Good afternoon, ladies and gentlemen, and welcome to the National Bank of Canada's Third Quarter Results Conference Call. I would now like to turn the meeting over to Ms. Linda Boulanger, Vice President of Investor Relations. Please go ahead, Ms. Boulanger.
Thank you, Operator. Good afternoon, everyone, and Welcome to National Bank's Third Quarter 2020 presentation. Presenting to you this afternoon are Louis Vachon, President and CEO, Bill Bonnell, Chief Risk Officer, and Ghislain Parent, Chief Financial Officer. Following our presentation, we will open the call for questions.
Also joining us for the Q&A session are Stéphane Achard and Lucie Blanchet, Co-Heads of P&C Banking, Martin Gagnon, Head of Wealth Management, Laurent Ferreira and Denis Girouard, Co-Heads of Financial Markets, and Jean Dagenais, SVP, Finance. Before we begin, I refer you to slide two of our presentation providing National Bank's caution regarding forward-looking statements. With that, let me now turn the call over to Louis Vachon.
Merci, Linda, and thank you, everyone, for joining us. Earlier today, we reported very good results for the third quarter in the context of what continued to be a challenging environment. Our businesses performed well with pre-tax pre-provision earnings up 5% from last year, and the bank delivered a return on equity of 17%. As we continue to navigate this uncertain environment, our results demonstrate the resilience of our business model and the benefits of our diversified earnings stream. In terms of outlook, economic and market indicators are sending mixed signals.
After an extraordinary plunge in the first half of the year, Canadian and Québec economies have begun climbing back with a phased reopening. In the province of Québec, given the strong rebound anticipated in the second half of the year, our economists are now forecasting an 8% contraction of the GDP in 2020, followed by a 5.5% recovery in 2021. In terms of provisioning, we were very proactive last quarter and significantly increased our PCLs, primarily to reflect the deterioration in the macroeconomic conditions caused by COVID-19.
In the third quarter, we continue to prudently build reserves, although at a much lower pace. Our total allowances for credit losses increased to more than CAD 1.3 billion, as we recognize that the future path of the recovery and the impacts on our clients remain uncertain. At this point in time, with the information available and considering our positioning and the performance of our portfolios, we believe that we are adequately provisioned. Bill will provide further details in his remarks.
At the end of the third quarter, the bank had strong capital levels with a CET1 ratio of 11.4%, in line with the previous quarter. In terms of capital deployment, our long-standing strategy remains unchanged. We will invest in our businesses where returns are attractive, otherwise returning capital to our shareholders, if permissible. Consistent with OSFI's expectations, our share buyback program remains on hold. Turning now to quarterly performance of our business segments.
In P&C, pre-tax and pre-provision earnings are down 8% year- over- year as a result of the lower interest rate environment and softer client activity in the context of COVID-19, partly offset by solid growth in retail mortgages and deposits. Since the crisis began, we have been supporting our clients with deferred measures across a breadth of products. Since Q2, the value of retail loans under deferrals is down 60%. In addition, the vast majority of clients are resuming payments as scheduled as they exit deferral programs. Wealth Management pre-tax pre-provision earnings were up 4% year- over- year in the third quarter.
Transaction volumes remain elevated at National Bank Independent Network and National Bank Direct Brokerage. Most importantly, assets under administration and under management returned to their pre-COVID levels, which should help alleviate some of the pressure on net interest income from the current rate environment. Once again, we are pleased with the strategic and technology choices we have made in the past, and we remain committed to our client-facing strategy as we navigate these uncertain times. Financial Markets delivered solid growth, with pre-tax pre-provision earnings up 17% on a year-over-year basis.
Our performance was driven by double-digit revenue growth in both Global Markets and Corporate and Investment Banking, as well as an industry-leading efficiency ratio. Our results this quarter highlight the agility of our Financial Markets franchise, which is key to delivering strong and consistent returns. This is particularly important in the context of a low-interest-rate environment, providing the bank with a diversified earnings stream. Looking forward, our priority remains to support our clients in challenging and uncertain markets while maintaining a prudent risk profile. Our international segment continues to perform well.
Credigy's results were solid this quarter, reflecting higher revenue and lower PCL as a result of a lower COVID-19 impact versus prior quarter. Investment volumes remained strong in Q3, with average assets up 29% compared to last year. We are very comfortable with Credigy's book, which remains diversified and well-positioned to withstand the impact of COVID-19. As mentioned at Q2, in the current context, we expect Credigy's earnings to be flat this year. Looking forward, we are confident in Credigy's ability to generate disciplined growth in the medium term. At ABA Bank, we saw momentum picking up starting in mid-June.
During the third quarter, ABA delivered solid results with net income up 35% year- over- year, driven by strong growth in loans and deposits. Over the last few months, ABA was able to grow at a faster pace than the market, with clients attracted by ABA's industry-leading digital solutions and strong brand, which have become key differentiating factors. As a result, ABA recently surpassed the one million client threshold in Cambodia and continues to have strong momentum. Overall, we are very satisfied with our international activities, which are positioned to perform well throughout the crisis and beyond.
In the current context, we are pleased with our overall strategic positioning, which we view as defensive, namely our super-regional bank model operating primarily in Canada, our overweight position in Québec, which has strong economic fundamentals and is showing solid momentum since the reopening of the economy, our lower exposure to unsecured debt, our above-average exposure in fee-based businesses like Financial Markets and Wealth Management, which is translating into strong earnings power, providing us with additional flexibility, our unique strategy outside of Canada, and the evolution of our culture into a collaborative and adaptable organization.
A key competitive advantage, especially in the current environment. In conclusion, I am satisfied with our third-quarter results and with how we have navigated the crisis to date. While significant uncertainty remains regarding the duration and the impacts of the crisis, there are clear signs that the economy is rebounding. I would like to take this opportunity to sincerely thank all of our people at National Bank for their continued dedication and unwavering commitments to our clients. With that, I will now turn the call over to Bill.
Merci, Louis, and good afternoon, everyone. During the third quarter, we maintained our proactive and prudent approach to provisioning in the context of an uncertain macroeconomic environment. The progressive reopening of the economy was apparent. Capital markets rebounded and were easily accessible by issuers. Commodity prices increased materially, and market volatility declined. However, the path to recovery is likely to be long and remains uncertain.
You'll see this clearly in our economists' updated forecasts presented in the graphs on slide 31. Our baseline expectations are for unemployment to slowly recover but to remain well above pre-crisis levels throughout the forecast period, and risks are skewed to the downside for both employment and GDP. In the table on the right, you'll find our baseline forecast for several macroeconomic indicators presented on a full calendar year basis. You can note that our quarter-over-quarter updates for those economic and market indicators were mixed.
Turning to slide seven, our total provisions for credit losses in Q3 were CAD 143 million, or 35 basis points, 70% lower than last quarter and up almost 70% from last year. Performing PCLs totaled CAD 62 million. This quarter, the main drivers of our performing PCLs were an update to our IFRS 9 scenarios and factors, an increased weight assigned to the pessimistic scenario, credit growth and migration, and an increase in the management overlay to take into account elevated uncertainties, as well as what we think was just a temporary improvement in retail credit metrics experienced this quarter.
The result was 15 basis points of performing PCLs spread across the retail, non-retail, and the international portfolios. Impaired PCLs totaled CAD 88 million, only 17% higher than last year. The positive impacts of support programs were evident here, particularly in the retail portfolios, which saw a significant decrease in impaired PCLs. Looking ahead, we expect impaired losses to trend upwards into next year and want to remind you that these can be lumpy from quarter to quarter in the non-retail portfolios. On slide eight, the progression in our allowances for credit losses is presented.
Total allowances increased to CAD 1.3 billion in the quarter, a 70% increase from the pre-COVID level. Performing allowances increased by CAD 58 million to more than CAD 1 billion, an increase of 76% since Q1, and non-performing allowances increased to CAD 342 million, which represents a strong 43% coverage of gross impaired loans. Given we remain cautious about the path of the recovery, we believe it is appropriate to continue proactively building performing allowances. With the information we have today, and based on the geographic, product, and sector mix in our loan books, we are very confident that we have a prudent level of allowances.
On slide 9, we've updated some key ratios we tracked that demonstrate the adequacy of our provisioning. Performing allowance coverage remained very strong at 2.8 x the last 12 months' impaired PCLs, and total allowances now cover 4.7 x our last 12-month net charge-offs. Turning to slide 10, gross impaired loans increased moderately to CAD 794 million, or 49 basis points. Net formations declined in corporate lending and at Credigy, while commercial lending had net repayments in the quarter.
On slide 11, we provide updated insights on our exposure to those sectors most directly impacted by COVID-19. Our exposure to consumer discretionary sectors is modest and declined on a quarter-over-quarter basis. An update on our customers' loans under deferral is shown on slide 12. The number of new retail deferral requests during the third quarter declined by almost 90% versus Q2.
The value of retail loans still under deferral declined by 60% during the quarter as more customers resumed regular payment schedules. In the remaining CAD 3.6 billion of RESL, nearly half are insured, and the LTV of the uninsured portion is 60%. Just CAD 35 million of credit card and personal loans combined remained under deferral at the end of July. Non-retail deferral balances were stable as the vast majority of these were for a six-month term. I think these positive metrics demonstrate the effectiveness of the programs put in place to support clients, early signs of our clients' increased confidence, and prudent consumer behavior.
However, we're monitoring payment patterns closely. For expired RESL deferrals, we've seen 98% already restart regular payments, and we've noticed that the performance on expired deferrals in Québec appears to be stronger than in other provinces. It is too soon to draw firm conclusions, though, as we're still in the very early days in the transition. We'll have better insights on this at the end of next quarter. On slide 13, details of our RESL portfolio are provided.
The weight in Québec was stable at 55%, and insured mortgages accounted for 38% of the portfolio. Uninsured mortgages and HELOCs in the GTA and GVA represented 10% and 2% respectively, with an average LTV of 51%. In the appendices, you'll find further details on our loan portfolios and our market risk. In closing, while the economic recovery is underway and we've seen signs of the positive impact of support programs, much uncertainty remains along the path of recovery.
Looking forward, while we believe the peak of total PCLs is behind us, we expect impaired PCLs to trend upwards through next year, while our performing PCLs should be driven primarily by changes in our macro scenarios, portfolio growth, and migration. We remain confident that having maintained our defensive posture in business and geographic mix and having prudently built allowances to help offset future credit losses, we're very well positioned to continue supporting our clients through these challenging times. On that, I will turn the call over to Ghislain.
Thank you, Bill, and good afternoon, everyone. My remarks today will focus on capital, beginning on page 15. We ended the third quarter with a strong CET1 ratio of 11.43%, up four basis points from last quarter. The improvement mainly came from strong internal capital generation, which added 45 basis points, excluding provisions for credit losses. This highlights the value of our diversified and consistent earnings stream. Even during these times in which we are prudently building strong credit reserves, our resilient earnings allow us to continue growing our franchise and serving our clients when they need us the most.
As highlighted by Bill earlier, we continue to prudently build allowances in the third quarter, representing 11 basis points of CET1. Risk-weighted asset growth reduced our CET1 ratio by 25 basis points. Turning to page 16 on risk-weighted assets. During the third quarter, we stayed the course on business development while remaining prudent. Risk-weighted assets growth related to credit risk includes both on and off-balance sheet items. While on balance sheet, loan growth was moderate, as many wholesale clients repaid precautionary draws they made in Q2, undrawn commitments and counterparty credit risk grew.
During the quarter, we were proactive on both a top-down and a bottom-up approach to re-rating our wholesale borrowers, which generated eight basis points of negative migration. That was partially offset by improving ratings in retail clients due mainly to loan delinquencies and lower utilization. We were very pleased again this quarter with our organic capital generation and see continued opportunities to invest that capital across all of our businesses.
We have demonstrated the resilience and diversification of our earnings stream, which allows us to generate capital at an industry-leading ROE of 17%, while proactively building strong credit reserves and absorbing risk-weighted asset growth. Now turning to page 17. As anticipated, our liquidity coverage ratio remained strong at 161%, with sustained growth in deposits across the bank. Our total capital ratio stood at a strong 15.1% at the end of the quarter. We are confident with the information known at this time that even under deteriorating economic conditions, we can maintain capital levels well in excess of regulatory minimum requirements.
For illustrative purposes, in our stress test scenarios, a one-notch downgrade on the wholesale book would negatively impact our CET1 ratio by approximately 100 basis points. In conclusion, while much uncertainty remains, the bank has a strong balance sheet, a defensive credit positioning, and solid liquidity and capital ratios. All of our businesses are performing well, and we remain disciplined on expense management, providing us with a resilient earnings stream. On that, I'll turn the call back to the operator for the Q&A.
Thank you. We'll now take questions from the telephone lines. If you have any question, then while using a speakerphone please list your handest before makiing a selection. If you have any 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 response for all participants. We thank you for your patience. Our first question is from Steve Theriault from Eight Capital. Please go ahead.
Thanks very much. A couple for me. Just a quick one, Bill, for you to start. You've worked your way through most, virtually all, of the credit card deferrals you had on. You indicated that 98% of the RESL deferrals have restarted regular payments. Can you talk a bit about how it's gone with cards in terms of how that's trended in terms of restarting payments or any color you can provide there, given you're a little further ahead than some of the others?
Sure. Thanks for the question, Steve. And I'll start, and Lucie might have some additions. We didn't give color on credit cards because, similar to the RESL, it was very positive, the performance that we've seen. But given the billing cycle, the sample size is small, and we're a little shy. We'd like another couple of months before we draw some conclusions on it. But I can say it was similar to the RESL and quite positive, with the same characteristics of kind of geographical differences between provinces. Lucie, do you have something to add?
I would say that basically, on the credit card, we see prudent behavior. So more than half of the clients that were on default have reduced their limited utilization, also, and the vast majority of them have made payment during the deferral period.
Okay. Thanks for that. And then, secondly, I wanted to ask a question on trading revenues. They didn't show quite as much upside as what we saw from some of the other banks that have reported this quarter. And in particular, equities was even a bit below recent run rates. So maybe it'd be helpful just to have a little color, A, on sort of the equity trading line, and B, maybe refresh us or give us a bit of context of, say, why Q2 was a bigger quarter for you guys at National on the capital market side versus Q3. Any sort of color would be helpful there.
Yes. Steve, this is Laurent. So I'll answer your question. I'll start with equity. So Q3, we had a significant drop in volatility levels, specifically July, August, versus Q2. Our activity also on the equity side is concentrated on ETF trading. ETF trading, there was a significant boost in trading volumes in Q2. That subsided in Q3. You also saw a tightening of spreads, bid-offer spreads, I think, in most equity products throughout Q3, and more specifically towards the end.
So I think you made the point. I think it's important to look at Q2 transition to Q3 in the context of the crisis. Look, we're really satisfied. I think the overall performance of our equity segment, having navigated through very large movements in volatility levels throughout Q2 and Q3, spikes in markets, obviously, record lows, and new highs now. So I think overall, we're very comfortable there. We also saw a shift in Q3 in terms of market opportunity from equity finance towards more fixed income. So you're seeing that in our results. And I think that's a good example of the agility in our trading team.
So our trading revenues, our revenues on the equity finance side, have gone down significantly throughout the quarter, but we saw the upside in our fixed income. So we saw spreads go down, demand go down on the equity side, but we definitely saw a pickup on the fixed income side. There's also a difference. If you look at our capital markets model versus our peers, we are Canadian. Our platform is Canadian. We're concentrated, and we're focused on Canadian clients. And so we're not active in the U.S., and I think you've seen a very large upswing in U.S. credit throughout Q3. So we didn't participate in that. So I don't know if that gives you a bit more color on our results.
Nope. That's great color. Thanks, Laurent.
Thank you. Our following question is from Meny Grauman from Scotiabank. Please go ahead.
Hi, good afternoon. Just following up on the capital markets side, in Appendix 11, the trading VaR trend got more negative. Just wondering what the explanation is for that and if you can provide some insight into Q4 and whether you're contemplating making changes to get to where you want to be in Q4.
Sorry, Meny. You're saying that our VaR levels are higher, or?
Higher, yes.
Okay. So we didn't change our strategy. I think you've heard us in the past. We are typically defensive. We like being long-vol in general. And so we didn't change that strategy. I think the big change here is data. We went through a stress period, and that stress is in our numbers. So we didn't reduce or change, really, our strategy or our risk profile. It's really having gone through a stress period, and that stays with us for a period of time.
Okay. And then just if I look at the Appendix 13 and the economic forecasts, one number stands out to me is just the change in the home price index forecast for 2021. And I'm just wondering what's driving that bigger negative. I mean, you're going from basically forecasting flat to - 8% Q4 over Q4 in 2021. And I'm wondering the implications of that forecast for your mortgage business and your overall view of credit in the mortgage business in particular.
Yeah. I'll start off, and then I'll let Lucie talk about the mortgage business. Thanks for the question, Meny. But the change really was pushing it. It wasn't a significant change in the total from quarter to quarter. It was really pushing it out later. What our economists expect will be a decline in house prices. So if you look at the Q2, it was more front-loaded in 2020 and then some again in 2021.
Based on the experience that we actually see in the market and updating for real numbers in the quarter, it certainly has been more positive on the home price index in the third quarter than we estimated it would be back last three months ago. So it's really more of a push forward of a potential decline. And Lucie on the mortgages?
Yeah, so on the mortgages, what we see right now is really the result of the confinement, and I think we will have the full impact of that in 2021, like Bill said, but I think there are still going to remain lots of differences across the country and through the different regions and also through the different types of dwelling, with probably less of an impact on single dwelling, maybe more of an impact on condos. That still has to be seen.
Thanks for that.
Thank you. Our following question is from Gabriel Dechaine from National Bank Financial. Please go ahead.
Good afternoon. My first question is for Bill. You commented in the slide there, the PCLs, the impaired PCLs reflect the benefits of the government programs. So what I understand from that is that perhaps some loans that would have gone impaired didn't because there was some government program that prevented that outcome. Is that correct? And is there any way to quantify that? Because a lot of people wonder what happens after some of these things end.
Hi, Gabriel. Thanks for the question. So I'd say it's more than just government programs. It's also the deferral programs that the banks have put in place. And you're right. I pointed, I think, specifically on the retail side. In Q3, we saw retail impaired losses about CAD 14 million, lower than last quarter. That's because the metrics in retail, you had the roll forwards into delinquencies, wasn't happening for those that were under a deferral program. You had lower utilization.
A lot of the indicators into the models that attribute scores for the retail clients were showing great benefits. And so it ended up that we took lower impaired losses. And I think that's pretty consistent across the sector in credit cards and others. Given that we think that it's temporary, we used our IFRS 9 and our forward-looking management overlay to offset that. So, you saw a build in performance of 17, yeah, in personal, 18, including wealth. So, I don't know whether that answers your question, but was there a second one coming?
It does. Yeah. And I do have a second, and it's for you and or Lucie. I guess you both have input on it. It's on the deferrals and some of the trends in the numbers within your book, but also relative to peers. Within your book, big drop in the number of value of mortgages deferring payments, but much bigger than what we've seen from the other banks. Is that a geographic thing? How are you managing it? And then versus the non-retail portfolio, big drop in retail, not so big. Well, it's flat in non-retail. I just want to know what's going on there. Are these six-month deferral programs, or are we going to have the rubber meets the road in October kind of thing, or something else going on?
Yeah, Gabriel, I'll start on the non-retail, then I'll pass to Lucie, and we'll share insights on the retail. So on the non-retail, you had it exactly right. The vast, vast majority of the deferrals were for six months. So it's really in Q4 that we'll see those rolling out of deferrals. The small number that have come off out of deferrals so far, the performance has been positive. But again, I'll caution, it's early days. Lucie on the retail?
Yeah. So, Gabriel, it's really the reflection of the approach that we took. So, back in March, I'd say a couple of days into the shutdown, we had to make quick decisions on how to proceed with deferrals, knowing also that this would be a big uncertainty looking forward. So on the unsecured credit, we offered three months. And it's important to note that we have stopped offering deferrals on unsecured credit as of June 30th.
And on mortgages, actually, what we did is we offered up to six months, but we approached it to work proactively with our customers for a first three-month period and then proceed with another three months at their request based on each individual need for hardship. So there were a couple of reasons why we did that. First, we wanted to be proactive and work with our customer quicker than in six months to better understand their situation and find proactive solutions. But we also understood that there was a cost for them to defer their payments, and we wanted to limit that impact as much as possible. And obviously, it gave us some insights on the risk trends before six months.
All right. That's a very thorough answer. That's all I need. Thank you.
Thank you. Our following question is from Doug Young from Desjardins Capital Markets. Please go ahead.
Hi, good afternoon. Bill, the impaired PCL ratio of 20 basis points is obviously quite low. And as you've indicated, you do expect that to trend higher as we move through Q4 and into next year. And I guess, is there any way to size this? I know you've given guidance on PCLs in the past, and I guess I get that we're in certain times, but is there any way to kind of, in your models, to give us a sense of what that impaired PCL could look like as we go through fiscal 2021?
Thanks for the question, Doug. I'm going to give you a two-part answer, and you may not like it. But the first part is I'm not comfortable to give you a basis point guidance on it. The main reason is because uncertainty is very, very high. We're only six months into this global pandemic. I've been through a lot of different downturns in the past of my career, but never a global pandemic. So I think it's better to be prudent and have a few more months before we think about giving guidance.
But the second part, Doug, is I'm happy to share with you how I think about what our total PCLs will be looking forward. And the first point is, I think, like in any downturn, the migration to impaired and impaired losses doesn't happen all at once in one or two quarters. It happens over time. And I think in this specific downturn, the nature of the pandemic and the nature of the programs that were put in place, that it may be longer for that to happen than in some of the other financial downturns I've seen before.
The second is I have a firm belief that what's going to drive the total aggregate of our realized losses through this cycle are really going to be the decisions we took over the last two or three years on our business mix, on not stretching for growth during the late stage of the cycle. So I think in the end, I think I've mentioned it before, it's going to be what's the aggregate impaired losses that we take. Finally, the way I think about it too is in an IFRS 9 world, if we've built adequate performing allowances, at some point, looking forward, that those allowances are going to bleed back into income to offset the impact of the impaired losses.
With that context and how I think about it, I'm comfortable to say that I believe we saw the peak in total PCLs in Q2. I think that Q3's 20 basis points of impaired PCLs is low, and it's going to trend up. I really think that the level of our performing allowances at 2.8 x coverage of last 12 months impaired and 4.7 x net charge-offs, I think that it's a prudent level given our mix and the cautious decisions we took over the last few years.
And just, Bill, on the allowance side, you talk about management overlay. I'm sure there was some in Q2, Q3. Can you size what that was? I know you didn't want to factor in too much of the benefits of retail because it's too soon and there's going to be some deterioration. But is there any way to size how much that overlay factored in?
I think in the past, I think I'm comfortable giving you direction, but I don't think we've talked about size, so our performing PCLs were a lot lower this quarter than last quarter. And I gave you really the key drivers of it in my text. And I thought it was important to mention that given the uncertainties and the, like we talked about, the temporary impacts on the retail impairments, we thought it prudent to address that through our forward-looking management overlay, but no, I wouldn't want to size it for you.
Okay. And then just second question on the CET1 ratio, a bit different than what we saw from others. You did have a negative impact from RWA this quarter. And just trying to get a sense of, maybe you can unpack what really drove that. And then same idea. So how do you see that? Some of your peers have kind of talked a bit about how they think the CET1 ratio could unfold over the next two to three quarters. And obviously, with negative migration coming through, how do you foresee that occurring, migration flowing through and impacting your CET1 ratio over the next year?
Maybe I can start on the migration and then pass it off for the other. But in terms of migration, as you know, in the retail book, it's very much input into the model-driven as opposed to commercial and corporate, where it's file by file assessment. For our commercial and corporate, we have both a top- down and a bottom- up. And typically, we focus on getting the re-ratings done quickly for the higher-risk files.
So oil and gas is the sector that oil and gas and the retail sector are the sectors that have seen the highest downgrades or migration from our reviews. For oil and gas, the spring review was pretty well done by the end of the quarter. For some of the other sectors in commercial, it takes a little longer. So we were more proactive on the top- down approach of reducing or decreasing the risk rating on those files which had not yet been reviewed individually. And we did that for retail and for commercial real estate, the retail segment.
And then on the commercial, the file-by-file approach, again, we focus on a risk-based approach and also on the larger files. And so far for our commercial reviews, we're about 45% done in value, and that'll continue on over the next couple of quarters. So that's it for migration. And one last comment on migration is there are many sectors which we didn't see much negative migration. We saw some sectors that are food and pharmacy and our gold mining portfolios, and such. We saw very little migration in many other sectors than those touched directly by COVID. Ghislain?
As Bill mentioned, we expect some negative migration in the next quarters, but it's going to come gradually on the quarters, and it will be manageable within our CET1 ratio.
And to add to that, this is Louis, so generally, in terms of position, in terms of CET1, what you should expect over the next few quarters, you should expect that ratio to creep up over time, given our. I think we have been generating good organic capital generation. And at the same time, though, I think where risk-weighted assets came this quarter, the increase came from capital markets on off-balance sheet items.
And generally, I think we're comfortable given where we are in terms of performance that we can slowly creep up in terms of CET1 and still use additional risk-weighted assets to grow the business and frankly, generate revenue growth for 2021 and 2022. So I think that's what you should expect going forward.
Great. Thank you very much.
Thank you. The following question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.
Hey, thank you. Louis, I just thought maybe I can go to you. When you finished your remarks, you said you were satisfied with the quarter's results. What would have made you ecstatic?
Do you have a part-time job as a psychologist? I think it's tough to be ecstatic. I'll give you the more substantive answer. I think it is obviously what we called it a very good quarter. It's tough to be ecstatic in an environment where you have a pandemic that affects an important segment of the population in a very negative way.
Six months into a global pandemic, your EPS back to pre-pandemic levels, your ROE back to pre-pandemic levels. So away from the wording that we used to describe it, I mean, how can things get better from here?
Sorry, Sohrab, I missed the last part of your question.
I apologize. I just wanted to find out how can things get better from here regardless of the words we used to characterize the quarter?
Points of improvement that we're looking at, obviously, is the sanitary conditions, which is still impacting a segment of our population and a segment of our economy, particularly the discretionary economy in urban centers is still suffering quite a bit from the side effects of the pandemic. So I think over time is how is that evolving and how is the pandemic from a sanitary and economic standpoint improving. So there is room for improvement just on that basis.
And I'm not a medical expert. I don't know what the timing is in terms of finding a cure or a vaccine for this, but there's still on that, Sohrab. I think there will continue to be we would reverse a negative headwind on the credit front at the very least, and hopefully one day on the interest rate front. So that is one clear path for me of improvement. The other one is, I think, the last thing we want to do in the context of a pandemic that we have never seen in the context of a globalized and digitized economy. I think you want to remain humble and on your toes in that environment.
So the last thing we want to signal is hubris or arrogance in this kind of environment. That being said, I think if you know our organization quite well, National Bank is a combination of regional and sectoral niches. So either, as I said, highly specialized or highly knowledgeable on a regional basis. And we feel that that high level of specialty should help us going forward and growing even in quite complex environments and very uncertain environments. I think that positioning has served us well in the past, and it should continue to serve us well in different possible environments. Does that answer your question?
Yeah, that's very helpful. Maybe just to kind of tie back into one direction, then is the direction arrow, given everything you said about the uniqueness and the nature of the business and the composition of the activities and what have you, do you think your ROE is heading higher, staying flat, or heading lower from here?
I think we'll do the right thing over the long term. I think we're satisfied with the strategic choices we have made, I think, and our risk positioning. But our objective over time is to have a balanced core for our stakeholders, whether it be shareholders, our clients, or our employees. So we're not managing the bank on one number. We're managing the bank on a number of KPIs and ways of measuring ourselves, which include the three main stakeholders that I just mentioned. If they do end up producing the highest ROE, all the better. But it is not. I can assure you, we're not managing the bank on one number.
I appreciate that. Thank you.
Thank you. The following question is from Nigel D'Souza from Veritas Investment Research. Please go ahead.
Thank you. Good afternoon. I have two quick clarification questions for you. The first is on the non-retail loans and deferral. You mentioned that within your presentation that less than 10% is non-investment grade, unsecured, and I was wondering if you could give us a sense of what the total exposure to or mix of non-investment grade credit is, and maybe some more color on the sector mix of those non-retail loans and deferral.
Hi, Nigel. I'll start off. And if Stéphane has something to add, he'll jump in. What I can tell you about the non-retail in terms of sectors, the sectors in our portfolio that have got the highest percentage that are in deferral, retail trade is the first, and that shouldn't be a surprise. When we dig a little deeper into retail, which is a pretty broad sector, the auto dealerships or auto dealership clients are the highest there.
And while we wouldn't have thought it at the beginning of the pandemic, what we've seen recently is the business has actually rebounded very, very strongly for our clients in that sector to where I think their July sales were just about back at or maybe even a little more than year-over-year numbers. So that's a surprise. The other sector, the second sector, was manufacturing. We have seen with the reopening of the economy some positive signals there. Conversations with clients are positive. I will caution you on all of these numbers. We're still early, and I don't want to draw too many conclusions. What we've seen so far has been good. Stéphane, do you have anything to add?
No. As to the percentage of investment grade versus non-investment grade, as you know, the reality is that, Nigel, that the commercial market is largely non-investment grade. So I don't have the number offhand, but the vast majority of any commercial markets business is typically non-investment grade.
Yeah. Typically, Nigel, it's the high levels. Our corporate book it's more than almost 3/4 probably investment grade. And the commercial book is more than 90% secured, 90%-92% secured. It's kind of two buckets. And of course, the deferrals are primarily in the commercial sector. Thanks for the question.
That's really helpful commentary. And I just have a quick follow-up second question here, just on risk-weighted assets for retail. So my understanding is that typically these assumptions that feed into risk-weighted assets are through the cycle estimates and not so much point-in-time estimates. So, could you provide us some colors and insight into how sensitive your inputs are for retail RWAs to delinquency trends in real time or what we see on delinquencies once we move past the deferral period?
So, Nigel, I'll start, but I think that may be a question that we can go into. We could spend a lot of time on. And we could do something offline. But clearly, you're right. The models for retail for RWA, they're different than the IFRS 9 models in that they are more through the cycle. However, the drivers of them in terms of the equivalent of a borrower risk rating are impacted by things like utilization, delinquencies, and such. So there is some sensitivity there. And maybe we can follow up offline.
Okay. That's really helpful. Thank you.
Thank you. Our following question is from Paul Holden from CIBC. Please go ahead.
Thank you. Good afternoon. I want to get a better sense of your plans to manage the loan deferrals or specifically the residential mortgage deferrals as they roll off. And that's a question kind of in the context of your own economic assumptions, which suggests home prices are going to be trending down next year. So really trying to get a sense of how aggressive are you going to be trying to get ahead of that curve and manage through these loans sooner than later?
Thanks, Paul.
Can you tell him to confirm?
Yeah. And Paul, we were having problems hearing you. I think I captured it, but if Lucie and I don't answer it, maybe we'll get you to repeat the question because your voice was soft. But on a couple of points, I'll make on the deferrals for residential mortgages is, as I think the slide shows, the LTV is 60%. And the credit scores are quite high for those that are in deferral as well. So we think that as we transition out, even for those that may be having ongoing temporary difficulties with income loss or disruption, or others, there will be good possibilities of working with the clients to find a solution that fits.
As we dig down into the portfolio as well and we look at how many of the population is what we consider vulnerable or higher risk, and those would be those with the lower credit score, say, mid-600s and worse, and high LTVs of 75% and higher, the numbers is pretty small. It's less than CAD 50 million. So the approach of how to work with the clients as they come off transition will differ depending on their situation. But the vast, vast, vast majority in that population, we think we'll be able to work with. And Lucie, do you want to talk about strategy?
Yes. And overall, when we look at the mortgage deferrals that are left, in terms of relationship with the bank, the average duration is 15 years of those customers. So obviously, we will definitely work with them on a case-by-case basis and making sure that we offer them the different options that we have in our playbook in those cases.
Got it. Thank you. And hopefully, my voice is more clear now. So I do have a second question because a lot of what we've been focusing on across the bank is sort of the more defensive actions taking place and some of the risks. But I think it is interesting to kind of turn a little bit to potential growth opportunities here, how you're thinking about that. Are there pockets of opportunities you're seeing that are rising as a result of the dislocations, whether that's better opportunities to grow in loans or maybe allocate capital to different key income-related businesses? Sort of curious on your thoughts there.
Hi, Paul. It's Louis. Welcome to the bank beat, by the way.
Thank you.
I think I gave part of the answer when I was talking to Sohrab. But clearly, let's start with the more obvious part in terms of growth. I think our international division remains very well positioned. Cambodia's ABA has very good momentum, which should carry us into 2021, 2022. And Credigy also, we're quite happy with how they're performing. And so we think we can generate double-digit growth with that division too. So international, I think we're well positioned. We continue to like the real estate market in Québec, particularly residential market.
Lucie and her team are working very hard on that particular segment with very good success. I think our strategy in terms of specialized commercial, both in Québec and outside of Québec, what Stéphane is doing, I think, has room to grow. I think generally, we'll have some tailwinds as we move out of this pandemic, both in retail and commercial. Levels of activity should go up in Canada in the recovery. So that should help us and help the industry generally.
And lastly, I think we're very, very satisfied with the way we're positioned both in Wealth Management and in capital markets. We're quite differentiated from our peers. And I think we like our strategic positioning. You should probably not expect acquisitions in the short term from us. I think we're very, very focused on organic growth versus acquisition.
Got it. Thank you for your time.
Yeah.
Thank you. Once again, please press star one at this time if you have a question. Our following question is from Gabriel Dechaine from National Bank Financial. Please go ahead.
I didn't think I'd get the follow-up, but anyway, just wanted to circle back with Laurent on the VaR and market risk, RWA issue, and it sounds to me like that might be something that could reverse. Volatility levels are back down, and if they continue on that trajectory, could we see some of that RWA inflation come back in Q4 or Q1 next year all else equal, and then on Credigy, just wondering if your outlook for growth there has changed. I'm sure it's still a good one, but with the Fed and buying everything out there and liquidity ample, to say the least, maybe the distressed opportunities just aren't as big as maybe they looked like a few months ago.
I'll start with the Credigy, perhaps. Then Laurent will answer on RWA. You're right that the very aggressive quantitative easing has helped market recover and has helped the securitization market, which in some ways is a direct competitor to Credigy. That being said, I think there's still sufficient dislocation and disruption in the credit markets in the U.S. that will still allow us to generate good growth. That's what we hear from the team. And so I think we'll see. I think there's still a lot of episodes to be written on how the Fed will manage the pandemic in the U.S. and how the U.S. economy will recover. So that's on that. And on the RWA, Laurent?
Sure. I think, Gabriel, you could see a trend down. But we didn't change anything to our strategy. We haven't reduced our activities with clients, servicing our clients. And so from that standpoint, we don't think that there's going to be any reduction from the way we've been operating. So the issue is we've been through a very volatile period. And so that is going to stay with us for a bit of time. But it will trend down at some point, Gabriel.
Okay. Thank you.
Thank you. We have no further questions for registered at this time. I would now like to turn the meeting back over to Mr. Vachon.
Thank you, everyone, and we'll talk to you next quarter. Thank you. Have a good day.
Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.