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Bank of Montreal (NYSE:BMO)
Q2 2020 Earnings Call
May 27, 2020, 7:15 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the BMO Financial Group Q2 2020 Earnings Release and Conference Call for May 27th, 2020. Your host for today is Ms. Jill Homenuk, Head of Investor Relations. Ms. Homenuk, please go ahead.

Jill Homenuk -- Head of Investor, Media & Government Relations

Thank you. Good morning and thanks for joining us today. Our agenda for today's investor presentation is as follows. We will begin the call with remarks from Darryl White, BMO's CEO; followed by presentations from Tom Flynn, the Bank's Chief Financial Officer; and Pat Cronin, our Chief Risk Officer. We have with us today Ernie Johannson from Canadian P&C and Dave Casper from US P&C. Dan Barclay is here for BMO Capital Markets, and Joanna Rotenberg is here for BMO Wealth Management. After their presentations, we will have a question-and-answer period where we will take questions from pre-qualified analysts. To give everyone an opportunity to participate, please keep it to one question.

On behalf of those speaking today, I note that forward-looking statements may be made during this call. Actual results could differ materially from forecasts, projections or conclusions in these statements. I would also remind listeners that the Bank uses non-GAAP financial measures to arrive at adjusted results to assess and measure performance by business and the overall Bank. Management assesses performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance.

Darryl and Tom will be referring to adjusted results in their remarks, unless otherwise noted as reported. Additional information on adjusting items, the Bank's reported results and factors and assumptions related to forward-looking information can be found in our 2019 Annual Report and our second quarter 2020 report to shareholders.

With that, I will hand things over to Darryl.

Darryl White -- Chief Executive Officer

Thank you, Jill and thank you for joining us this morning. We always value the opportunity to connect with you and particularly during this extraordinary time. The global COVID-19 pandemic is having a profound and deeply personal impact on all of us. We want all of our stakeholders to know that as one of the largest banks in North America, we feel a clear responsibility to do our part to support the health of the economy.

We're working together with policymakers, customers and other stakeholders to develop solutions to the complex challenges presented by the pandemic. The measures taken by governments and central banks to support the overall economy, individuals and businesses have been significant and unprecedented. For BMO, the strength and the clear momentum that we had going into the crisis means that we can provide the needed support to employees, to customers and communities and to ensure the operational and financial stability for the long-term benefit of our shareholders.

Our top priority has been and continues to be the health and safety of all of our employees and customers while maintaining critical banking services. We mobilized quickly to transition 90% of our non-branch employees to work remotely. We implemented strict safety procedures to protect those who need access to physical locations. We are acutely aware of the uncertainty and financial concerns our customers are facing and we're committed to helping them navigate these challenges.

We've provided personalized advice and access to a variety of flexible relief options, including payment deferrals for over 200,000 customers in Canada and in the United States. As of last week, we facilitated over CAD2 billion in funding under the Canada Emergency Benefit Assistance program and over $5 billion in loans in the US SBA Paycheck Protection Program helping 75,000 businesses to keep operating and pay their employees.

We're maintaining access to branches, ATMs, and call centers and we're also connecting with customers and each other in new and innovative ways. We've very successfully expanded our virtual and digital tools to meet customers' needs, including broad use of e-signatures, phone and video meetings and digitized processes. Our ability to implement these changes quickly has directly benefited from the investments we've made over many years in our technology and our digital infrastructure.

Turning to community, guided by our purpose to Boldly Grow the Good in business and life, we've announced several initiatives aimed at helping the communities where we live and work, including donations through the United Way to help get support to those in greatest need. For our frontline healthcare workers who go above and beyond each day to help keep us all safe, we've converted our Institute for Learning building to provide a safe place for them to rest and recover. Together with MLSE we've repurposed the kitchens at BMO Field to prepare and deliver meals to hospitals and shelters across Toronto communities.

We also know the impact the pandemic is having on mental health as people of all ages struggle with the challenges of social isolation and an uncertain future. That's why we remain fully committed to our ongoing sponsorship as a founding partner with Kids Help Phone, reimagining our Annual Walk so Kids Can Talk to a virtual Never Dance Alone-A-Thon. I invite you to join us on May 31st to help raise funds and awareness for mental health in Canada.

Just yesterday, we announced that we've joined others to support a promising pan Canadian COVID-19 clinical trial being coordinated by Sunnybrook Hospital research team donating CAD300,000 to this potentially groundbreaking research.

Turning now to our financial results, while COVID-19 had a meaningful impact on the Bank's earnings this quarter, the Bank's operational performance and capital position remains solid. We benefited from positive momentum across all our businesses going into the crisis with a focused strategy and a very disciplined approach to expense management. This quarter we delivered CAD2 billion in pre-provision pre-tax earnings, demonstrating the resilience and earnings power of our diverse businesses.

We fully absorbed a significant increase in loan loss provisions, including a $705 million provision for credit losses on performing loans. Our personal and commercial businesses in Canada and the US continue to drive core profitability and revenue growth, as both businesses worked very closely with customers. Strong loan and deposit growth was in part driven by customer reaction to the pandemic, which increased loan utilization and a movement to deposit safety. We're now seeing these trends stabilize.

Our capital markets and wealth management businesses were impacted by the market volatility and dislocations during the quarter. Capital Markets' results reflect the increase in provisions for loan losses primarily for performing loans. Client-driven trading revenues were mixed, with strong performance in certain asset classes offset by negative impacts from the market environment. Underlying performance in Wealth Management held up very well with good net new asset growth in our advisory businesses and very strong online brokerage revenue as our teams supported a doubling of transaction volumes and account openings compared to a year ago. These good wealth results were negatively impacted by market movements on our insurance business and a legal provision.

Capital Markets and Wealth Management continue to demonstrate their competitive strengths in supporting the efficient and effective functioning of Global Markets. BMO Capital Markets was a lead book runner for the CAD8 billion global benchmark sustainable development bond issuance with the World Bank aimed at strengthening health systems in developing countries. BMO GAM was proud to be selected as the asset manager for the Bank of Canada's Provincial Bond Purchase Program which aims to support the liquidity and efficiency of provincial government funding markets. While the scope and the scale of the economic and social impact of the pandemic remains uncertain, our strong liquidity and capital provide the strength and stability to withstand a period of prolonged economic recovery.

Our CET1 ratio at 11% is well above regulatory requirements and supports our commitment to maintaining our dividend payment record. We've prudently provisioned for future losses, have a demonstrated track record of strong risk management and are singularly focused on working with our customers across industries and geographies to help them withstand and recover as we always have through every part of the business cycle. Our commitment to improving the Bank's efficiency is as strong as ever. On a year-to-date constant currency basis, we've held expenses flat to last year and maintained positive operating leverage and we'll harness the speed and agility with which we've been executing change during this period to further improve efficiency in each of our businesses over the long term.

We're not alone in finding efficiency improvements that will sustain future growth. The economic recovery is likely to be uneven with some sectors able to rebound quickly and even outperform as they take advantage of accelerating trends that were already emerging. Economies have proven to be resilient and we salute our personal and our business clients who are incredibly resourceful as we work together with them to overcome challenges and close innovation gaps. We all have a shared accountability to make things better when we get through the other side of this crisis.

At BMO, through the pandemic, we've developed a new way of working that has been core to our strategy for a long time, but has now accelerated as we build a stronger, more competitive BMO for the future. We will continue to show discipline and accountability on how we allocate resources to areas with clear competitive advantages, strengthening value for our customers and delivering a more sophisticated, integrated approach on digital first, combining the power of our modern technology platform and proactive analytics.

Before I close, I'll leave you with my summary reflections on how I feel about our quarter in such unprecedented and remarkable environments. First, I'm extremely proud of how our employees responded so admirably supporting each other, our customers and our communities in moments of extreme anxiety and need. I'm proud of our brand and our ability to live our purpose when it truly matters most. Here I could not have asked for more.

We earned CAD2 billion of PPPT comfortably absorbing significant and prudent increases in provisions for credit losses and we earned this despite meaningfully lower revenues in some of our market-sensitive businesses. We have a strong capital and liquidity position, a disciplined operating plan and very good momentum. The strength and resilience of our overall diversified business model has been tested and we are performing well through these challenges. As a result, I'm confident that our Bank has never been positioned better to face the environment ahead.

I'll now turn it over to Tom to talk about the second quarter financial results.

Thomas E. Flynn -- Chief Financial Officer

All right. Thank you, Darryl and good morning, everyone. My comments will start on slide 9 with the highlights of our financial results for the quarter. Despite the challenges of the environment, our pre-provision pre-tax earnings and our operational performance remained resilient. From a balance sheet perspective, we are also in a very good spot with strong capital and liquidity positions. Q2 reported EPS was CAD1 and net income was CAD689 million. Adjusted EPS was CAD1.04 and adjusted net income was CAD715 million, both down from last year, primarily due to higher provisions for credit losses, which drove 85% of the decline. Pre-provision pre-tax earnings were approximately CAD2 billion, down 5% and comfortably absorbed the impact of higher PCLs. Adjusting items are similar in character to past quarters and are shown on slide 29.

Turning now to revenue. Second quarter net revenue was CAD5.5 billion, down 3% from last year. Higher revenue in P&C businesses from strong loan and deposit growth was offset by lower revenue in our market-sensitive businesses. Net interest income of CAD3.5 billion was up 12% or 10% in constant currency, driven by higher deposit and loan balances. Net non-interest revenue was CAD1.9 billion compared to CAD2.5 billion last year with the decline largely driven by lower trading, insurance and market-related fee revenues. Expenses decreased 2% from last year and reflect disciplined expense management. The provision for credit losses was CAD1.1 billion and Pat will speak to this in his remarks.

Moving to slide 10 for capital, the capital position is strong and well above regulatory requirements. The common equity Tier 1 ratio was 11%, down from 11.4% in Q1. The change in the ratio reflects higher risk-weighted assets in the Clearpool acquisition, partially offset by the expected credit loss provisioning adjustments and other smaller net positive items. Growth in risk-weighted assets was driven by strong loan growth in support of our customers and changes in asset quality.

As you are aware, during the quarter we instituted a 2% dividend reinvestment plan or a 2% discount on our dividend reinvestment plan. We view this as a prudent action, given the uncertain environment and the loan growth that we had in the quarter. Our liquidity position has remained strong and benefited in part from excellent customer deposit growth which exceeded loan growth. Liquidity metrics including the LCR which was 147%, improved during the quarter.

Moving now to our operating groups and starting on slide 11. Canadian P&C maintained good core profitability with pre-provision pre-tax earnings of CAD985 million, up 1% from last year and net income of CAD362 million reflecting higher credit provisions. Revenue increased 2% as the benefit of higher balances was partially offset by lower non-interest revenue and lower margins. Average loans were up 7% with commercial loans up 14%. Deposit growth was strong with personal up 12% and commercial up 20%, reflecting higher liquidity retained by customers due to the impact of COVID-19.

Net interest margin was down 10 basis points from last quarter, primarily due to lower loan spreads as a result of a narrowing of the Prime to BA relationship. While projections are difficult, the net interest margin is likely to drift somewhat lower over the balance of the year due to the impact of lower interest rates. Expenses increased 3% primarily due to higher technology and pension costs.

Moving to US P&C on slide 12 and my comments here will speak to the US dollar performance. Net income of $253 million was down from a year ago due to higher credit provisions. Pre-provision pre-tax earnings growth was strong at 11%. Revenue was up 6%, driven by deposit and loan growth and higher fee income, partially offset by lower deposit margins. Commercial loans were up 13% and personal up 9%. Average deposit growth was 18%.

The net interest margin was up 2 basis points from last quarter as the negative impact of lower rates was more than offset by an elevated LIBOR and strong deposit growth relative to loan growth. The net interest margin is expected to move down somewhat over the next two quarters, reflecting a more normalized LIBOR and the impact of rate cuts. Expenses were up just 2% from last year.

Turning now to slide 13. BMO Capital Markets had a net loss of CAD68 million as performance was impacted by higher credit losses and the market environment. Pre-provision pre-tax earnings were CAD300 million. Revenue was down 15%. Global Markets revenue declined in the quarter, although performance was good across rates, foreign exchange, commodities and cash equities. Trading non-interest revenue was negative, given the impact of extraordinary market conditions on our equity-linked note-related businesses as well as credit and funding derivative valuation adjustments.

In Investment and Corporate Banking, revenue decreased as higher corporate banking related revenue was more than offset by markdowns on held for sale loans and lower underwriting and advisory fees. Expenses were down 15% from last year due to the impact primarily of a severance in the prior year. The provision for credit losses was CAD408 million and included a provision on performing loans of CAD335 million.

Moving now to slide 14. Wealth Management net income was CAD153 million. Traditional Wealth net income of CAD169 million was down from CAD236 million last year, largely due to the impact of a CAD49 million after-tax legal provision and lower fee-based revenue, partially offset by strong online brokerage revenue. Loan and deposit growth continued to be strong.

The insurance business had a net loss of CAD16 million compared to average income of approximately CAD60 million a quarter over the last couple of years. The decrease was primarily due to the impact of unfavorable market movements in the quarter. The impact of market movements on our insurance business and the legal provision together reduced earnings per share by approximately CAD0.15 in the quarter. Expenses were well managed and up just 1%.

Turning now to slide 15 for Corporate Services. The net loss was CAD81 million, relatively unchanged from last year as lower expenses and higher revenue were largely offset by the impact of a less favorable tax rate in the quarter.

To conclude, our pre-provision pre-tax earnings and underlying operating performance demonstrate the strength of our franchise. In what was an extraordinary quarter, we earned through higher credit losses, supported our customers and employees and maintained a strong balance sheet.

And with that, I'll hand it over to Pat.

Patrick Cronin -- Chief Risk Officer

Thank you, Tom and good morning, everyone. The current COVID-19 pandemic has had a meaningful impact on all of our risk types. With that said, we went into this crisis in a very strong risk position with a long track record of successfully managing risk through challenging times. As such, we expect to navigate the risks of the current crisis successfully and continue to serve our customers across all businesses.

The most evident COVID-19 impact in the quarter is on our provisions for credit losses. As shown on slide 17, our total provisions for credit losses were CAD1.1 billion or a provision rate of 94 basis points, significantly higher than what has been seen in recent quarters. The total provision was made up of a provision for impaired loans of CAD413 million or a provision rate of 35 basis points and a provision for performing loans of CAD705 million. Based on our estimates, we see approximately one-third of the impaired provisions being related to COVID-19 impacts in the quarter.

As per slide 17, this increase in provisions on impaired loans was due to increased provisions in Canadian P&C and in Capital Markets. In the Canadian P&C segment, the CAD212 million of losses were driven by elevated consumer losses with the increase versus Q1 largely related to the impact of COVID-19 and elevated commercial losses in part related to COVID-19 as well as one larger credit loss that occurred before the pandemic and that involved fraud.

In Capital Markets, the PCL of CAD73 million, an increase of CAD20 million versus Q1 was driven by continued stress in the oil and gas markets, exacerbated this quarter by COVID-19 related demand declines for oil. In addition, Capital Markets had a larger PCL in the apparel retail sector, largely related again to the impact of COVID-19 on store operations.

US P&C impaired loan provisions were CAD124 million, a decline of CAD8 million from the prior quarter. Transportation Finance provisions accounted for approximately CAD41 million or 37% of our US commercial provisions this quarter. The remainder of our US commercial businesses saw impaired provisions decline by 17% quarter-over-quarter.

Turning to slide 18. The CAD705 million provision for credit losses on performing loans was primarily due to the weaker economic outlook with other factors like changes in scenario weights, balanced growth, credit migration and model changes largely netting out. While cognizant of the unique nature of this economic disruption, as well as the substantial support provided by governments, we followed our normal process and portfolio overlay type adjustments were not a large determinant of the overall provision.

Our closing allowances by line of business are shown on slide 18. We feel our closing allowances are appropriate when compared to our actual historical impaired loan experience as well as our own expectations for impaired losses in the future. In particular, this quarter we saw a significant increase in the capital markets allowance, reflecting expected continued stress in the oil and gas sector.

On slide 19, impaired formations were CAD1.396 billion and gross impaired loans were CAD3.645 billion or 74 basis points. The elevated level of both formations and gross impaired loans are largely a reflection of continued stress in some industry sectors like oil and gas, US agriculture and transportation, as well as more recent stress on other sectors more impacted by COVID-19, like retail, trade, and services.

Loan growth shown on slide 20 was largely due to borrowings by our existing accounts, in many cases driven by draws against previously committed facilities. This utilization of revolving lines of credit peaked at the end of March and has been declining steadily and notably ever since. Consumer loan growth was modest, with utilization levels actually declining in Q2 relative to Q1 in several products. This was particularly noteworthy in credit cards where balances declined 12% quarter-over-quarter, explaining about two-thirds of the increase in overall credit card delinquency rates in the quarter.

Turning to slide 21. We've included a view of our loan portfolio with additional balance information for some sectors that are generally viewed as more impacted by COVID-19. For the purposes of this disclosure, we have taken a very broad view of what sectors to include. And while we are not immune to the stress these sectors may experience, on slide 22, we note numerous important considerations that give us some comfort when evaluating the potential for that stress to ultimately translate into loan losses.

On slide 23, we provide further detail on our oil and gas loan portfolio. Although the impaired loan rate of over 4% is clearly elevated, we expect to continue to benefit from the reserve-based nature of virtually all of our sub-investment grade exposures in the extraction segment. In addition, we have a prudent oil and gas performing provision of CAD357 million as of the end of Q2, representing roughly 2.4% of the balance of the entire energy portfolio and 3.2% of the entire portfolio excluding pipelines.

You'll note additional disclosure on payment deferral programs in our MD&A this quarter. As of the end of Q2, we had 11% of our consumer balances and 9% of our commercial balances under deferral arrangements. With respect to consumer deferrals, 89% of the deferred balances are real estate secured lending, with 94% of those deferred RESL balances in Canada. Of the deferred Canadian RESL balances, the large majority are mortgages, of which 33% are insured.

The credit quality of consumer deferrals varies by product, but the average bureau score weighted by deferred balances is approximately 750 in Canada and 730 in the US. And the average LTV of deferred RESL balances is approximately 60% in Canada and 55% in the US. Commercial loan payment deferrals are adjudicated case by case based on a strict set of criteria, including but not limited to a requirement for all loans to have been current prior to COVID-19, minimum credit ratings and an assessment that the business is likely to recover.

Turning to slide 24, our trading related net revenue shows several days in the quarter where we experienced notable losses. These days coincided with periods of extreme volatility, historic price declines in equity markets and unprecedented discontinuity between previously well-correlated assets. Although many parts of our trading businesses performed exceptionally well this quarter, a small number of specific segments saw elevated losses. These segments have been closely evaluated and where appropriate, material risk reduction actions have already been taken. Although the majority of the Company is now working remotely, our operational risk remains within acceptable ranges and our control activities across all three lines of defense are largely operating business as usual.

In terms of outlook, given the historic level of economic stress due to COVID-19, we would not expect to see a reduction in impaired loan losses over the next few quarters and depending on the length of the crisis and the impact on specific industry sectors, we could see further increases in impaired loan loss rates. We will review our allowance coverage as appropriate given our current forecast for future loan losses and as such, would expect the performing provision in the next few quarters to be largely a function of the normal factors that influence this provision in any given quarter.

With that, I'll turn the call over to the operator for the question-and-answer portion of today's call.

Questions and Answers:

Operator

Thank you. We will now take questions from the telephone lines. [Operator Instructions] We have a question from Ebrahim Poonawala from Bank of America. Please go ahead. Your line is now open.

Ebrahim Poonawala -- Bank of America -- Analyst

Good morning. I guess, first question on just on credit. Pat, if you can talk to us around the reserve coverage, so when you look at slide 18, one, like, a comment you made about future performing PCLs, like why -- if 49 basis points is reflective of this macro backdrop and why is that enough, because we've already seen some sort of concern from investors whether this stat ranks lower against your peers and whether this might be enough given some of the COVID sector and exposures that you outlined. So would appreciate some thought process around why 49 basis points is enough and why we shouldn't expect a meaningful increase in that number going forward?

Patrick Cronin -- Chief Risk Officer

Sure. I think I caught most of your question. I would start with -- I don't know if you suggested that there was a meaningful increase coming in the provision. I wouldn't say that at all. The performing provision we would expect to come down from this level starting next quarter and so we don't see an increase coming in the quarterly provision.

With respect to the appropriateness of the coverage, obviously, we spend a lot of time thinking about that appropriateness. And I think, first of all, you can look at it on an overall coverage basis. If you look at the roughly CAD2.4 billion of the total allowance, we think some -- a good way to look at it is versus trailing four quarters of specifics. And that gives us about 2 times coverage of trailing four quarters and that includes two quarters of, as you know, significantly elevated impaired PCL, or you could even look at it based on the current quarter annualized. So a fairly stressed impaired quarter annualized for four more quarters and that's still about 1.5 times coverage. And so I think when you compare that to the peer set, you'll see that we're actually pretty much in line with most of the Group.

And then we also look at it by line of business, and I think for me, I look at the closing GA in terms of basis points, and how that compares to the historical range of specific loss rates. And if you look across every business, US commercial is a good example. We have 49 basis points of coverage now in US commercial. The historic impaired rate of that business and for the last six years has ranged between 6 basis points and 27 basis points. So we think we're actually quite well covered in that sector.

And then, I think, we look at the experience even this quarter in US commercial, we actually saw the non-TF specifics go down this quarter, including, incorporating some specific impacts from some of the sectors you talked about that are impacted by COVID. So I guess two comments. We're not really seeing significant stress yet in the US commercial book. We think it's a really well put together book that can withstand a lot of stress. And at 49 basis points compared to the historic loss rate of that segment, to us that feels like adequate coverage. And I think if you look across all of the business segments and compare them to their historic loss rates or even some version of a stress loss rate like we're seeing now, you'll see that we're over-covered in every single one of the business segments.

Ebrahim Poonawala -- Bank of America -- Analyst

Got it. And just on the...

Jill Homenuk -- Head of Investor, Media & Government Relations

Ebrahim, sorry, it's Jill. I just going to have to jump in with apologies, but I think we better keep it to one question, just because we all know we have a hard stop at 8:15.

Ebrahim Poonawala -- Bank of America -- Analyst

That's fine. Thank you.

Jill Homenuk -- Head of Investor, Media & Government Relations

Okay, thank you. Operator, next question.

Operator

Thank you. The next question is from Scott Chan from Canaccord. Please go ahead. Your line is now open.

Scott Chan -- Canaccord Genuity -- Analyst

Hey, guys, good morning. Pat, in the Capital Markets side, you talked about trading losses on several days on certain segments or sectors. Can you talk about those certain sectors? Is it the sectors that are more kind of commodity driven or is there something else, kind of that was a bit unusual during the volatility?

Patrick Cronin -- Chief Risk Officer

Yeah, thanks for the question, Scott. I think what I'll do is maybe I'm going to ask Dan to make some preliminary comments on this. And if I have anything to add, I'll jump in after the fact.

Dan Barclay -- Chief Executive Officer and Group Head

Sure. Thanks for the question, Scott. I think, as you'll appreciate, the quarter was a fascinating quarter where the early part of the quarter we had some adjustments as COVID came in. The two weeks in March were extraordinarily volatile. And then subsequent to that, in April and now going on into May, we've actually had, I would call it, exceptional results. In that period of high volatility, we had a couple of places where we had such extreme market dislocation around historical patterns that we had some exposure. The first is what we call our equity linked note business and then the second is how we're covering off the hedging of our exposure around our derivative book which you will have known as XCA [Phonetic]. So those are the two places that we work through some of that dislocation to the marketplace.

Scott Chan -- Canaccord Genuity -- Analyst

Okay.

Operator

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

Gabriel Dechaine -- National Bank -- Analyst

Good morning. Just on the energy provisioning, I was a bit surprised that the -- is CAD54 million of specific provisions and then thankfully, you gave some additional disclosure on the provisions on performing. Similar question to Ebrahim's there, given all the issues that we're seeing in that sector, why does that number makes sense? I'm just like devil's advocate here.

Patrick Cronin -- Chief Risk Officer

Yeah. No, sure, that's a great question. And we think with that rate of coverage, we size it relative to a couple of things. I mean, first of all, that's well above the current loss rate we've seen on specifics over the last couple of quarters. And as you know, the sector is already quite stressed. And that specific PCL rate has actually been pretty stable in the book for the last three quarters. And so we've had a pretty good picture of what stress looks like.

The other thing you can look at is, what level of stress we would have seen in our book back in 2015, '16. '16 would have been the worst year during the last downturn and there we averaged about 150 basis points of loss in that year. As you know, we recovered a fair bit of it later, but that was the rate in that quarter. So that kind of gives you another bookmark.

And then lastly, obviously, we do a ton of stress testing on the portfolio. And I would tell you that CAD35 flat for three years stress test and keep in mind, this is just a stress test, there's assumptions baked into it, but our best guess of a CAD35 flat environment for three years running would be roughly about a 2% loss rate per year in that portfolio. And so that kind of gives us some sense that at 2.5 times -- 250 basis points of coverage, or 3 plus if you exclude pipelines, is a pretty reasonable number for a sector and actually would incorporate higher levels of stress than we've seen in some of the more stressed periods in the past for that sector and is quite consistent with our stress tests.

Gabriel Dechaine -- National Bank -- Analyst

When you take the specifics, are you seeing -- are you looking at when an actual account goes bankrupt or whatever? Are you doing any -- I think these guys are going bankrupt, so I'll take a specific now?

Patrick Cronin -- Chief Risk Officer

No, we would take a specific provision on every oil and gas account that is currently classified as impaired and that provision would fully reflect our complete expectation of what the loss would be. So everything in the oil and gas impaired portfolio right now has a specific provision that's been taken on it, if it needs one. I would remind you that a huge chunk of that oil and gas portfolio is reserve based.

For example, we had a fairly -- one very chunky addition into the impaired oil and gas portfolio this quarter. In fact, it accounted for almost two-thirds of the increase -- the formations we had in the sector this quarter, and given the reserve base nature and the significant amount of junior debt that's below us, we actually don't expect to take any provision at all. And so that also gives us some comfort.

And the other thing to keep in mind too is, a lot of the producer clients that we deal with, particularly in the United States are hedged and a lot of them are hedged to the balance of the year. So they can weather quite well short term storms. We'll see as prices play out. But in the short term, given that, plus the reserve based nature of our lending, plus our stress testing and our own historic experience, we feel pretty well covered in the sector.

Gabriel Dechaine -- National Bank -- Analyst

Thank you.

Operator

Thank you. The next question is from Steve Theriault from Eight Capital. Please go ahead. Your line is now open.

Steve Theriault -- Eight Capital -- Analyst

Thanks. Could we go back to Capital Markets for a moment and just the equity linked note marks. It didn't look like these products really reared their head to the equity line like the last time. I appreciate it wasn't as adverse, but go back to '08 and we had a big sell off. Maybe can you talk about the differences there and would you expect that to come back linearly as the market comes back or has come back in, since quarter-end somewhat or is it a situation? I think maybe it was Tom earlier mentioning that you've taken some risk off the table and some spot. So is that -- does that come back with the market?

Thomas E. Flynn -- Chief Financial Officer

Yeah, thanks for the question, Steve. I think the piece I would give you is, there was extreme volatility as we moved through that two weeks in March. And so as you think about some of that normalization, you're right, we will get some of that back over time with that normalization, but also, as we went through there, we are doing dynamic hedging and some of that dynamic hedging will then be permanent in terms of a realized loss.

As we think about going forward, we've done a lot to take risk off the book, both in terms of market downside protection, making sure that we have matched our term volatility profiles and then our exposure between different marketplaces, so think Canada versus US and have worked very, very hard to take that book out and look at it. Today it's being relatively balanced, strong and immunized. And again, I do think there will be some recapture as we go forward. It's a strong business for us and has been and will continue to be so.

Steve Theriault -- Eight Capital -- Analyst

Is that dynamic hedging program for that book new or just enhanced?

Thomas E. Flynn -- Chief Financial Officer

It's enhanced from where we were, and if you think, we've taken a more conservative view of our risks and so we're managing the business that way.

Steve Theriault -- Eight Capital -- Analyst

And if I look at the trading days in the appendix, the day that had CAD180 million, I think I'm reading that right, loss day, it that primarily the -- this book or is that a combination of things?

Thomas E. Flynn -- Chief Financial Officer

It's -- every one of those loss days is a combination of many things, if you think about the breadth of our positions. That day in particular was a combination really of the equity linked notes as well as the XCA. If you remember that was the day of extreme market dislocation just before the Fed came in and put in place its positions with dramatic asset sale prices moving and dislocating. And so you saw some of the volatility there to the negative. You see the volatility to the positive after that as markets started to normalize. But I think of it in my mind as about two-thirds for the equity linked notes and about one-third for the XCA.

Steve Theriault -- Eight Capital -- Analyst

Great. Thanks for the color.

Operator

Thank you. The next question is from Meny Grauman from Cormark Securities. Please go ahead. Your line is now open.

Meny Grauman -- Cormark Securities -- Analyst

Hi, good morning. As I'm thinking about sort of where PCL ratios peak and also going back to the discussion of the adequacy of coverage on the allowance, I'm wondering how appropriate is it to look back? You referenced sort of the past few quarters and years, but if you go back farther to past deeper recessions in Canada, the early '80s, early '90s how appropriate is it to look back to those historical examples to kind of gauge the magnitudes? And I guess government support is probably one factor. Are there other factors that would make that comparison not the best in your view?

Patrick Cronin -- Chief Risk Officer

Yeah, thanks for the question, Meny. I think you answered your question a little bit right there. I certainly wouldn't discount the possibility that loss rates could end up being higher than within what we factored into the performing provision. I mean, when I think about impaireds going forward, we're running this quarter at 35 basis points. That's clearly a rate lower than what you would have seen in the financial crisis or you would have seen in prior recessions. But as you noted, there are some things that are quite a bit different this time around, not the least of which, as you mentioned, is some very, very substantial and quite targeted and direct stimulus provided by the government.

The second thing I would suggest is, loss rates tend to be very much a function of duration of the economic stress. And in prior recessions, you could think of those as running two to three years before we started to see recovery. In this one, just given the unique nature, most of the economic consensus forecast would see a recovery much, much faster than that. And think about stress on corporates or consumers, a lot of them, particularly when you get to higher quality credit books like ours, can withstand short periods of stress, but things start to get non-linear in terms of PCL as that duration goes longer.

So I would say the risk to our forecast is, if a sharper correction or a correction that is anticipated by the consensus turns out to be much longer than we expect, then you're going to see some upward pressure and likely to push up into some of those more stressed loss rates that you're talking about from prior recessions.

The other thing I'd highlight too is, mix has changed over the course of time as well. Our CRE portfolio is a great example. We had fairly elevated CRE losses during the last recession. That book looks dramatically different today than it did back then. And so when we run a stress test today on that portfolio, we see very different loss rates than what we would have seen in '08. So I would say, those three things, mix, duration and government stimulus would likely see loss rates lower. I'll caveat all that with, we're in dramatically uncertain times and so that forecast could be different.

But I think about loss rates as from 35 basis points where we are today, they are likely to drift up higher. I think likely into the 40s. The other end of that book end would probably be at the 70 basis point range where -- which would be closer to what you saw during the GFC. So hopefully that answers your question, Meny?

Meny Grauman -- Cormark Securities -- Analyst

Yeah. Thank you.

Operator

Thank you. The next question is from Doug Young from Desjardins Securities. Please go ahead. Your line is now open.

Doug Young -- Desjardins Securities -- Analyst

Sorry, I was on mute there. Questions for Pat, I think, Pat, in your prepared remarks, you talked about just the build-out of performing loans and I think you mentioned and I didn't catch it, so I'm hoping you can flush it out. The weaker outlook accounted for most of the build and change in scenario weightings, models and whatnot, that all netted out. So I'm hoping you can kind of just flush that out a little bit more and talk a bit about, more about the process and maybe if you can give some weightings in terms of how much was driven by the scenario changes versus the forward-looking indicators and whatnot. Thank you.

Patrick Cronin -- Chief Risk Officer

Sure. So as I said in my comments, the single largest factor by far was the macroeconomic variable change, so of the CAD705 million provision that can -- that's the size of the macro impact was about, was actually slightly larger than that. In addition, we had some balance growth in there which contributed about, call it about, CAD40 million credit migration, with -- little bit of credit migration for about the same amount. There is some FX in there as well. That contributed about CAD50 million. So those were the things pushing upward on the provision. We had some model changes, which are pretty normal course in any quarter that adjusted it down by about CAD60 million-ish.

And then we did change our scenario weights in the quarter, because we are -- our base case is actually much, much closer to what our prior adverse case looked like and we're now clearly in a downturn, we felt that the probability of a benign scenario was about equally weighted to the adverse scenario now just given that we're right in the middle of a downturn or entering into it. And so that scenario adjustment actually reduced the provision again by about CAD50 million. So those -- other things all netted out to about the impact of the macro change, and that's why I made those comments at the outset.

Doug Young -- Desjardins Securities -- Analyst

So the modeling reduced the performing loan PCL and I get the scenario weightings, because you're not going to expect a downturn on top of a current downturn and so that's still what you're thinking in terms of scenario, but when you think of the modeling, what did that relate to?

Patrick Cronin -- Chief Risk Officer

Yeah, that's probably more detail than I think, I want to get into on the call. There is a lot of technical things that we -- we are constantly evolving our models every quarter, are always looking to improve the efficiency. And then sometimes we'll add sector-specific models where we don't have them, and so these things tend to be quite small. This quarter was a little bit larger than you might normally see, but model changes are completely normal course. We have them fairly often as I'm sure most other banks do as well.

Doug Young -- Desjardins Securities -- Analyst

Okay. That may be something to follow-up on. Thank you.

Operator

Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead. Your line is now open.

Mario Mendonca -- TD Securities -- Analyst

Good morning. Can I just ask one quick clarification first. Pat, when you talk about performing loan losses declining, but impaired increasing, have you -- can you offer an outlook on just the total PCLs ratio looking forward? Could the impaired increase sufficiently such that we're looking at a total PCLs ratio to levels similar to Q2 in subsequent quarters, Q3 specifically?

Patrick Cronin -- Chief Risk Officer

Yeah, I would say, if you're thinking about totals, our current expectation would be that it would not be at the same level as what you would have seen this quarter. Beyond that, it gets pretty hard to predict. As you can imagine, the performing number, there is lots of moving parts in that that can change from quarter-to-quarter. And so that one is harder to predict, but -- and based on where I sit today, I don't see a large amount of upward pressure on the impaired provision. And so that gives me some confidence that the net of those two things will be a lower total performing or a total provision number, but just given how much uncertainty there is in the market, I'm a bit low as to try and pinpoint a specific number in terms of loss rate for you at this point.

Mario Mendonca -- TD Securities -- Analyst

Okay. The actual question I wanted to get to then was, Pat, you talked about the duration being very, very important to the trajectory of credit losses. When you think about setting your performing loan loss reserves, can you talk about when in your models things are normal? What -- by that I mean unemployment returns to the pre-COVID level, GDP activity is essentially back to the pre-COVID level, can you offer some commentary there?

Patrick Cronin -- Chief Risk Officer

Yeah, I think -- well, first of all, I'll caveat that by saying that those things are obviously important, but there are many, many other variables that go into the model. BBB spreads, levels of the VIX. So all of those things can move around enhancing or offsetting some of the movement you're -- the move back to normal that you're talking about. And then beyond that, I would actually just simply point you unfortunately to the MD&A. We have some pretty good disclosure there about what we see. You'll see, for instance, in Canada GDP decline this year by roughly about 6% and then in 2021 rebound of 6%. Just the way the math works, that doesn't get you back to flat by the end of 2021, but it gives you a sense of how we're predicting the recovery there. And then you'll see similar patterns for the unemployment rate as well.

Mario Mendonca -- TD Securities -- Analyst

Okay, thank you.

Operator

Thank you. The next question is from Nigel D'Souza from Veritas. Please go ahead. Your line is now open. And it is the last question.

Nigel D'Souza -- Veritas -- Analyst

Good morning. Thank you. So I actually wanted to follow up a bit on the macroeconomic variables for your performing loan loss modeling. And if I could turn to page 32 of your Shareholders Report where you outline your updated forward-looking indicators [Technical Issues] have turned a little bit more positive. So you're expecting a higher home price appreciation in your base case scenario and in your adverse scenario, you're not expecting or forecasting a decline in oil prices. So I was wondering if you could just provide more color on your thinking there and maybe also touch on what's the sensitivity of your performing loan allowances if in the future you did forecast a more material decline in the HPI?

Patrick Cronin -- Chief Risk Officer

Yeah. And unfortunately you cut out there, I don't know if it was on our end or yours, but I missed a good chunk of your question, actually. But maybe I'll try and answer it based on what I heard. I think you can -- we actually show the adverse scenario there on page 32. So you can get a sense -- and we also disclose if we had a 100% weight in the adverse scenario. So that just gives you some perspective. It's about -- relative to the allowance today, it's about a CAD600 million increase in the allowance if we move to our 100% adverse case. And so that just gives you some perspective and in there we obviously don't -- you're on [Phonetic] page 32, we don't disclose all the variables that it would be associated with our adverse case, but that just gives you a sense of the sensitivity. And hopefully that answers the question part of which I did not hear.

Nigel D'Souza -- Veritas -- Analyst

So if you have time, just for clarification, just the assumption on your own price outlook, it looks to be more positive now. So I was hoping you could just provide more color on not forecasting a decline in real estate prices even in the adverse scenario?

Patrick Cronin -- Chief Risk Officer

So your question is, why are we generally bullish on housing prices?

Nigel D'Souza -- Veritas -- Analyst

Yeah. According to your forward-looking indicator, it looks like you're expecting price to be flat or higher in your scenario ratings here.

Patrick Cronin -- Chief Risk Officer

Sure. Maybe I'll ask Ernie. She is very close to this market segment and so she has probably got some very good color.

Ernie Johannson -- Group Head of North American Personal & Business Banking

Yeah, thank you for that question. What we're thinking on the forecasting related to housing prices is basically what we're seeing now is, some stabilization in certain sectors, in certain geographies and so I would say right now our position would be that we're going to be remaining quite flat on the housing prices. Obviously, in oil affected regions etc., we're going to see some nuances there. But for now, that's what our indicators are suggesting.

Nigel D'Souza -- Veritas -- Analyst

Okay. Appreciate the color. Thanks.

Operator

Thank you. I would now like to turn back the meeting over to Mr. Darryl White.

Darryl White -- Chief Executive Officer

Thank you, operator, and thank you to everybody on the call. I'll just wrap up with a couple of summary thoughts in terms of bringing us back to our core messages, I would remind you that we are extremely proud, I'm extremely proud of the strong response our teams have had through the crisis. We're very comfortable with our capital and liquidity position, which drives the stability of the Bank. The PPPT at CAD2 billion despite the softness in our market-sensitive businesses is very substantial relative to the prudent provisioning that we've got in our PCLs and we're very confident in the outlook.

So, with that, operator, I will leave the call there and I wish everyone continued health and safety. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Jill Homenuk -- Head of Investor, Media & Government Relations

Darryl White -- Chief Executive Officer

Thomas E. Flynn -- Chief Financial Officer

Patrick Cronin -- Chief Risk Officer

Dan Barclay -- Chief Executive Officer and Group Head

Ernie Johannson -- Group Head of North American Personal & Business Banking

Ebrahim Poonawala -- Bank of America -- Analyst

Scott Chan -- Canaccord Genuity -- Analyst

Gabriel Dechaine -- National Bank -- Analyst

Steve Theriault -- Eight Capital -- Analyst

Meny Grauman -- Cormark Securities -- Analyst

Doug Young -- Desjardins Securities -- Analyst

Mario Mendonca -- TD Securities -- Analyst

Nigel D'Souza -- Veritas -- Analyst

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