National Bank of Canada (NTIOF) CEO Louis Vachon on Q2 2020 Results - Earnings Call Transcript

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National Bank of Canada (OTCPK:NTIOF) Q2 2020 Results Conference Call May 26, 2020 5:30 PM ET

Company Participants

Linda Boulanger - VP, IR

Louis Vachon - President, CEO & Director

Ghislain Parent - CFO

Bill Bonnell - Chief Risk Officer

Laurent Ferreira - Co-Head of Financial Markets

Denis Girouard - Co-Head of Financial Markets

Stéphane Achard - Co-Head P&C Banking

Lucie Blanchet - Co-Head P&C Banking

Jean Dagenais - Senior VP, Finance

Conference Call Participants

Scott Chan - Canaccord

Gabriel Dechaine - National Bank Financial

Meny Grauman - Cormark Securities

Sumit Malhotra - Scotiabank

Doug Young - Desjardins Capital Markets

Sohrab Movahedi - BMO Capital Markets

Nigel D'Souza - Veritas

Mario Mendonca - TD Securities

Darko Mihelic - RBC Capital Markets

Steve Theriault - Eight Capital

Operator

Good afternoon, ladies and gentlemen, and welcome to the National Bank of Canada’s Second 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.

Linda Boulanger

Thank you, operator. Good afternoon, everyone, and thank you for joining us so late in the day, exceptionally this quarter. 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-Head of Financial Markets; and Jean Dagenais, Senior VP, Finance.

In order to respect physical distancing, we are hosting the call in a different room than usual, which may impact sound quality. We apologize in advance if this result in any technical difficulties and we thank you for your patience. Please also note that the presentation is slightly longer this quarter as we wanted to address a few key topics as we navigate this environment. So before we begin, I refer you to Slide 2 of our presentation providing our disclaimer regarding forward-looking statements.

With that, let me now turn the call over to Louis Vachon.

Louis Vachon

Yes, Linda, and thank you everyone for joining us this afternoon. The world is going through extremely challenging times, both from a health and financial perspective. Our thoughts are with those suffering loss or hardship due to COVID-19. Since the beginning of the current crisis, our focus has been and continues to be on the wellbeing of our employees, our clients, and our communities. Our mission of putting people first truly resonates with what we experience today and it's guiding us in our decision making. I am extremely proud of how fast we adapted to this unusual and difficult environment. This would not have been possible without the profound cultural and digital transformation at the bank over the past few years and the strong engagement of our employees. I wish a sincerely thank to all our people for the way we have managed this crisis to-date and also our clients for navigating with us through this situation.

Governments, regulatory bodies and banks have collaborated efficiently to rapidly implement extraordinary relief measures to help Canadians navigate through the current uncertainty. We are deploying exceptional efforts to help our retail and business clients. We have been providing financial relief measures where most needed. We have been extending our balance sheet and we continue to support capital markets amid volatility.

Now, let me say a few words on the Province of Québec. While the lockdown restrictions have been more severe since the beginning of the COVID-19 crisis, the situation is stabilizing and the economy is gradually reopening. Looking forward, the outlook in our whole province remains favorable based on structural strength, including sound public finance, a well-diversified economy, a less indebted consumer and a well-developed financial support system for local businesses.

We entered the crisis on a solid footing with strong capital and liquidity positions, strong credit quality, and a defensive positioning. Our businesses have shown their resilience and are performing well in extremely challenging times with revenue growth across all segments, led by financial markets and wealth management.

In the second quarter, pre-tax pre-provision earnings were up 20% from last year, demonstrating the bank’s earnings power. While our underlying pre-tax pre-provision results were strong, we have adopted a prudent approach to provisioning considering the uncertain macroeconomic outlook. As a result, we significantly increased our provision for credit losses and recorded $504 million for the second quarter, more than 5 times recent levels. Nevertheless, we are maintaining strong capital and liquidity levels, with a CET1 ratio of 11.4% at the end of the second quarter.

Last March, we announced a number of actions to support businesses and supplying credit to the economy during a period of disruption. Banks are expected to use this additional lending capacity to support Canadian businesses and households not to increase dividends and/or buy back shares. Consistent with this expectation, the bank paused buyback activity after having repurchased 525,000 common shares during the first half of the fiscal year. Earlier today, we announced a quarterly dividend of $0.71 per share, unchanged from the previous quarter.

Turning now to quarterly performance by business segment. Our P&C segment delivered pre-tax pre-provision earnings of $389 million, up 3% year-on-year. We must look at the second quarter in two parts, before and after the beginning of the pandemic. We were off to a very good start through the first half. But as of mid March, our business was impacted by lower class activity in the context of the increasing strict lockdown measures encouraging Canadians to stay at home. These measures had a significant impact on the momentum of several businesses.

Since the very beginning of the lockdown, we have been supporting our retail clients with more than 110,000 deferrals to-date, including our mortgages, loans and credit cards. We have been able to offer our clients uninterrupted service; thanks to strong employee mobilization as well as talent mobility between branches, call centers and operations teams.

The new reality has also acted as a catalyst, spurring increase in digital adoption and effectively accelerating our digital transformation. National Bank is also committed to supporting its business clients. We have been prudently extending our balance sheet to our commercial and corporate clients with $3.8 billion drawn in existing facilities during Q2, and $1.8 billion in new lending. In addition, we have provided principal payment deferrals for over 3,000 business clients and we are participating in all applicable government programs.

To illustrate, we have now provided in excess of $1 billion to over 20,000 SMEs just through the CEBA program. I am proud that National Bank has been ranked as number one in client satisfaction across Canada for small and medium sized businesses since the crisis began.

Our Wealth Management segment delivered a robust quarter with pre-tax pre-provision earnings up 23% year-over-year. Our business mix and client-facing strategy prove successful in the current environment. Transaction volumes were particularly high in National Bank Independent Network and National Bank Direct Brokerage, and solid inflows into our full service brokerage and private banking businesses more than offset market declines. We are pleased with the strategic and technology choices we have made in the past which are giving us resilience required to be there for our clients through the uncertain times.

Our Financial Markets segment continued to deliver strong performance with pre-tax pre-provision earnings up 70% year-on-year. Our global markets franchise was well positioned going into the crisis and delivered particularly strong results. Market volatility observed in the second half of the quarter translated into a significant increase in volumes across all businesses. We also delivered a solid performance in corporate and investment banking, driven by M&A, and government debt underwriting.

Overall, I am very pleased by our ability to support our corporate and institutional clients in very challenging times.

Turning to our International segment, Credigy and ABA, our resilient operations are well-positioned to perform well throughout the crisis. Credigy reported a decline in revenues, primarily due to mark-to-market adjustments to the fair value of certain assets. The underlying collateral on those investments remain strong and fair market value -- fair value should increase when markets stabilize.

In Q2, increased provisions reflect changes in the macroeconomic environment. We remain very comfortable with Credigy’s book which is well-diversified to limit the downside impact of COVID-19 stress, specifically Credigy has limited exposure to unsecured assets, significant exposure to asset classes less correlated to consumer economy and investments with structural enhancements that provide for the downside protection. In the current environment, Credigy’s earnings will likely be flat this year. We are -- looking forward, we continue to emphasize disciplined growth and we are confident in Credigy’s ability to generate growth in revenues and earnings in the medium term.

ABA Bank continues to grow, albeit at a slower pace. The COVID-19 health situation in Cambodia is stabilizing, but some sectors of the economy have been hit hard such as manufacturing and tourism. Slower economic growth in the country has led to slower revenue growth at ABA. ABA entered the crisis with strong capital and liquidity position. In terms of credit, ABA is benefiting from what has been historically a prudent provisioning approach and a vast majority of its portfolio is secured. Financial relief measures have been offered to customers and 6% of clients have taken advantage of those programs with 95% of those that chose that program continuing to pay interest on their loans. We expect ABA to generate slight earnings throughout for the current fiscal year and I'm confident that ABA will return to above growth -- to above average growth once the global health and economic situation stabilizes. Overall, we are very satisfied with the performance and positioning of our international activities.

To conclude, there remains significant uncertainties regarding the severity and the duration of the current crisis. At this time, it is impossible to predict its full impact on the economy and on the bank's futures performance, but there are clear signs that the economy is rebounding from April lows.

Our primary focus will remain on supporting our clients and our employees and on the wellbeing of all our stakeholders while managing the business with our usual prudence. In these uncertain times, I am confident in resiliency of the bank and the agility of our teams across all business segments. The strength of our balance sheet, the quality of our credit portfolios, and our defensive positioning also provide us with comfort as we navigate those difficult waters.

Based on everything we see today and the earnings power of the bank, I am also confident in our ability to maintain the current level of dividends to our shareholders.

With that, I will now turn the call over to Bill.

Bill Bonnell

Thank you, Louis, and good afternoon, everyone. In the investor deck, we provided additional insights this quarter on our credit provisions and allowances, as well as lending exposures in a few sectors most directly impacted by the COVID-19 crisis. Before I begin to review the slides, I'd like to repeat some key messages that we've discussed in the past as we approach the later stages of the credit cycle.

We maintained an underweight position in unsecured consumer lending. We maintained an overweight position in our home Province of Québec, as we believe the Québec economy would be resilient to stress given lower home prices and consumer debt, a greater share of two worker households and the government with a strong fiscal position that would be able to provide support during an eventual downturn. We’ve maintained discipline in our commercial lending activities, keeping growth rates to below peer average, particularly in certain sectors such as commercial real estate. We’ve reduced the size and rebalanced the composition of our oil and gas portfolio. And since IFRS 9 was implemented, we tried to be consistent and prudent in building allowances on performing loans.

The COVID-19 crisis that began earlier this year is much more complex and far reaching than previous downturns we've seen. However, we feel that the decisions we've taken over the past years on a defensive portfolio mix, prudent underwriting and disciplined growth rates have provided us with resiliency needed to support our clients and the domestic economy throughout this downturn.

Please turn to Slide 8. We continued our prudent approach to provisioning this quarter in the context of the uncertain macroeconomic environment. Total provisions for credit losses increased to $504 million in the second quarter, more than 5 times the PCLs registered last quarter, caused primarily by a large increase in provisions on performing loans. The most significant driver was the revision to our forward-looking macroeconomic scenarios which generated more than three quarters of the $391 million or 99 basis points of provisions on performing loans. Retail performing provisions were $111 million driven primarily by revisions to our outlook for unemployment. Non-retail performing provisions were $254 million driven by a broad based deterioration in outlook for a number of economic factors.

In the international sector, performing provisions increased to $26 million. Compared PCLs increased to $120 million in the quarter as specific provisions were taken in a number of non-retail files across several industries and provinces. Given these significant increases this quarter, we provided a more detailed summary of our allowance for credit losses on Slide 9. As a reminder, under IFRS 9, the way we calculate ACL is as follows.

We start by developing three forward-looking economic scenarios and assess the probability for each. We run our portfolios through IFRS 9 models to compute ACL based on those scenarios, we assess the adequacy of our management overlays, which can reflect additional factors or uncertainties to then arrive at the total ACLs for our performing loan portfolios. The result of this rigorous process was an increase in our performing loan allowances to $978 million including impaired and POCI. Total allowances for credit losses reached $1.2 billion, a 57% increase from last quarter. Breaking down this total ACL by portfolio type, you can see the increase in allowances for our retail portfolio was 30% reflecting the underweight position in unsecured consumer lending. In the non-retail portfolios, total ACLs increased by 90% reflecting both the sudden change from benign to severe economic conditions as well as prudent provisioning in highly uncertain environment.

Looking at total ACLs by stages, performing loan allowances increased by 67% from last quarter, representing about 3 times coverage of the last 12 months impaired provisions; Non-performing allowances increased to $302 million, representing a 39% coverage of gross impaired loans. All told, with these significant increases this quarter, we are confident that our allowances prudently reflect the potential impacts on our portfolios of the deterioration and uncertainty in the outlook for the economy.

In trying to assess the adequacy of allowances for credit losses, it's important to do so in relation to the size, mix and risk profile of the portfolios being assessed. On Slide 10, we’ve provided a few metrics to help investors in that assessment. The ratio of total allowances to total loans increased to 77 basis points at the total bank level. One should remember that this ratio uses notional loan balances and is not risk-based. In comparing this ratio across banks and banking systems, it's important to consider portfolio composition and risk profiles, such as the nature and weight of residential mortgages and credit cards. A more risk-based approach that we've talked about on previous calls is the ratio of performing ACLs to last 12-month provisions on impaired loans, which reached about 2.8 times at the total bank level and about 3 times excluding the International segment. We’ve provided the breakdown excluding the International segment, given the impact on the ratios from the amortization of Credigy’s unsecured consumer portfolio that occurred over that period.

Since the beginning of IFRS 9, we've tried to be consistent in building proven allowances, and think that this is reflected well in these ratios.

Turning to Slide 11, our gross impaired loans increase to $780 million or 48 basis points in the second quarter. Formations were pretty stable in the retail and international sectors. However, for commercial and corporate, in addition to normal course formations, we revised our view of the likelihood of full loan repayments in a number of files managed by our [workout] group, moved them into impaired status and took specific provisions. Details of our loans and sectors most directly impacted by COVID are provided on Slide 12. Our exposures in most of these sectors are quite limited, and we're working closely with impacted clients as they navigate through this difficult time.

Slide 13 shows details of our portfolio in the oil and gas sector, which has been impacted both by the COVID-19 crisis and the recent price war between major international producers. While oil prices have seen a significant recovery from recent historic lows, it remains a challenging environment for producers and services. As you know, over the past five years, we've significantly reduced the size of our lending to producers and services and rebalanced the mix in our portfolio towards larger cap clients and investment grade pipelines.

Some data on payment deferrals provided to clients is on Slide 14. Our employees have been intensively working with our customers to provide relief measures to help them face this unprecedented situation. Our data looks in line with industry data published by the CBA when accounting for our market share proportions. Details of our market risk exposures are provided in the appendices. Trading VaR increased through the quarter, averaging about $9.5 million and we experienced nine days with trading losses. In an extremely volatile market and with a majority of staff working from home, the team performed remarkably well and was able to provide market making and transactional support to clients throughout the quarter.

In closing, the economy has changed from benign to severe conditions in a remarkably short period. And the monetary and fiscal policy responses have been unprecedented in size and speed. These changes will generate volatility in provisions on performing loans as we've seen this quarter.

In the end, the performance of our credit portfolios will I think be evaluated by the amount of provisions on impaired loans that will incur over the next couple of years. Those usually be higher and lumpier from quarter-to-quarter than what we've enjoyed over the past few years. However, we believe that having maintained a defensive posture in product and geographic mix, discipline in portfolio growth and having prudently built allowances to help offset those future credit losses, we have a resilient position that will enable us to continue supporting our clients through these challenging times.

On that, I will turn the call over to Ghislain.

Ghislain Parent

Thank you, Bill, and good afternoon, everyone. In light of the current environment I will focus my remarks today on capital and liquidity, beginning on Page 17. We entered the crisis with robust capital and liquidity levels, allowing us to support our clients in these challenging times.

Net income generation net of dividends but excluding provision for credit losses was strong across all business segments in the second quarter and added 52 basis points to our CET1 ratio. This was offset by the provision for credit losses, mostly on performing loans, which deducted 41 basis points of CET1. Risk weighted assets growth, which I will comment in a minute, was primarily driven by credit risk and reduced our CET1 ratio by 71 basis points.

During the quarter, pension plan had a positive impact on capital and we also benefited from a regulatory measure on ECL amounting to 23 basis points. Share buy backs were minimal this quarter. We ended the quarter with a solid CET1 ratio of 11.4%.

Now turning to risk weighted asset growth on Page 18. Excluding foreign exchange, our risk weighted assets increased by approximately $5.5 billion during the quarter with the largest increase coming from additional lending and drawings on committed credit lines, as we support our business lines through to crisis. RWA rate also increased following our decision not to renew a series of securitized credit card portfolios that matured during the second quarter since market conditions were not favorable at this time. The CET1 impact was 12 basis points which we expect to recover when market conditions stabilize.

Now turning to Page 19. Our total capital ratio stood at 15.5% at the end of the second quarter. At this time, our goal is to continue investing organically in our different business activities. Despite deals presently we are facing, we are confident that even under deteriorating economic conditions we can maintain capital levels well in excess of regulatory minimum requirements for the rest of fiscal 2020.

Our liquidity now, our liquidity coverage ratio stayed stronger in the quarter at 149%. Total deposits continued growing healthily during the quarter with channel inflows of stable customer deposits, essentially matching the draws from our corporate and commercial clients. In spite of the uncertainty surrounding the economic conditions for the rest of the year, we currently anticipate the LCR to remain high until the end of fiscal 2020.

In conclusion, while larger uncertainty remains, the bank has strong underlying business fundamentals and has performed well through the onset of the pandemic as that came to a new reality. We have a solid balance sheet, strong capital and liquidity levels, and we have back -- we are backed by the earnings power of all our business lines. This puts us on a solid footing to support our clients through these uncertain times.

On that, I'll turn the call back to the operator for the Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. We have a first question from Scott Chan from Canaccord. Please go ahead. Your line is open.

Scott Chan

Good afternoon. Louis, just on the -- when you talked about the International and Credigy and the mark-to-market on certain assets, can you give us examples on some of those assets that were marked down and that you expect that could recover, in a market recovery?

Louis Vachon

Sure. Jean, do you remember which portfolio had the fair value adjustment.

Jean Dagenais

Reverse mortgage.

Louis Vachon

It was reverse mortgage portfolio Scott.

Scott Chan

Okay. And just briefly, just on the capital market side, underwriting and advisory fees were very strong. Was underwriting mostly [GPM] that you called out government debt underwriting and maybe kind of talk about the pipeline you're seeing post quarter on both those?

Louis Vachon

Sure. I'll let Laurent or Denis answer that. Did you hear the question guys?

Laurent Ferreira

Yes, I did. Thanks. So, yes mainly debt for sure. Although we did get some new equity issued during the quarter, but the growth mainly came from the debt side. And going forward, I think we are seeing a pretty good pipeline on that front. I don't know, Denise, if you want to?

Denis Girouard

No, exactly. We continue to see big issuance scheduled for provinces obviously because of all those programs that we put in place, but also in the corporate sector we're seeing since the middle of March up to now a very, very big calendar of new issuance coming to the market.

Louis Vachon

And the last thing is, we've been saying that publicly. We feel that there's a need for equity in the system to navigate through the crisis. So we feel that at some point we've started to see a little bit more equity issuance. But we -- over the next few quarters, I think there's a scenario that I think is increasingly possible that we'll see hopefully a revival of the equity capital markets business as we see more and more equity being issued either to prop up balance sheets or to finance acquisitions.

Operator

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

Gabriel Dechaine

Good morning. My first question is for either Louis or Lucie. It's still early, but Québec is one of the provinces that opened -- reopened more ambitiously than some of the others. And wondering if you're seeing any trends in your business that you could talk about, whether it's customer behavior, in terms of what they're spending on, borrowing habits or any shifts in the deferral numbers that everybody is going to be looking at this quarter? Thank you.

Lucie Blanchet

Yes Gabriel, it’s Lucie. So I would say that our assumptions evolve on a weekly basis with the pace of the reopening measures implemented in the different markets. So let's say we monitor and maintain three components of customer behavior. The first one would be loan activity and then the credit behavior and also the customers’ liquidity position. So in the past week, we've seen positive signs of recovery in loan activities, where we see a slowdown, not collapses. So to give you some color, the week of April 6th we faced rock bottom in terms of activity. So mortgage originations were down 50% year-over-year that week, auto lending was down 80% year-over-year, and as well the credit cards purchase volume was down 35% month-over-month compared to February. And we have seen significant improvement since then. And as of last week, for example, mortgage originations are down 5% year-over-year, and auto loans are down 35% and it's also interesting to see that the number of transactions improved quicker than the volumes themselves and do not follow completely the same trend. So that implies to me that growth activity is coming back, but involving lower amounts, showing prudent behaviors from consumers.

And on the credit card purchase volume, we are down 3% compared to the pre-COVID weeks. So clearly we went from pessimistic to more optimistic in terms of loans activity. But although it's encouraging, we don't expect loan originations to come back to the level of pre-COVID before the end of the year.

On behavior on credit, I would say overall that we see prudence usage of unsecured credit. I think people will remain prudent, deliver it when they can, sometimes using some of the deferral that is offered and also we’re evaluating their willingness to take more financial risk. So I think we will keep continuing to see that prudent behaviors and to be honest there is deposit and money in the cash account. So liquidity is there. And all-in-all, I think obviously we’ve seen stickiness also on those deposits. So that's very encouraging.

Gabriel Dechaine

My question then for Bill, it's a -- when I ask some another bank and I might ask all of them this quarter. We kind of saw what we expected to see this quarter, big spike in provisions. Can you give a glide path for what you see for the next few quarters as far as you can tell? And what the thought process is behind that outlook? And I'm thinking specifically of -- now the percentage of deferral -- loan to deferral, very high. I mean relatively lower but still high. And some of that might be tactical, people just taking a payment holiday. And how you see that evolving over the next few months as it relates to your credit outlook?

Bill Bonnell

Thanks, Gabriel. I'll break down the question in a few parts. First, in terms of the path on provisions, with the information we have now, we would expect performing provisions to be much lower in the coming quarter. We aren't giving a target range for PCLs because there's so much uncertainty in the path of the reopening and the -- following the effectiveness of the fiscal and government programs that have been put in place. However, in the next quarter if there's no significant change in our outlook for the macroeconomic scenarios, then the performing provision should go back to being driven by portfolio growth and migration.

To give you an idea without giving any target ranges or anything, but if you look at the MD&A on Page 74, we gave a disclosure on our sensitivity in the -- to the different scenarios, and you'll see that even if we weighted the pessimistic case, a 100%, the increase in the ACL would be less than -- much less than it was this quarter. So we'll -- our performing allowances will be driven by our view of the information that we have at the end of the next quarter and our outlook for the future. But we would expect them to be lower than -- certainly than what we saw this quarter.

For the deferrals, maybe quickly, it is uncertain. We haven't had, and we haven't seen such a level of deferrals before. We definitely have experienced with smaller deferrals with I think floods and fires and our experience in those smaller cases has been very, very positive. However, this is significantly different. One in that although unemployment has increased dramatically, there is an expectation that it may be temporary in many cases, but certainly it's going to be some more permanent damage to some sectors and some areas of the economy. But a lot of it could be temporary.

The amount of cash that was put into the system, as Lucie commented on, we're seeing good behavior. Usage of lines of credits are going down, credit cards utilization is going down. So the prudency that Lucie described is one data point that we're looking to try to assess what will happen after the end of the moratorium. And when we see lines of credit being paid down, there's cash coming from somewhere. Is that from jobs or -- and they're continuing to receive their income. They're receiving the cash from the government programs. Was there some that were using the deferral requests more tactically? Given the uncertainty that everyone was facing in March, it was a good idea I think in giving advice to clients to take some, have a little bit more flexibility and for the most major cash flow of the mortgage payment to give yourself some optionality. And it looks like some of the usage of those referrals was really tactical given the uncertainty. And we have had many cases where clients now that they're wanting to not run significant debt are asking to reverse the moratorium, starting to come back to their regular payments. So -- it’s data, it’s early and we're following it extremely closely as Lucie mentioned and we'll develop our view more over the next quarters. We see continue to where the economy and where the consumer behavior goes. Does that answer your question, Gabriel?

Gabriel Dechaine

Yes, it does.

Operator

Thank you. And the next question is from Meny Grauman from Cormark Securities. Please go ahead.

Meny Grauman

Just wondering about the changing outlook on your real estate footprint as a result of the COVID situation, you show the stats in terms of work from home. Also we know about an increase in digital adoption. So kind of in two parts. Have you changed your view? Do you see any potential for more significant savings from a reduced real estate footprint and maybe digging more specifically in terms of implications for the branch footprint as a result of this big experiment?

Lucie Blanchet

It’s Lucie. I'll start with maybe the branch footprint and Louis could comment more broadly. So on the branch, I would say we were already working two things in parallel before COVID. So we were transforming the in-branch experience and we adapted through COVID on that front. But we were also working on optimizing our physical networks and we already had a three year plan on this. So we were active on that front and our plans remain unchanged. So we have been rightsizing some urban markets where we might have had redundant locations. So we consolidated a couple of sites and you see that in our branch counts in the supplemental, but that didn't affect our brand share. So could we change our plan now because of COVID or should we change it? And so I think we will pursue what we had planned for 2020 and we will see later in 2021 and beyond. But for me, one important assumption for the future will be, will the consumer keep and adopt their new banking behavior post COVID? And I think with the digital adoption movement, it's very positive. Will it accelerate, will it stabilize, will it revert back? I think at this point it's too soon to confirm. I don't know if you want to Louis comment more broadly on it?

Louis Vachon

No. In terms of the head office, I think we have flexibility around the new head office for working remotely and that's why we sold our old building last summer and not to be too overweight in our own real estate portfolio and around the new tower we have, depending on how much working remotely, we will -- employees will be doing going forward. We have flexibility around some of the space in the new tower.

Operator

Thank you. The next question is from Sumit Malhotra from Scotiabank. Please go ahead. Your line is open.

Sumit Malhotra

I wanted to start with Bill, maybe for Louis. When we compare the increase that you've enacted on the performing portfolio today, I think it was exactly four years ago this quarter that you had the increase in the sort of the enactment of the sectoral provision that was taken for energy. And after you took that one, the provisions required for that portfolio going forward were quite small. Actually I think you ended up being able to reverse or move some of it later. So when you tell us that the management overlay was -- it sounds like a decent chunk of the remaining performing portfolio after the change in scenarios, just curious, how would you compare these different models, the sectoral four years ago which allowed you to deal with energy in one shot and what we'll see in the performing book going forward? Is it really that management overlay piece that you think is the one that gives you flexibility to bring this down, now that the scenarios have been changed?

Louis Vachon

Sumit, it's Louis. I'll start with a non-technical answer. And Bill will give you the more technical one. As you know, as a team once we identify an issue, we tend to move very proactively to address it. That's where we did four years ago. And thanks for reminding me of the anniversary. But I think we -- going back further, when we had ABCP issue in 2007, we went after that also quite aggressively if you recall in terms of provisioning. So I think that's our style of management to try to identify an issue and address it aggressively.

Now, sufficed to say that this one is more complex -- quite a bit more complex than the oil and gas situation four years ago or even ABCP in 2007, 2008. So, hopefully we're well ahead of it, but it's too early to say that where we stand exactly on it. Bill, anything you want to, particularly on the issue of management overlay.

Bill Bonnell

I think, Louis answered the question very well. I’ll just remind you that there are many pieces of the process around IFRS 9. There's the scenarios themselves, which are an important aspect of driving the ACLs. There's a probability attached to that. There's the models themselves that are important and the magnitude of the PCLs that are taken on performing loans, and there's the management overlay.

So I don't want to give you the impression that any specific, whether it's severity of our scenarios or it's the models themselves or what that, when you add them all up, and the ACL is calculated, I think you can look at the -- our Slide 10 to relate it to the risk positions and see why we're comfortable in that. We've been prudent in developing those allowances.

Sumit Malhotra

Yes. That's very good and I think you gave reference that we could probably go into these a lot more but we've got a few more calls this week that we can try our luck with that. One more on the other obviously important issue is capital. I would say for National the increase in the ACL and the transitional arrangement obviously help. I want to get to the next piece that we're going to focus on, which is going to be the RWA migration. It doesn't look like to me at least in some of the credit density calculations that we do that you actually had much of anything at all. And obviously, this quarter was the one that focused on the draw downs of corporate and commercial lines. So maybe this is for Ghislain. I'm just curious as to what type of speed you expect that RWA increase to take as a result of credit migration? Do you feel that the RWA growth you saw this quarter is something that could be replicated by migration, or is it likely to be at a more reduced pace on that?

Ghislain Parent

Thank you, Sumit. But I will let Bill answer that question.

Bill Bonnell

Yes. Just in terms of migration and thinking about the path through the downturn, I would expect migration to happen over several quarters, unlike performing PCLs with a significant change where the performing PCLs is more front-loaded. So I think what you saw in terms of RWA growth on the credit side this quarter, a lot of it was because of the draw downs, the magnitude of the draw downs, and the new facilities provided to clients early on. They tended to be larger corporates that were -- had been issuing in CP markets and others that couldn't any longer and use these facilities. So the quality of the draw downs were very, very high. And some of those draw downs were paid back during the quarter after the markets opened up. So for the migration, I think over the next few quarters, it will be different than this quarter. It'll be more on -- it'll be more based on how the economy progresses, the speed of the reopening, the success of the fiscal programs to stimulate the economy and support certain sectors. And it won't be a multi or one quarter story.

Sumit Malhotra

Yes. When you mentioned you expect to stay above regulatory minimums on CET1, were you thinking of 10% as a floor?

Ghislain Parent

Well, this is Ghislain. So I don't want to give a number, essentially because we need to be prudent with all those scenarios. There's so much uncertainty right now that we don't want to provide a specific number. But of course, with the scenario with that we’re around, we're pretty sure that we would be able to maintain our capital level well in excess of regulatory minimum. And so it's for capital but also for liquidity.

Operator

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

Doug Young

Just maybe sticking with regulatory capital. One thing that just caught my eye was the decline in RWA related to market risk, which just surprised me in light of the environment that we're in. I would have expected that to have gone the other way. So I'm just curious as to what happened there? And then on the market risk component of it, the credit, you talked a bit of it, the market risk component of it, how should we think of that evolving over the next few quarters?

Bill Bonnell

Hi, Doug. It's Bill. I'll start off and then maybe Laurent or Ghislain can comment. So you will have seen the -- with the volatility in the markets and those volatile days entering our historical VaR period, that VaR increased during the quarter and we would expect that a VaR will remain elevated and a little volatile for a period of time. As part of some of the regulatory measures that were given to take this into account the current situation, some measures gave some benefits to the capital treatment. And the -- so we would expect VaR to stay high and we wouldn't expect to see a reduction in -- of the same magnitude and risk weighted assets for market risk going every quarter for sure.

Doug Young

I guess if the regulatory changes weren't in place, can you quantify what the impact would have been for market risk in the quarter?

Ghislain Parent

Doug, this is Ghislain. So it would have been 18 basis points the impact on the capital. It is our understanding that the temporary measure will be removed when the market conditions have returned to normal. So at that moment, of course we would lose the measure, but our market risk would go back to normal as well. So it would be positive on the CET1. But the impact for the quarter was 18 basis points on the capital.

Bill Bonnell

And Doug, just one more thing to add on there the -- on that measure, the -- with VaR and stressed VaR, there were some measures put in place after the last crisis, which made sense. SFR was a very good one as part of Basel 2.5. It wasn't designed and the intent wasn't to be attached to a situation where you're currently in a stressed scenario. So the appropriateness to remain aligned with the -- what the tool was used for is more questionable in this environment. So I think the measures were quite appropriate.

Doug Young

No, understandable. The second question, I think you mentioned somewhere in the release that on some of the deferrals you're not actually charging interest on interest, which is the first time that I've seen that. And it's only for certain clients that you're not doing that for. Is that -- is it a material amount of clients and which clients would that apply to? And did that result in you having to kind of as well build a performing loan, PCLs at all this quarter?

Lucie Blanchet

It's Lucie. So on the deferrals and all of the deferrals, they are charged interest obviously. So it's just for the period of the deferral we gave a relief to our customers, to all our mortgage customers. So it's not the question of applying or not. It may be a small amount. But in principle, I think it is fair the measures we've put in place, but it has no link with any of the PCL and the provisions.

Doug Young

So you're not charged. So if you give an interest deferral that interest doesn't accumulate onto the balance in these cases, is that correct?

Lucie Blanchet

Yes. So the deferral -- the interest is actually linked to the balance and it is reset as the date of the maturity of the term. So it is not -- the change in payment that it may give is not affected when the deferral start again, it's really at the end of the term that there is an adjustment for the payment itself.

Doug Young

Okay. I may come back on that one offline. And then just lastly on ABA, you indicated that earnings will be up modestly in fiscal ‘20. And if I look at year-to-date earnings, they were 95 million this year and then last year was 118 million. So it implies the next few quarters you're in the $10 million to $15 million range for ABA. And just curious if I'm in the ballpark? And what would be the big headwind? Is this more of a -- is this a credit issue that you foresee? Is this just loan growth going the other direction, just hoping to get some color because that's been a decent growth driver and has been a stable part of the business. Hoping to just get some color on what you're seeing in the Cambodia business?

Louis Vachon

The loan growth, it’s really -- the loan growth has really slowed down. So we don't expect it to go negative. But it's going to be a low single-digit growth probably on the loan side. Incenting and deposits -- and deposits will continue to grow but not at 30%, 40%. Because as you know, there's a smaller social safety net in these countries. So with a slowdown in the tourist industry and the manufacturing industry, people have to use a part of their savings to get through the crisis. So that's the main driver of -- actually the current economic conditions are slowing down significantly to growth in deposits and loans.

Doug Young

And why would that cause like a sequential -- decent sequential decline? Because if ABA put up 54 million just in this quarter -- and I guess there was 20 million of tax item. But if I'm thinking right and it's 10 million to 15 million, it just looks like it's -- like the decline would be quite material year-over-year and I get the slowdown in growth. But it looks like it's actually -- it's going to be negative year-over-year. Not negative earnings, but negative growth.

Louis Vachon

Yeah. No, I don't think so. So, maybe we were prudent on that one too.

Operator

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

Sohrab Movahedi

I apologize, I had to drop off a part of it. So if the questions have been answered, I'll go back to the transcript. But I just wanted to start off with Bill. And Bill, lots of talk obviously that the bank had exercised quite a bit of prudence coming into this, obviously not expecting this. But I think over the last number of quarters Louis had said you’ve been very selective with especially commercial loan growth for example. It is a little bit surprising that you have to increase the reserves so much like fivefold. Can you -- did you find that a surprise yourself when you were sitting down doing it and what are some of the businesses that may have surprised you?

Louis Vachon

I'm so sorry, I guess, that question was answered. So you can look at the transcript, I'm kidding. I think I'll start -- I think, I may have -- I think we answered it earlier, it was just twofold, it was me and Bill. So going back to your point, at the end of the day, never mind stage one and stage two losses. I think the real criteria of outperformance going forward will be phase three losses. And on that, I think as a team, we're still confident that we're going to look pretty good on a relative and absolute basis. The other thing derived from experiences when we identify an issue, we tend to go out at it very proactively. So, historically, that's what we've done with oil and gas. That's what we've done with ABCP. So in this, I think it's more the prudence that you see is more our corporate culture and the way we've been managing the bank for the -- as many last years. And we want to -- we feel that's the right way to manage the business. And that's more a continuation of that way of managing the business than us being wrong in our forecast or positioning in terms of risks. Bill?

Bill Bonnell

Yes. Maybe just to add on technical, I think the -- we weren't surprised that the non-retail increase was larger than the retail increase, I think -- and taking the theory of IFRS 9, I think that's what was expected. I point you to the Bank of Canada FSR, which gave a stress test and that's exactly what they forecast as well. I think the surprising thing as we think about during the quarter, Sohrab, the views on the severity of the economic inputs to the model certainly evolved during that quarter. So unemployment and GDP most importantly. But for the fact that the non-retail portfolio and performing loans increased it’s bigger percentage. Now I think that's just the -- that's just how it works.

Sohrab Movahedi

And I appreciate it’s late in the today. If I can just ask one other question? I mean maybe ask Louis. Louis the -- or Ghislain for that matter, I mean I think you've highlighted how much of year-over-year increase you had in the quarter in the pre-tax pre-provision, so arguably reflective of the underlying earnings drivers away from their reserve building. I mean -- what do you care to provide some thoughts as to how you see that trending forward?

Louis Vachon

Well, it's -- as you know, it's pretty -- we would describe the current environments Sohrab as going where no one has gone before. So this is “Startrek Finance” that's how we call it, the current environment.

Sohrab Movahedi

I think you're doing really well in this one.

Louis Vachon

The episode is not over. So still watching for the cling-ons. And so listen, I think first of all the -- let's go back in time a little bit. We're certainly I think without getting arrogant or cocky, I think we are legitimately pleased with the performance of the business lines during Q2, all of them. And I think it shows that, I think we're pretty good at managing crisis, but also I think it suggests that we made some right strategic choices. Now I understand that we're not out of this crisis yet. So we are not going to have this time the upgrade on St. Catherine streets while the games are still going on at the Bell Center. But I think some of the choices we've made and the positioning. So in terms of P&C, I think that some of the stats that Lucie stated earlier are encouraging in terms of signs of recovery. That being said, we know that net interest income, low interest rates is a reality we have to deal with. And that is more of a negative for the next few quarters. Capital markets, as you know, I am a permanent bull on capital markets. I think that is a business that’s been grossly understated and underestimated by many stakeholders. And I think that was demonstrated again in high fashion in Q2. I think I look at the fundamentals of public finance debt, the need to recapitalize, managing risks, managing portfolios, I think the fundamentals of that business, within normal quarter-to-quarter volatility remains very good. And also I think our wealth management business is extremely well positioned as evidenced last quarter. And we still see volume of transaction -- that quarter is still very early, but the volume of transaction remains to be -- remains still strong.

And I think I've addressed our international, I think, yes. I think we're doing fine this year in 2020 on a relative basis in our international, and we feel that our growth strategy there post-COVID is basically intact, once we're out of the crisis. And no, we don't expect a catastrophe in the meantime. So that's where we stand. I think we'll take it a quarter at a time. We're not going to take undue risk or stupid risk to inflate the top-line. That's not where we’ve tried to avoid to do or at least in the last three years and don't expect us to do that in the current quarter or in the next few quarters. So I think we'll try to generate revenues and growth but at without losing sight of risk.

Operator

Thank you. The next question is from Nigel D'Souza from Veritas. Please go ahead.

Nigel D'Souza

So I have a two part question for you, and I wanted to kind of reference the macroeconomic assumptions that are built into your expected credit loss modeling under IFRS 9. So this is laid out on Page 73 of your shareholders report. I was hoping you could provide some color on the economic conditions you're expecting based on these assumptions. Because when I look at your next 12 months forecast, you're still expecting positive GDP growth. And most of these scenarios are still forecasting unemployment to be below 10%. So if you could touch on that and just kind of looks like you're expecting a pretty strong V-shaped recovery, but if you could just expand on that? And the second part, when I look at your downside scenario, it looks like the -- your expectations for house prices haven't really moved since the October assumptions and the GDP growth forecast actually kind of went up a bit and you're predicting down 2% in October and now you're predicting about down 1.7% for GDP. So if you just expand on what's feeding into these economic assumptions?

Bill Bonnell

Sure. Nigel it's, Bill. I'll take that question. I can understand your question. The shape of the path on some of those variables is very unusual. It is not a normal forecast going forward. And when we -- when our economist team was building this scenario, intra-quarter there is significant changes and shocks that the way that it's sliced and diced and presented in that table, I can understand it's hard to get a feel for the severity of it. I think in the language on the next page, actually it's on the same page, 73. So if you look a little down further, because it's hard to see from those forecasts, there's a little more color given about some of the magnitude of changes of GDP, more than 30% down, unemployment around 12% and things which don't stand out. But that's really because of the unusual nature. That's why as I mentioned earlier, there are different parts of the IFRS 9 ACL or the economic scenario is one of them. You really need to look at what the results are and compare it to the risks. So just in the magnitude as I mentioned earlier in these scenarios, all three scenarios are recession scenarios. And if you look at on the next page, Nigel, the 100% upside scenario, so our most optimistic scenario this quarter generates an ACL that is pretty darn close to a number to what we showed in Q4 as our a 100% pessimistic case scenario. So, the impact on the ACLs is what I think should guide you in assessing the scenarios, just because slicing and dicing next 12 months and future periods just doesn't capture well the significant downturn in the variables. Does that help you answer the question -- help you through the answer Nigel?

Nigel D'Souza

Yes, that's very helpful. So would it be fair to say that as we get a better sense of the economic impact, the assumptions that are going are going to firm a bit and going to be less volatile or vary going forward?

Bill Bonnell

Well, even I think if you look at the base case, you can't see the severity within the next 12 months. But one important factor is that the shape of the path that we have in the base case leads to still significantly higher unemployment in the remaining forecast period. So it's a sharp impact. And the fiscal and reopening the economy does have a significant improvement in a short period of time. But we get back to a place where we're 200 basis points higher in unemployment than when were we started. So it's not -- the scenario isn't a V and we go back to where we started, it's 200 basis points higher unemployment, and it persists for a long time in this scenario. So the way that you can see that is by the size of the ACLs that it generates more than by what -- the way it slices and dices in time periods on the table.

Louis Vachon

And it’s Louis, the thing that makes it even more difficult in terms of scenarios, and I know you know that because you've done your own modeling, it's the public health, the different path of how this thing would evolve. This crisis would evolve from a public health standpoint is something that none of us here are qualified really to predict so and the path there, there are many of them and they have a direct impact on the lockdown and on the recovery. So that makes all the scenario analysis even more complicated.

Operator

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

Mario Mendonca

Good afternoon. I kind of want to go along the same direction here. Bill, would I be right in saying that the reason why the next 12 months shows GDP growth of 1.4% is simply because once we're out a year we'll be comparing it to a very negative call it Q2. So the math -- it’s just sort of mathematically would set that way. Because you'll be preparing for a very bad Q2. Is that the right way to frame it?

Bill Bonnell

I think that is part of it. And Mario given what we saw in the scenarios when it was first sliced and diced in this format of next 12 months and the remaining, we were surprised by how it looked given our understanding of the severity. So if there are technical aspects like that, there's also the fact that economics is kind of from the end of Q1, which was already included March, was a significant decline in the calendar Q1, so the starting point was lower. There's lots of technical aspects that don't show up here. But when -- in previous quarters when our scenarios looked very severe, I think I pointed out, don't look only at the scenarios, it's each of the pieces of the process, which is important and probabilities, which is very important, and the modeling and such. So here, I would direct you as well to be cautious about just comparing this table and thinking that you get the real visibility on the severity of the shock, you really have to look at the details.

Mario Mendonca

Yes, I think from a from a compatibility perspective, what might be helpful is if you showed 2020 full year, 2021 full year, that might make it easier to compare to what maybe the -- I'm not sure what the other banks going to report, but that's what I thought we might see. But that's on aside. A sort of related question is, the timing of the recovery might be just as important if not as -- if not more important as the severity. So what would be helpful here is when you think about your scenarios, when does -- when do you figure unemployment return to the levels we saw before COVID or the level of GDP return to the level before COVID? Is that like a late 2022 scenario? When do you see that, essentially, the return trip back to where you were before this mess?

Louis Vachon

Yes. In our base case, I think it is that -- it would be if -- if it's in that time period, it would be at the end of that time period. Our base case is the unemployment rate stays high, it's persistently higher than where it was pre-COVID and it's a long time before it gets back. So towards the end of the period.

Mario Mendonca

And just so we're clear, you're saying the end of 2022?

Louis Vachon

The remaining period goes up to ‘24, ‘25.

Mario Mendonca

So even beyond the end of 2022 before we’re normal again.

Louis Vachon

Because you see remaining forecast, not the same for all the portfolios but some of it, three years of it, four years.

Bill Bonnell

I don't have the exact quarter that it is, but I know from memory seeing the shape, it's delayed in our scenario. The actual -- what happens in reality may be very different than that. And we hope that it's -- maybe next quarter we'll be talking about the green shoots and the positive signs there that we're seeing maybe will be more rapid, but it is impossible to know.

Mario Mendonca

But I wouldn't be wrong in saying it's beyond 2022.

Bill Bonnell

Yes. You’re correct.

Operator

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

Darko Mihelic

Hi, thank you. Good evening, and thanks for taking my question here so late. I just wanted to revisit risk weighted asset one more time Bill. And maybe just give us an idea of what it is we should be looking for to watch for migration? When I look at what's happened in the environment, I see credit spreads that really blew out. They come back in a bit, but they're still high. I see rating agencies making all sorts of downgrades across all sorts of industries, investment grade, non-investment grade. And yet when I compare your last quarter, this quarter, I look at the PD bands, there's very little migration happening in the quarter. So what is it that would spark your team to migrate and cause an increase in risk weighted assets that I can see from the outside looking in?

Bill Bonnell

Thanks for the question, Darko. I'd say there's -- some did occur this quarter and particularly in some of the most immediately impacted sectors, so oil and gas you can think of and others. So the more directly impacted sector would be, then I think the faster you would see that happening. So it is related a bit to the mix in the book and not related to -- not all downgrades externally or heavy portfolios that we're in. If you look at the corporate book, there's a lot better in utilities – distillate utilities, pipelines and such. And I think the migration would be much slower in some of those -- not much migration in some of those segments. I think in real estate -- retail sector of real estate would be fast. I think office probably will be -- it's more of a question mark about what will happen with office real estate. I can tell you we're sitting in a room, Darko that is significantly larger than the room that we typically take these calls from and we're all six or seven feet apart. What will the new office space reality be and how that will play through in office sector of the real estate? I think it'll be a little bit longer. So I don't know if that answers your question. But based on history it's over a few quarters, it's not all at once. Primarily driven by what happens with the economy.

Louis Vachon

And I think the way -- Darko it’s Louis. I think the way we're looking at the scenarios going forward is that the discretionary economy is the part of the economy that's going to be feeling the effect of COVID-19 for the next few quarters a lot more than the general, the rest of the economy. So that's why in our presentation, we highlighted the sectors we felt were the most exposed within the discretionary economy: restaurants, hotels, retail. Because we feel that the risk of migration was going to be significantly, either we've taken it already, as Bill mentioned, on the oil and gas and some other related sectors, and it got to be much more concentrated on those. Whereas the non-discretionary part of the economy, and manufacturing and some of the others, I think is going through -- either is going through their crisis on a more stable basis or will rebound very, very quickly outside of the -- once we're out of the lockdown. So that's why we're trying to differentiate and look on those. And as Bill said, we feel that generally on the elements of the discretionary economy where there could be risks of migration and losses, we're under-indexed to the general economy and maybe some of our peers.

Darko Mihelic

And maybe just a follow up to that. When I look at the deferral information you provided on Page 14 of your presentation and I look at the -- what you guys are referring to as non-retail, 6% of the loan balances have been some sort of -- been some sort of accommodation. I'm curious of the 4.4 billion of loans that have been deferred in the non-retail, how many of those are like small businesses kind of [indiscernible] the larger, more commercial? Or do you have that, maybe that breakdown by how many of them are actually part of the government program and how many of them are deferred without the need for a government program?

Bill Bonnell

Yes. Thanks. I'll start off and maybe Stéphane can add in. But similar to what we described in the retail, we think that early on in the crisis, there was a lot of uncertainty of -- if you remember back very early on of, if and when the government programs would come up to speed. And I think proactively a number of customers really wanted to have some flexibility until they got a sense of what the future would be. And I think that was a wise and proactive thing to do. In terms of the split between the corporate and commercial, there is very little in corporate but -- or smaller amounts in corporate than commercial but Stéphane do you -- give some anecdotes of.

Stéphane Achard

Yes, and -- well and reality is by quarter -- by the end of Q2, the only program that was really out complete and operational was the CEBA program. And there were hardly any programs on the co-lending with BDC and EDC. So the vast majority of the clients Bill is right. The vast majority of clients of all sizes went for the deferral programs, if you want, that we offered. And most of them had not -- other than CEBA small business had not tapped into the federal programs at that time.

Operator

Thank you. [Operator Instructions]. And the next question is from Steve Theriault of Eight Capital. Please go ahead.

Steve Theriault

Hi. Let me first apologize if this is at all repetitive, I did drop off -- had to drop off for a little bit. But I think on RWA inflation. I heard your response to Darko. But early did you give any sense of what you expect here in terms of a base case RWA inflation, or I appreciate it lags in a little bit over time here. But is there any numbers that you can put around that?

Louis Vachon

No, we didn't give a number.

Steve Theriault

And you think it’s not reasonable to?

Bill Bonnell

I think also to repeat the -- I think it'll happen over quarters. I think it'll be driven by what the reality of the economic path will be. It's less model based with our scenarios in terms of ACLs and IFRS 9. It’s going to be based on the reality of the economy and of the corporates and kind of clients’ performance. Ghislain, did you want to add?

Louis Vachon

I think we -- sorry, Steve, it's Louis, I think I'm not sure where you were when you were offline. But we answered with -- I think it was Sohrab or Darko that we mentioned that the reason we feel that RWA inflation is going to be manageable, notwithstanding the fact that we're starting this quarter at 11.4 after having taken what we feel is a very prudent provisioning on the loans. That when you look at the sectors of the economy, and that's why we -- when we look at where there's more vulnerability for either losses or arguably weight migration over the next few quarters, it’s still sectors related to discretionary economy. And that's why we described our exposure to that sector in our presentation. On oil and gas as Bill has mentioned, we've taken some RWA inflation already. And on the other sectors, you can see that it's relatively small in terms of percentage of our portfolio. And that's why we feel it's manageable. It's going to be done over the next few quarters.

Steve Theriault

Okay. And just the other thing I had and feel free to say so if this is repetitive. I was hoping to hear from maybe Lucie, in terms of, in P&C, consumer activity levels would have dropped off very dramatically at the start of the shut down. Can we get a little color just around to what extent that is starting to come back, how much closer to normal? Any numbers just around activity levels I'd be interested in?

Lucie Blanchet

Yes, well I think I, I gave a lot of data points on that.

Louis Vachon

Yes, Steve I would urge you to look at the transcript because Lucie gave a very lengthy answer to that very question early in the presentation.

Operator

Thank you. And we have the next question from Mario Mendonca from TD Securities. Please go ahead.

Mario Mendonca

Sorry to do this again. Just if we could go back to this RWA inflation, I think it's obviously an area of interest to everyone. In your regulatory supplement, you talk -- this is Page 30, the regulatory capital supplement. You talk about how credit risk RWA increased meaningfully as much as $3.7 billion ready to book size, but book quality was actually a reduction as in the -- there was an improvement in the book quality. Now, I think Louis, some of your team has helped me understand that part of the negative migration actually fits inside of book size and it can't be easily disaggregated. But perhaps you can help me understand how book quality can actually appear as an improvement in the quarter, given everything that we saw?

Jean Dagenais

This is Jean. The question is what we report as book quality is improvement to our parameters in the models. So it could have that we have improved the model, the parameters, the data that we use to create those models and that created an improvement into the risk weighted assets.

Mario Mendonca

So in a quarter like the one we just went through, you found it appropriate to adjust the parameters to reflect a better outlook then?

Jean Dagenais

The methodology of the portfolio as such. And don't forget that for risk weighted assets we're talking about over an economic cycle, mean in IFRS 9 we're talking about in point in time. So it's not exactly the same thing.

Mario Mendonca

So would it be fair to say that in subsequent quarters we might see the book size impact decline as the draw downs are reversed and perhaps commercial loan growth slows but the quality could actually deteriorate? Is that the right way to look at it?

Jean Dagenais

The quality and the book size are reported in that table that you referred to into the same line book size. So you may not see anything different from that in the future.

Mario Mendonca

So then maybe you could just answer this. Inside the book size, presumably there was a portion of that reflected negative migration. Is there any way to desegregate that or is that the number you're telling is too difficult to do?

Jean Dagenais

Well, we can estimate it. It's about 4 basis points in Q2 of 2020.

Mario Mendonca

Okay. Negative you mean?

Jean Dagenais

Yes, increased risk weighted asset.

Operator

Thank you. There are no further questions registered at this time. I'd like to turn the meeting back to Mr. Vachon.

Louis Vachon

Well, thank you, everyone, and we'll talk to you next quarter. And in the meantime, stay healthy and stay safe. Thank you very much.

Operator

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