving market-leading organic growth while building up capital buffers as opposed to acquisitions or ramping up share buybacks. Furthermore, over the last 2 years, we've made a conscious decision on the composition of our loan portfolio, including prudently managing our corporate loan book, growing our residential mortgage portfolio and maintaining both underwriting limits and strict discipline on not originating non-prime unsecured retail credit. We are confident in our robust balance sheet, underpinned by a strong 11.7% CET1 ratio, which is 270 basis points or $15 billion over the current regulatory minimum even after increasing provisions and providing exceptional support to our clients. We took prudent action to bolster our alliance for credit losses to $6 billion given the economic outlook and our expectation of a prolonged recovery. Our stress tests suggest that even under a severe pandemic scenario, our capital levels remain above current regulatory minimum levels, and we remain well positioned to continue playing -- paying our dividend. While our corporate clients have been drawing down on lines and accessing Capital Markets, our retail clients have cut discretionary spending on debit and credit cards by over 20% as social distancing took hold in the beginning of March. Physical distancing measures have also impacted the Canadian housing market with sales activity retrenching, although house prices are largely unchanged. Although any recovery in the housing market will be gradual at first, we believe the risk of a sharp near-term price decline is low. Despite rising unemployment levels, we remain confident that our prime Canadian retail portfolios will continue to perform well, with the combined power of our client relief programs and the government-led initiatives providing support to our clients. Even though the Canadian retail mutual fund industry had its toughest months ever in March as markets experienced extreme corrections, RBC asset management continued to grow its leading market share in Q2 with a strong performance in February and a recovery in April. In other parts of the bank, activity levels have never been higher. We are benefiting from our significant investments in technology over the last number of years to provide alternative ways to deliver products and services to clients. We have seen a significant growth in digital banking volumes with mobile sessions up 20% from last year as we ensure our clients' day-to-day financial needs continue to be met. We have also seen increased e-transfers and digital sales, and Direct Investing recorded all-time high volumes during the quarter. We are also proud to note that RBC has been ranked #1 in overall customer satisfaction among Big 5 retail banks in the J.D. Power 2020 Canadian Retail Banking Satisfaction Study. After delivering very strong results in Q1 2020 and early into Q2, we entered this period of heightened uncertainty from a position of strength. While much has changed in the past 8 weeks, it's also important to focus on what has remained the same. We remain committed to creating long-term value for our clients and our shareholders. We will continue to leverage our strong balance sheet, our leading scale and distribution capabilities across our franchises to prudently and efficiently support our clients. And we believe our past investments in building unique capabilities such as Borealis AI, Insight Edge and MyAdvisor will significantly differentiate us in the future and enable us to deliver even more value for our clients. Several of our ventures are also well positioned to support our clients, including Ownr, which helps entrepreneurs manage their businesses and build their brand online; and Dr. Bill, which helps reduce the stress and complexity of medical billing for physicians. Our entire leadership team is focused on how RBC can emerge from this differently and stronger in the future. And with that, I'll turn the call over to Rod.

[Rod Bolger, Chief Financial Officer]

Thanks, Dave, and good morning, everyone. Starting on Slide 8. We reported earnings of $1.5 billion and EPS of $1 with results impacted by $2.8 billion of provisions for credit losses, up nearly 7x from last quarter, which Graeme will touch on shortly. Pre-provision pretax earnings were up 3% from last year to $4.6 billion driven by strength in Capital Markets, Investor & Treasury Services and Insurance, a testament to the continued strength and success of our diversified business model. Our record pre-provision pretax earnings through the first half of the year allowed us to prudently absorb over $3 billion of PCL and still generate nearly $5 billion of net income. A few thoughts on expenses, which were essentially flat year-over-year. Excluding FX and $30 million of COVID-related costs, mainly in Canadian Banking, our expenses would have been down 1%. Given the current environment, we saw a slowdown in costs related to marketing and travel, which were collectively down close to $40 million from last year. And recall, variable compensation largely acts as a natural hedge to lower market-sensitive revenue. As Dave noted, the crisis is changing client behavior, and we have seen an accelerated shift towards digital engagement. We would expect to see opportunities for cost savings going forward, assuming client preferences continue to trend towards digital interactions. Early last year, we spoke about managing our costs based on the earnings outlook, and we remain diligent in this regard. However, as always, we will balance any project prioritization with our commitment to creating long-term value for our clients and shareholders. On taxes, our lower effective tax rate largely reflected changes in our earnings mix, given the elevated PCL taken in the quarter was largely in jurisdictions with higher tax rates. Before I get to the segment results, I wanted to add to Dave's earlier comments on capital. Moving to Slide 9. We reported a strong CET1 ratio of 11.7%, down 30 basis points from last quarter. The largest driver of CET1 was related to an increase in credit RWA, which lowered our CET1 ratio by 41 basis points through both unprecedented levels of draws and credit downgrades. Turning to Slide 10, where we show our RWA composition by the probability of default. The composition of our largely Canadian retail portfolio remained consistent from last quarter, underpinned by our high-quality residential mortgage portfolio. In corporate portfolio, the majority of the credit line utilization was from our investment grade clients in Capital Markets where the loan utilization rate increased by 9 percentage points from last quarter to 38% on April 30. This is down from the March peak of above 40%. Drawdowns from our Canadian Banking and City National commercial clients are more muted at this stage. The impact of credit downgrades this quarter was largely from our Capital Markets loan book. We would expect the impact of credit migration on our commercial portfolios to increase in the coming quarters. I wanted to spend some time on the downside risk to our capital ratios. Our disclosures on Slide 30 highlights the assumptions that went into our IFRS 9 calculations in late April. We have also run more severe stress test scenarios, including Canadian equity prices falling more than 50% over the next 12 months and Canadian and U.S. GDP falling 18% to 20%. We also consider unemployment staying over 14% for a number of quarters and not returning to 2019 levels for a number of years. While we believe these scenarios are unlikely, they do represent the inherent uncertainty still surrounding the health care and economic outcomes. In our severe scenario, we believe our CET1 ratio will remain well above our regulatory minimum. To provide additional color, in a very conservative scenario of a 1 notch downgrade across all sectors and geographies in our well-diversified wholesale portfolio, this scenario would result in the RWA density of these portfolios increasing by approximately 15 percentage points over a number of quarters negatively impacting our CET1 ratio by approximately 115 basis points over time, comparing this unlikely scenario to our 270 basis point buffer over the current regulatory minimum, which represents an RWA buffer of approximately $165 billion or a 30% increase above current RWA levels. Furthermore, our consistently strong organic capital generation will continue to act as the primary absorber of any credit deterioration. Also, should credit spreads normalize, we'd expect a recovery in unrealized losses carried at fair value through OCI. These impacted our CET1 ratio by 19 basis points this quarter. Moving to our business segment performance, beginning on Slide 11. Personal & Commercial Banking reported earnings of $532 million. Canadian Banking net income was $649 million with pre-provision pretax earnings of $2.4 billion, which was relatively flat year-over-year. Strong volume growth was offset by lower net interest margins, down 2 basis points from last quarter due to the impact of lower interest rates. We continued our strong momentum in mortgages, up 9% over last year. However, as Dave noted, we're seeing a material slowdown in housing activity, and this is reflected in much lower mortgage application volumes since April 30. We expect mortgage growth to slow to the mid-single digits by year-end. Both business and personal deposit growth was strong, up 14% and 8%, respectively, providing a partial offset to margin pressures. While strong growth trends in our core checking account continued into May, we would expect these trends to moderate from here. Noninterest revenue was impacted by lower card services revenue as client purchase volumes declined as a result of the COVID-19 pandemic. Turning to Slide 12. Wealth Management reported earnings of $424 million with pre-provision pretax earnings of $653 million, down 16% year-over-year. The impact of market volatility contributed to mark-to-market seed capital losses in RBC Global asset management and unfavorable interest rate derivative valuation adjustments in City National. The impact of market volatility also drove unfavorable changes to our U.S. share-based compensation plans. Adjusting for these, our pre-provision pretax earnings would have been down 2% year-over-year. Canadian Wealth Management benefited from higher fee-based average client assets and an increase in transaction volumes driven by higher client activity. Global Asset Management AUM was up 7% from last year, mainly due to strong net sales, including in our institutional business. Canadian retail net sales recovered well in April, particularly in our money market and long-term fixed income strategies. Very strong double-digit buying growth at City National and fee-based asset growth in our U.S. private client group was offset by the cumulative impact of the Fed rate cuts as well as by higher costs to support underlying business growth. We expect City National's expense growth to slow over time as its elevated technology investments and regulatory costs begin to normalize. Moving to insurance on Slide 13. Net income of $180 million increased 17% from a year ago, mainly due to higher favorable investment related experience and new longevity reinsurance contracts, partially offset by the impact of actuarial adjustments and lower benefits from favorable reinsurance contract renegotiations. While overall claims were largely flat from last year, we saw an increase in travel claims this quarter. We continue to help Canadians with their travel insurance claims where trips have been interrupted or canceled in light of COVID-19. On to Investor & Treasury Services on Slide 14. Record net income of $226 million, increased 50% from a year ago primarily due to higher funding and liquidity revenue, reflecting the benefit from interest rate cuts in the current quarter as well as higher gains on the disposition of certain securities. Our asset services business benefited from higher FX revenues, reflecting increased client activity as a result of heightened equity and FX market volatility. Going forward, we would not expect to see the same level of benefits. We expect next quarter to be particularly challenged given our surplus liquidity position, lower asset valuations and more normalized client activity. Turning to Capital Markets on Slide 15. Capital markets reported earnings of $105 million. Pre-provision pretax earnings of $1 billion were up 16% year-over-year and were our second highest level on record following our strong Q1 2020 performance. The segment generated positive operating leverage of 6.5% with expenses kept flat as lower variable compensation costs were offset by higher costs to support business growth. Corporate investment banking revenue was down 25% year-over-year, largely due to $229 million of unrealized mark-to-market losses in loan underwriting in the U.S. and Europe as high-yield credit spreads widened significantly. M&A and IPO activity was muted given the market uncertainty. In contrast, we saw strong debt underwriting activity. Global markets had a record quarter with revenue up a strong 37% from last year, largely due to higher fixed income trading revenue across all regions. Our rates trading business performed well in the volatile interest rate environment. In addition, we saw higher earnings on our spreads in our repo business. Lower results in our equities business were driven by losses in our structured products business given severe market dislocations and normal course correlations. And with that, I'll turn it over to Graeme.

[Graeme Hepworth, Chief Risk Officer]

Thank you, Rod, and good morning, everyone. As Dave noted earlier, COVID-19 has had a significant impact on financial markets and the global economy. While significant progress has been made in slowing the virus and managing the economic fallout, the speed at which the economy recovers, the efficacy of government support, future potential waves of the virus and the availability of a treatment or a vaccine all remain highly uncertain and will continue to affect our risk profile going forward. In response to these events, we increased our allowance for credit losses by $2.4 billion since last quarter, as you will note on Slide 17. With this significant increase, we now have $5.9 billion in total allowances to absorb future loan losses. This represents 0.84% of all loans outstanding and 4.2x our net write-offs over the last 12 months. Nearly 90% of this increase in our allowance this quarter is a result of higher provisions on performing loans, up $2.1 billion from last quarter. This is primarily driven by unfavorable changes in our macroeconomic forecast to reflect the current economic conditions, was also impacted by ratings migrations and drawdowns mainly in our Capital Markets loan portfolio. Additionally, 2/3 of the increase related to our wholesale exposure, which spans Capital Markets, Personal & Commercial Banking and City National, and 1/3 related to our retail exposure, which is predominantly in Personal & Commercial Banking. The other 10% of the increase in allowances is due to higher PCL on impaired loans. Turning to Slide 18. PCL on impaired loans of $613 million or 37 basis points was up 16 basis points from last quarter, largely reflecting higher provisions in Capital Markets. These provisions were mainly related to the oil and gas and consumer discretionary sectors, reflective of the current macroeconomic environment. In Canadian Banking, provisions were up $39 million from last quarter. We had higher impairments in our collectively assessed commercial portfolio and higher impairments in our personal lending portfolio. In City National, provisions were up $18 million from last quarter, largely due to higher losses on previously impaired loans in the consumer discretionary sector. Turning to Slide 19. Gross impaired loans of $3.5 billion was up $593 million or 6 basis points from last quarter, reflecting higher impairments in Capital Markets in the same 2 sectors I noted earlier. This was partially offset by lower impairments, mainly due to 1 real estate account that has returned to performing this quarter in our Canadian Banking commercial portfolio and higher repayments in our Caribbean Banking portfolio. In addition, City National had lower impairments in its consumer discretionary sector, which is partially offset by higher impairments in the consumer staple sector. Outside of Capital Markets, the current macroeconomic weakness was not a significant driver of new impaired loans this quarter. Turning to Slides 20 to 23. I'd like to provide some color on some of our more vulnerable sector exposures, which includes components of our consumer discretionary, commercial real estate, oil and gas, transportation and media sectors. Consistent with our broad and diversified portfolio, these sectors account for about 7% of RBC's total loans outstanding. Let me start with the oil and gas sector. About 90% of oil and gas provisions this quarter related to companies that have been struggling to recover from the 2015 oil downturn. Our exposure to this sector, which represents 1.3% of RBC's total loans outstanding, increased by 22% from last quarter, driven by higher draws on existing facilities as well as new liquidity facilities that we provided to existing investment grade clients. The majority of our exposure to this sector is to E&P companies, which is predominantly done through a borrowing-based lending structure whereby loans are secured by the value of proven and producing reserves. About half of our oil and gas exposure is most sensitive to oil prices, and many of those clients have hedged their production through the end of 2020. Our ACL coverage ratio for the oil and gas sector is now at 4% of our outstanding exposure and is slightly above the cumulative amount of provisions we took in this sector from 2015 to 2017. For the other vulnerable sectors noted, clients have been affected by business closures, physical distancing measures and other government restrictions. Retail-related commercial real estate has been impacted by retail closures, creating challenges around tenant's ability to pay rent. Retailers and restaurant owners with limited to no online presence or that are independent businesses without access to broader corporate support are being negatively impacted. Hotels have seen a substantial drop in occupancy rates, and recreational and media-related companies have also seen a substantial drop in demand or have been forced to shut -- temporarily shut down. While each sector is unique, we feel that the support programs we put in place for our clients, our consistent and prudent approach in our underwriting standards and the various government programs available to them will all help mitigate potential loan losses. This is additionally, supported by an allowance for loan losses of 1.1% of our total wholesale outstanding exposure. Let me now discuss our retail portfolio, turning to Slides 24 and 25. As I noted earlier, we had higher impairments in our personal line portfolio and stable impairments for the remainder of our retail portfolio relative to Q1. Card utilization rates have declined in April, and other revolving lines of credit have been stable through the quarter. 4% of our clients have taken advantage of our Client Relief Program, but the pace of client take-ups has subsided over the past few weeks. Our Client Relief Programs offer the opportunity for retail clients to defer certain payments for up to 6 months. Once these Client Relief options run their course, we do expect to see elevated delinquencies and insolvencies given the significant impact COVID-19 has had on the labor market. As reflected in our allowances, we expect the weak economic outlook to more acutely impact our cards and personal lending portfolios due to the unsecured nature of those products. Given our prime focus in retail, the vast majority of our collect credit profiles remain strong, and we are proactively assisting clients that may be experiencing hardship to help them navigate through this environment. While we are forecasting a decline in house prices, declining credit performance in our mortgage portfolio will be mitigated by the very strong credit profile of our clients as reflected in the FICO distribution as well as our strong security position as reflected in the LTV profile. Let me now discuss market risk on Slide 27. We saw sizable market movements over a few weeks in March that were equivalent to or greater than we'd experienced over a number of months during the 2008 financial crisis. This volatility led to 13 days of mark-to-market losses. Four of those days exceeded VaR projections in March due to markdowns of the loan underwriting portfolio, the counterparty default and significant market volatility. In April, trading businesses were able to capitalize on the reopening of primary markets and better secondary market activity as markets recovered and volatility subsided. Average market reservoir increased from Q1 due to wider credit spreads and market volatility that impacted our loan underwriting commitments as well as fixed income and equity portfolios. Going forward, we do expect our average VaR to be at higher levels than it has been historically as the volatility experience in March will be reflected in our VaR methodology for the foreseeable future. Having said that, VaR has now declined by approximately 25% from its April peak as a result of reduced loan underwriting exposure and improved market conditions. As I noted, earlier in 2019, our leveraged finance business employs an underwrite to distribute model with 2 primary risks: market risk in relation to the loans and bonds we distribute; and credit risk in relation to the portion of the credit facilities we retain. For our loan underwriting activities, our primary protection against market volatility is in the form of price flex that helps mitigate against spreads widening during the distribution period. Given the significant market volatility noted earlier, we saw spreads widen in the quarter beyond our flex protection. These spread movements have all been reflected in the valuations Rod mentioned earlier and referenced on Slide 12. We ended Q2 with a committed loan underwriting book of $3.9 billion, and market activity in May has allowed further reductions subsequent to quarter end. Our overall approach to leverage lending, including the portion we retain, continues to adhere to our disciplined risk management approach. The committed portfolio size is largely unchanged over the past year. It is a very well-diversified portfolio with no sector representing more than 16% of the portfolio and single name concentrations kept relatively small. To conclude, our history of prudent underwriting, the prime nature of our retail portfolios and the diverse nature of our wholesale portfolio serve as strong mitigants against the deteriorating macroeconomic conditions that have arisen as a result of the COVID-19 pandemic. We believe we have taken appropriate provisions to reflect these deteriorating external conditions. Based on our current view of the economic outlook, we believe that PCL and performing loans this quarter has reached the high watermark. However, as I noted at the beginning of my remarks, there is great uncertainty with respect to the speed at which the economy recovers, the efficacy of government support, future potential waves of the virus and the availability of a treatment or vaccine, all which may impact provisions in the future. We expect impaired loans and the associated losses to be muted in the near term given the prevalence of client relief options with a more material impact beginning to show once the relief options run their course. As a result, we anticipate our PCL impaired loans to trend higher to the latter portion of 2020 and into the start of 2021. We expect to be able to draw down on the allowance on performing loans that we built this quarter such that our total allowances won't materially change as the ones become impaired. Drawing down on our allowance and performing loans will partially offset the expected PCL on impaired loans we're anticipating. With that, operator, let's open the lines for Q&A.

[Operator]

[Operator Instructions] The first question is from Ebrahim Poonawala of Bank of America.

[Ebrahim Huseini Poonawala, Director]

I guess I just wanted to follow up on something that, Rod, you mentioned around expenses and operating leverage. Crises create opportunities. And when you look at Royal, I mean, it's hard to argue that you won't be better off competitively than you were even coming into the crisis. Talk to us just in terms of how you're thinking about pulling back on discretionary expenses or investments versus any opportunities that are already beginning to emerge where -- either from a market share standpoint in retail or Capital Markets that you could be looking to sort of capitalize on.

[Rod Bolger, Chief Financial Officer]

Thanks, Ebrahim. I'll start and Dave might chime in. In terms of investments, we've been ramping up our investment spend on technology with a client focus and then obviously also an efficiency focus, but really on a client focus and market share growth focus over the last 5 years. And so that was done in anticipation that if and when a recession hit, we could dial that back and still be in a strong position. And so that holds. We will still continue to invest if it makes sense, but we're also taking back discretionary spending. We kind of bucket it into 2 or 3 buckets, which is what are the low-hanging fruit that you can dial back in a situation like this, which I mentioned in my comments, marketing and travel; then there's the investment spend where we have definitely curtailed the growth. We could take it down. We could keep it at the same level depending on what makes sense from an NPV and an investment in future growth standpoint. And then there's the other items which kind of ratchet up and down with business volume, such as variable compensation. So our strategy has not been significantly changed by this. We look to drive efficiency through the cycle. And that has not changed.

[David I. McKay, President, CEO & Director]

I'll just add an example in City National, where we've been investing and expanding our network and opening new branches and in new locations, whether it's Nashville or New York City. So that will continue. We see enormous growth opportunity. You've seen the results in the City National kind of growth story. At the same time, we've been investing in digital capabilities there. We're launching -- we have launched a new cash management system for City National. And we're -- we've delayed the launch, but we'll launch this summer, a new mobile banking platform. So those types of investments, we use the tailwind of rates of that organization, obviously. City National is facing tougher revenue headwinds with the decline in rates and the rapid decline in rates. But we've got a lot of that work behind us. But you still want to invest where there's growth. And I think there's an example of where we're going to be careful, but we still want to invest. So as Rod said, we'll look at where there's opportunity. Where there's client growth, we'll continue to invest. But we have made a big chunk of our technology investments. And if needed, we can pull back, depending on the revenue profile going forward, knowing that we have very strong technology capabilities on a comparative basis.

[Operator]

The following question is from Steve Theriault of Eight Capital.

[Stephen Gordon Theriault, Principal & Head of Research]

Rod, that was great color on how your -- some of your most adverse stress tests would impact capital. You said you remain well above the regulatory minimum. Does that -- is it safe to say that translates into greater than 10% if we take that -- you mentioned 115 basis points was the -- sort of what would weigh on CET1 off the 11.7% you're at this quarter? I just want to make sure what the messaging is there.

[Rod Bolger, Chief Financial Officer]

Yes. Thanks, Steve. So our current buffer is 270 basis points above the regulatory minimum of 9%, including the domestic stability buffer of 100 basis points. Most of our scenario analysis would suggest that we are going to remain well above that 10% threshold that you mentioned. If we do take some of our more severe scenarios, we're still working through how those might play out. Whether it's a W-type recovery or others, we are fine-tuning these scenarios consistently -- constantly. And as we work through those, we remain well above our risk appetite, which includes a buffer above that 9% minimum. And in a predominant number of cases, we are well above that 10%.

[Stephen Gordon Theriault, Principal & Head of Research]

Okay. And then the 41 basis points of drawdowns and downgrades you mentioned, am I right to assume that the vast majority of that is the drawdowns we saw this quarter?

[Rod Bolger, Chief Financial Officer]

No, it's approximately a 50-50 split. So 41 basis points figure '20 for drawdowns and '21 for downgrades.

[Stephen Gordon Theriault, Principal & Head of Research]

Okay. And if I could sneak one more in for...

[David I. McKay, President, CEO & Director]

It’s probably [indiscernible] your question then, Steve. We're -- well, could you requeue?

[Stephen Gordon Theriault, Principal & Head of Research]

Sure. No problem, Dave.

[Operator]

The following question is from Meny Grauman of Cormark Securities.

[Meny Grauman, Former MD & Co]

I know you mentioned you expect a moderation in mortgage growth. But if I look at what we've seen through the quarter, definitely very strong. And I'm wondering how you reconcile that strength with everything we know in terms of deferrals and lockdowns and just the depression level economic indicators that at least we'll see in the short term. So how does how does that all makes sense to you?

[David I. McKay, President, CEO & Director]

Well, thanks for the question. We started the year exceptionally strong. So we were -- originations for the first quarter were exceptionally strong, so that was really fueling the early growth. As soon as we really saw the impacts of COVID, obviously, you can't show a home and transactions just dried up. So right through till really the end of April, we were at annual lows for origination. We've since seen that come up a little bit, probably about 1/3 from sort of peak to trough in May. But right now, we're -- on an annual basis, we're probably looking at an outlook for originations of about 80% to 85% of last year. And a lot of uncertainty, obviously, given we don't know what the measures are going to be and how much access that clients are going to have to go and actually look at home. So that's how we'd really bridge the 2. Strong start and then just a sudden breaking as the inventory just dried up.

[Meny Grauman, Former MD & Co]

And then just in terms of your commentary on pricing, how would you contrast your outlook for condos versus single-family in terms of the expectation for price declines?

[Graeme Hepworth, Chief Risk Officer]

I don't know if we -- this is Graeme. I'll answer that at a broad level. I don't know if I have the split between the different types of housing. But overall, in our forecasting, we built a 7% decline in house prices with kind of recovery period taking over about 2 years. Underneath the hood, that would split by different geographies and different property types. I just don't have those numbers with me. But the national level of the client we're forecasting and modeling right now is that peak to trough of 7%.

[Operator]

The following question is from Gabriel Dechaine of National Bank Financial.

[Gabriel Dechaine, Analyst]

First of all, thanks for all the disclosures and especially on the impact of downgrades and your commentary, Rod. On one hand, I could say that you're conservative. But on the other hand, you also have about 43% of your wholesale portfolio with non-investment grade credits. Like how would you address that dichotomy?

[Graeme Hepworth, Chief Risk Officer]

So -- Gabriel, this is Graeme. I'll maybe take it out of the migrations a little bit. So just to think through how this is happening. So what Rod gave you was a sensitivity that reflects if we did a 1 notch downgrade across the whole portfolio, which would be very broad and pervasive, but just does give a good sensitivity against it. In terms of how we've approached this so far, we basically have gone through our corporate book and really taking the rating actions that we think are necessary in that space. And we're very much able to do that in such a kind of a timely manner there just because of the very public nature of those companies. We have very visible data around them. They've got visible information in terms of markets and have a very constant dialogue with the companies on that. And so we think we've taken prudent rating actions as necessary there across the piece. Where there is more, I would say -- so any rate exactions there, I would say, will come by company-specific information or changes in the macroeconomic environment that might have us change our view on these companies. On the commercial and retail side is where there is more ratings actions to come given the latent information set that we get there. Many of those are more model-driven and as the model captures more information around our client activity, we will and do expect to see further credit action and migrations through the latter half of this year. To give you some context, though, on Rod's number, so oil and gas as an example, and we talked about it in our slides here, would be one of the most highly impacted sectors in this environment. And was one of the sectors that we saw the most downgrades in. The average downgrade there, for companies that were downgraded was 1.8 notches. And so that just gives you some context for the kind of downgrade activity we would see on average, and that would be true regardless of whether it's investment grade or non-investment grade.

[Gabriel Dechaine, Analyst]

Right. And while I have you, Graeme, we're -- people are going to ask about your PCL expectation for Q3 and Q4, and that's important. But I'd like to know, and you alluded to it, the outlook for peak gross impaired loans, like when do you expect that to take place in roughly what level? Because that's ultimately going to dictate if the provisions you're taking now next quarter are sufficient or more than sufficient.

[Graeme Hepworth, Chief Risk Officer]

Yes. Sure, Gabriel. I'll kind of walk you through how our thinking is on the PCL because the growth impaired loans is really just a -- is really what we're forecasting through the day when we're calculating our expected credit losses and then we're translating that back into provisions. And so we have a lot of very rich tools in our toolbox. Certainly, we've built a lot of very strong modeling capabilities for IFRS 9. We've had a lot of strong modeling capabilities for our stress testing. And so as we headed into the COVID pandemic that we're facing, that's a great starting point we have. But certainly, the storyboard here is very unique and unlike anything we've ever seen. And so we really took those tools that we've kind of reset the storyboard. We really reset it to reflect the environment we think we're facing. So our base case started with the storyboard that talked about this pandemic being a situation where we're going to effectively be in an economic lockdown for 3 months to get the virus under control before the economy starts to reopen following that and reopen over a very extended period of time. And then we translate that into the macro variables that I think, that you saw in our disclosures there, and then really took those -- all that information set and the modeling capabilities we have to try and forecast gross impaired loans ultimately and the translation into Stage 3 losses, which is ultimately then what we kind of discount back to get the expected credit losses that we established in our Stage 1 and 2 provisions. We talked about the severity of different scenarios. When we established that base case, we are really trying to reflect the real acute severity of the economic conditions we're facing. And we've already mentioned some of the variables there. And that scenario, we're talking about HPI, down 7%. We're talking about unemployment going up to 15% and taking many years to recover. We're talking about oil prices dropping down into 20s and staying in the 30s before recovering over the next 2 to 5 years into the 40s. So we think we've reflected a very severe scenario in our base case than we use to project these losses. Now we did bring in -- because of the severity of the situation, we did bring in a lot of other tools here. We really leveraged our portfolio management teams, our product specialists and really our credit experts that know their sectors inside out. We really had them kind of think through these scenarios and assess what they thought impairments and loan losses could be. And we're really able to bring all these together to really project and get confidence in kind of the impairments that we think we will face going forward. And so the peak level of impairments, I guess, was your original question, really ties to kind of the guidance I provided on provisioning, which is to say we do think in the near term, there will be some suppression in impairments in Stage 3 losses with that in large part due to the deferral programs and the government programs. But as those run their course, many clients will return to -- back to a good performing position. But we will have clients facing hardship, and then that's reflected in our elevated levels of unemployment that we expect in the coming quarters and years. But we really expect to see that start to accumulate kind of the latter half of this year and really into early 2021 as those programs run their course.

[Gabriel Dechaine, Analyst]

Early 2021?

[Graeme Hepworth, Chief Risk Officer]

Sure. That's a short answer.

[Operator]

The following question is from Sumit Malhotra of Scotiabank.

[Sumit Malhotra]

Graeme, just to start with you, towards the end of your prepared remarks, you were commenting on the on the increase in the allowance. Just wanted to make sure I heard you correctly. Did you indicate that the bankers of the view that the level of the aggregate allowance should not change too much from here going forward? Or were you talking about one specific part of the reserves?

[Graeme Hepworth, Chief Risk Officer]

Yes. Thanks. No, we are talking about reserves in aggregate, right? I mean we have built up a very significant allowance in Stage 1 and 2. That is our expected credit losses. And assuming the world plays out consistent with the forecast we've made, then we would expect to draw down on that, and that would offset the impaired loan losses that we would expect to increase over the coming months and quarters here. So we do -- all else being equal, we do see those as largely offsetting. Now there's a lot of uncertainty to that. And so all that will change obviously as the -- each and every quarter as we reestablish kind of our forecast, as we learn more about our client behavior relative to how we've modeled it, that will all impact our reserves each and every quarter. But in our baseline, that is how we would expect this to play out, and that's how it is by design, set up to operate.

[Sumit Malhotra]

So said differently, going forward for Royal, the provisions and charge-offs essentially net off in the assumptions that you've made going forward?

[Graeme Hepworth, Chief Risk Officer]

That is the assumption, subject to all the uncertainty that we've put out there.

[Sumit Malhotra]

Last question is for Rod Bolger. I'll echo the statements, really appreciate your upgraded disclosure this quarter. And specifically on capital, looking at your waterfall chart, the comment about 23 basis points of IFRS 9 capital modification. Does that only reference the expected credit loss transition? Or have you also -- does that number also pick up the reduction in this stress VaR multiplier?

[Rod Bolger, Chief Financial Officer]

That's just for the 70% modification on the Stage 1, Stage 2 build. That falls to 50% next year and then 25% the year after. So it does not include the stress VaR.

[Sumit Malhotra]

And is the stress VaR -- I think your methodology and policy line in market RWA was down -- I don't have in front of me, I think it was $4 billion to $5 billion. You talked about the VaR scenario updating next quarter to include the volatility in Q2. Just curious as to how you were expecting that market risk line to trend from here given that change in VaR and frankly, what is also you indicated would be the market environment in which that stress VaR multiplier relief would be removed.

[Rod Bolger, Chief Financial Officer]

So on the first question, you'll see in the waterfall, the 6 basis points in the $2.7 billion. That's a net figure. So we did get about 11 basis points of benefit from the SVaR modification, and that's offset by other model and methodology increases that were about 5 basis points. We would actually expect as we roll through VaR and you get a full quarter in, the way our methodology works, we would expect market risk RWA to increase next quarter despite the 25% reduction that Graeme outlined. My understanding is that OSFI may change the multiplier back once we get to normal volatility levels and market conditions, which is not anytime soon that I would anticipate.

[Operator]

The following question is from Sohrab Movahedi of BMO Capital Markets.

[Sohrab Movahedi, Analyst]

Graeme, when the bank had hosted an Investor Day a couple of years ago, I think one of the benefits of the tech and the data infrastructure, I think, was highlighted was a better risk management, I guess, perspective. Is there any way to quantify how much of a benefit would have been reflected here? Or maybe put it differently, how much higher would your provisions had been had you not had the benefit of the investments you had made in technology and data and the like previously?

[Graeme Hepworth, Chief Risk Officer]

It's Graeme. Maybe I'll start with that. I don't know if there's a way to quantify what our provisions would have been if we didn't have the capabilities we have today. The capabilities we have today, I think, are just inherent to how effective we are and capable we are at managing risk. And those credit models can -- that we build and leverage all the data and infrastructure we have can really -- benefits us in 2 ways through a cycle. One is we can use it to mitigate and not originate risk that we otherwise might have originated or we can use those models to take out new revenues for risks that we're quite comfortable with. So it's not as simple as just saying how does it trim one part or the other. When I look at this quarter, in particular, and how valuable those capabilities and that modeling was, we were really able to take that infrastructure, the data and really the people and capabilities we have there to really get down into account level modeling to understand income disruption with our clients, to understand the impact of payment deferrals at the account level, the government programs and really help support the loan losses we established here today. I mean, likewise, on the fraud side, which is such an acute risk in this environment, we've really been able to leverage that data to ensure a really strong performance on the fraud front. Cyber would be another example of that. I mean we just -- these are all just incredibly strong capabilities we have to really help manage risk effectively through the environment. To quantify that for you, I just -- I don't know how to put a number to that.

[David I. McKay, President, CEO & Director]

The only data point I would add is you've heard me talk about our retail scoring systems and bringing an expansive data set, which we continue to do. When we first implemented it 15 years ago, we got about a 30% lift, so we've seen a material shift. And the more data, the more insight you bring to decisioning, that investment in managing data, which allowed us to really focus on core checking accounts. As I've told you before, the information value of our core checking business is not just on purchasing habits and lifestyle habits of clients. It also comes down to risk management and allowing us to manage our book appropriately. So we've seen, to Graeme's point, a really significant return on the investment of technology and data and why we continue to make it a big part of our strategic set going forward.

[Operator]

The following question is from Mario Mendonca of TD Securities.

[Mario Mendonca, MD & Research Analyst]

I think rightfully, everyone on these calls is focused on here and now, the short-term because it's so meaningful. But now with a few of the banks under our belt, I want to just take a longer-term perspective. Coming out of the financial crisis, every bank's ROE dropped pretty significantly from -- we had like 20% plus ROEs. And Dave, as you said, the bank's averaged a 13 -- sorry, a 17% ROE over the last 3 years. I'm not sure if it's possible yet, but when you look out to the end of this crisis, could we be looking at a Canadian banking sector led by Royal with ROEs that are substantially lower than 17% either because of higher capital requirements or much lower interest rates or just a much weaker Canadian consumer? Are you able to think that far out yet and look at what ROE potential Royal has when this is all said and done?

[David I. McKay, President, CEO & Director]

So maybe I'll start, and I'll hand it to Rod for a more detailed balance sheet comments. But if you look at our strategy, Mario, it's a strategy of driving a premium ROE. And we've invested in businesses and in customer franchises and geographic expansion that allows us to drive a premium ROE strategy. And we're not moving away from that. We still think our collection of client franchises, businesses, our scale, our diversification, technology investments and the comparative advantage there allows us to drive a premium ROE in the marketplace. And that continues to be our medium-term objective and will be how we manage this organization going forward. We're learning a lot about the business as it stands through a crisis. We'll look at our businesses going forward. We'll look at how customers have changed, and we'll continue to invest in driving a client franchise that has a premium ROE to it. And we'll have to exit businesses that we don't think can drive that premium going forward. And so we've gone through a world of change, it's early to call exactly which customer franchises or products may not be part of the set going forward, but we're keeping a list to see, okay, this business has been impacted significantly, will it recover? How will it recover? Is there going to be a new capital ratio applied? How does liquidity perform? So all of that will be taken into consideration. But we're starting from a position, as you referenced, of enormous strength. And I don't see a significant change from the premium retail franchise we have, the premium wealth and our focus on wealth growth in the United States, in Canada. Having said that, as you said, we are expecting kind of medium-term headwinds from a low rate environment in the U.S. that impacts our U.S. wealth franchise significantly, as you saw the results, but that will recover. But volume growth is helping offset that, and we continue to see enormous opportunities to drive good volume growth. So we will manage the business accordingly. And we're very much focused, as you heard at the end of my comments, on emerging from this as even stronger and more focused company knowing that we can continue to lever all of the capabilities, the brand, the technology, the fortress balance sheet, the team and the people that we have to drive a premium ROE. And I think that's what you should expect from us.

[Rod Bolger, Chief Financial Officer]

Yes. I'll just add-on 2 structural elements, Mario. The -- looking at the financial crisis versus now, different Basel mechanisms. But if you do like-for-like and that kind of pro forma to Basel 3.5 back to the pre-financial crisis, we're 3x capital ratio we were entering then. We did pretty well through that crisis. We did do a small equity issuance. We don't expect to do any equity issuance this time. And we expect to maintain well, well above, much higher regulatory buffer. So we don't think that there's a structural need for more capital in the banking system. We think it's been elevated to levels it needs to be, which means that we should be able to return to pre-COVID premium ROE as well. You won't see that immediately because you're going to see inflated RWA, which means that you're going to be holding denser equity, if you will. So there will be a couple of years where that's going to be suppressed. But structurally, we don't think there's going to be a seismic shift up in the equity, which would dampen those returns.

[Mario Mendonca, MD & Research Analyst]

So just to put a final point on it, the denominator doesn't change much because unlike the financial crisis, I would hope we're not going to go through yet another update to capital requirements. But I guess what I'm hearing is maybe we've got to be a little careful about the numerator of the ROE calculation, that earnings could be somewhat depressed for some time. Is that fair?

[Rod Bolger, Chief Financial Officer]

Well, you're going to see earnings suppressed in the short term until the economy recovers, absolutely. And then once the economy gets back, if you look at the Chart 30 that we shared, if the economy gets back to those levels in 2022, you should start to see that ROE pick up again.

[Operator]

The following question is from Scott Chan of Canaccord Genuity.

[Scott Chan]

Rod, you talked about the U.S. NIM at CNB, and it's down another 20 bps quarter-over-quarter. And I think you talked about a bit of a decline short term but do you have any color on when you expect that margin to stabilize from what you know right now?

[Rod Bolger, Chief Financial Officer]

Yes, we expect a couple more quarters of compression just because it's going to take a little of time for that to flow through. Now we have seen very significant deposit growth, which has continued. So that's helped displace some wholesale funding with retail and core deposit funding. But we would expect that to continue and it's fairly consistent. If you look at the impact, it's fairly consistent with the impacts that we had disclosed previously in terms of the earnings compression. And we're managing the business that way. Dave outlined our continued investment in that business. The core franchise is growing extremely well. And obviously, we have some margin compression to deal with and work through. And so it's not unexpected, but we would expect it to continue for at least 2 more quarters.

[Scott Chan]

Okay. And then just quickly on Slide 7. I appreciate the disclosure on the client activity. Just on the Canadian retail AUM, have you noticed a notable shift with your clients in terms of penetration into active mutual funds versus ETFs kind of pre-COVID and what you're seeing right now?

[Graeme Hepworth, Chief Risk Officer]

Yes. Doug, I'll take that. So I wouldn't say there's been a real change because of COVID. The shift from active to passive has been much slower in Canada than the U.S. We've built the product shelf to address whatever the rate of change is in that direction in terms of the alliance that we've arranged with BlackRock around ETFs. What we have seen in disrupted markets is a higher-than-normal share of gathering assets, and a lot of that ends up in cash deposits in the retail bank and slower mutual funds sales across the industry. Our share of those sales has been very strong, disproportionately strong. And so our market share of the active long-term funds continues to rise. And we expect, like we've seen in prior disruptions, that as markets normalize, people will do what they should with their savings, which is start to invest it across asset classes and we'd expect it to slide over into mutual funds. So that business remains extremely healthy from our perspective.

[Operator]

The following question is from Steve Theriault of Eight Capital.

[Stephen Gordon Theriault, Principal & Head of Research]

I just want to ask a question on cards, for Neil. We've heard from some of the other banks that activity levels bounce back pretty close to pre-COVID levels. Maybe that's temporary, maybe not. But can you give a bit of an update there on what you're seeing in your card book? And in particular, for your WestJet portfolio, how much impact are you seeing there from -- with air travel being mostly on pause?

[Neil McLaughlin, Group Head of Personal & Commercial Banking]

Yes. Thanks for the question. Yes, I mean, if you look at -- if you break down the categories, I mean, for the quarter, travel was down about 90%. Largest airlines, we're seeing -- it just evaporated. Dining is down about 50%. Gas, sort of these large categories, down about 50%. It's really only kind of the daily essentials, it's food, it's things like pharmacy, they're up about 20%. So those are the, I think, the big category swings. Net-net for the quarter, we were down about 12% or 13% in terms of spending, so that would translate. There's about $5 billion of purchase volume that we had anticipated that did not materialize because of the COVID measures. In terms of splitting it between the WestJet, Steve, to your question, we're seeing if we lump sort of all of the reward products together, spending was down about 30%. When we look at the portfolio that does not carry rewards, it was down 20% for the quarter. If you look at sort of through the quarter, I wouldn't say it is -- we've bounced off the bottom, but we're nowhere near kind of back to normal.

[Stephen Gordon Theriault, Principal & Head of Research]

And for that, for the WestJet card that earns WestJet dollars, is there ability to earn sort of regular RBC loyalty points?

[Neil McLaughlin, Group Head of Personal & Commercial Banking]

No. No, so those -- they earn those dollars, and we immediately pay WestJet for those, and that liability is transferred over to WestJet.

[Stephen Gordon Theriault, Principal & Head of Research]

And that 30% you mentioned for the loyalty-type products, like the WestJet is sort of in line with that?

[Neil McLaughlin, Group Head of Personal & Commercial Banking]

Yes.

[Operator]

The following question is from Nigel D'Souza of Veritas Investment.

[Nigel R. D'Souza, Investment Analyst]

So I wanted to tackle your commentary on impaired -- the outlook for impaired loans and delinquencies towards the end of the year. And a lot of that will depend on how fiscal support programs play out and how the deferral loan programs wind down. So I was wondering if you could maybe give us a sense of what's already baked into your performing loan loss this year. So in other words, of the deferred loans that you currently have, which is pretty sizable for mortgages and wholesale for example, how much of those loans are currently classified as Stage 2? Or are the majority of them still in Stage 1?

[Graeme Hepworth, Chief Risk Officer]

This is Graeme. I'd have to -- I don't have that breakdown off the top of my head. I would say, again, going back to the commentary we had on the modeling we've done, that's exactly what we've been playing out. We go down to the account level and really trying to understand the income disruption there, overlay our views on the unemployment situation that we talked about earlier, and then in the government support, ultimately, to kind of model out what we think the delinquencies and impairments will be and thus the loan losses. The disclosure we provided on the payment deferral programs, which is to give you some context, as you said, certainly, the biggest balances come in the mortgage space. A couple of pieces I would maybe just give you for context on that, one is -- so in the deferrals, about 40% of our clients took a 1-month deferral on that. So that's the first cohort we've been able to look at a little bit. We've just gotten some early insights on that. And about 50% of those clients have returned back into a payment status, that's just one point of context. So that's a bit of the earliest data we have to start to validate the assumptions we've been making. The other piece, just in terms of kind of the higher risk piece there. If you take kind of that, again, those clients that have opted for deferral programs and you look at our mortgage book, the uninsured component of it and kind of the high LTV, the over 80%, you're talking about $900 million in balances right now that fit that kind of high-risk category. So those are just kind of some of the points. But again, the modeling we do is obviously much richer than just kind of capturing those points. And certainly, as we kind of see our client behavior going forward, we'll continue to reflect that into our modeling and any adjustments we need to make in our provisions. But right now, that's very much the granular approach we've taken to it.

[Rod Bolger, Chief Financial Officer]

Yes. If you really want to get into the details, you can look at Page 77 of the RTS where we break out the staging by risk category, by product, which includes residential mortgages. So about 8% of our portfolio is currently in Stage 2. So that is up from year-end and from the prior quarter.

[Nadine Ahn]

Thank you, operator. I think we're done with the call. We'll turn it over to Dave McKay.

[David I. McKay, President, CEO & Director]

Thanks, Nadine, and thanks, everyone, for your calls. I recognize how difficult the last 2 days have been for the analysts and particularly, this morning with 2 banks reporting. There's really kind of 3 themes that I wanted -- we're hoping that you took away from our commentary. And as many of you have noted, the enhanced disclosure that we provided to give clarity on the strength and power of our franchise. Number one, our strong financial position. The diversification of our business model and the scale we talk about on almost every call for the last 5 or 6 years, and I think it really showed again, in a time of crisis and with balance sheet strength, we've been preparing, as we said in our comments, for recession sometime in 2022. It caused us to approach and build our capital to not make acquisitions, to not buy back shares, and therefore, we started this crisis which we didn't see with a very, very strong 12% CET1 ratio. And you see after a crisis where we took over $2.8 billion of charges, 11.7% CET1 ratio. So there, our diversified model, the size and scale of our business, the capital base, the fortress balance sheet really give us an opportunity to support our clients, to absorb the uncertainty with resilience and to take advantage of opportunities going forward. I think we're in a very good position to do all 3. I also hope from our disclosure, from the commentary, from how we've approached the uncertainty of the health and economic outcomes, the conservatism with which the management team here at RBC has approached this from the reserves we've taken, from our approach in the discussion, that we're taking a very conservative -- our base case, as you heard Graeme describe, is quite a severe scenario, and you should dig into that. But we've approached this entire crisis with a very conservative approach to protect our balance sheet, to protect our shareholders. But third is very strong earnings power. We exited Q1 2020 with a fantastic quarter, we carry that momentum in. You saw a very strong pretax, pre-provision earnings, and that talks again to the diversification, the quality of our client franchise. So our conservatism, our strength, the diversification and earnings capability position us well to withstand the uncertainty and turn around and exit this a stronger bank and a bank that can take advantage of the opportunities that will present itself in the future. So thank you very much for your questions, and we look forward to talking to you over the coming quarter.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation. A