National Bank of Canada's (NTIOF) CEO Louis Vachon on Q1 2016 Results - Earnings Call Transcript

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National Bank of Canada (OTCPK:NTIOF) Q1 2016 Earnings Conference Call February 23, 2016 11:30 AM ET

Executives

Hélène Baril - Senior Director of Investor Relations

Louis Vachon - President and Chief Executive Officer

Ghislain Parent - Chief Financial Officer and Executive Vice President

William Bonnell - Executive Vice President, Risk Management

Jean Dagenais - Senior Vice President of Finance

Diane Giard - Executive Vice President, P&C Banking

Ricardo Pascoe - Executive Vice President, Financial Markets

Luc Paiement - Executive Vice President, Wealth Management

Analysts

John Aiken - Barclays

Stephen Theriault - Bank of America Merrill Lynch

Robert Sedran - CIBC Capital Markets

Meny Grauman - CIBC Capital Markets

Sumit Malhotra - Scotia Capital

Gabriel Dechaine - Canaccord Genuity

Sohrab Movahedi - BMO Capital Market

Doug Young - Desjardins Capital

Mario Mendonca - TD Securities

Darko Mihelic - RBC Capital Markets

Peter Routledge - National Bank

Operator

All participants, please stand by. Your meeting is ready to begin. Good morning, ladies and gentlemen. Welcome to the National Bank of Canada First Quarter 2016 Results Conference Call.

I would now like to turn the meeting over to Ms. Hélène Baril, Senior Director of Investor Relations. Please go ahead Ms. Baril.

Hélène Baril

Good morning and thank you for joining National Bank's first quarter 2016 results conference call. In a few moments, Louis Vachon, President and CEO, will start the call with his opening remarks. Then, Ghislain Parent, CFO and Executive Vice President, Finance and Treasury, will present the overall Bank performance as well as the capital management review. His comments will be followed by the presentation of Bill Bonnell, Executive Vice President, Risk Management, who will cover the Bank's Risk Management section. Following his comments, Jean Dagenais, Senior Vice President of Finance, will cover the business unit's results. Then, we will take your questions.

Please note that Diane Giard, Executive Vice President, P&C Banking; Ricardo Pascoe, Executive Vice President, Financial Markets; and Luc Paiement, Executive Vice President, Wealth Management, will also be on hand to answer your questions.

Please also note that all documents referred to in today's conference call can be found on our website at nbc.ca in the Investor Relations section. I would also like to remind you that a caution regarding forward-looking statements applies to our presentation and comments.

Over to you, Mr. Vachon.

Louis Vachon

Thanks, Hélène. Good morning and thank you for joining us today. In the first quarter of 2016, National Bank posted adjusted net income of C$427 million or C$1.17, up 3% from the same period last year.

The quality of our credit portfolios remain excellent with provisions for credit losses of C$63 million or 21 basis points. In addition, the Bank delivered slightly positive operating leverage. Return on equity was 16.4% and the Common Equity Tier 1 ratio under Basel III stood at 9.7%, which includes impact of the - mainly for bank write-off of 13 basis points.

So what do we expect in the coming quarters. So let's start with the positive. We foresee stable economic conditions in Québec and Ontario in 2016. Full time employment is showing good trends in Central Canada. We also see good momentum in the tourist industry as well as in exports and services, and manufacturing goods, thanks to the weaker Canadian dollar.

Moreover the Québec province is on track to balance its budget for this fiscal year. Multi-billion infrastructure projects like the Champlain Bridge and the choke card interchange are currently underway and more expansion in fiscal policy at the federal level should contribute to the construction industry coast-to-coast over the next 18 months to 24 months. The quality of our overall credit portfolio remains solid with key indicators showing stable trends.

Finally, each of our three business segments increased net income compared to the same period last year. Personal and commercial banking showed good volume growth while wealth management and financial markets benefited from diversification of their activities. One of the highlights of the quarter is the solid contribution from Credigy as a result of their purchase of asset portfolios in previous quarters.

More information on our international initiatives including key growth initiatives at Credigy will be provided on September 16 at our next Investor Day. The event will be held in Toronto and will be broadcasted on our website.

If we now look at the challenges we faced in the first quarter of 2016 I would like to underline three items. As you know the persistence of low oil prices led all producing provinces into a severe economic slowdown. Bill will provide an update on the oil and gas loan portfolio.

That being said, I'd like to remind everyone that our exposure to consumers and small business loans in the oil regions of Canada remains low and manageable. I should also note that recently we've seen positive signs of capital being put to work in the sector. In recent weeks, we've seen a couple of public equity issues, some asset sales, and more opportunistic capital coming into the market. It is too soon to note, this is the beginning of the long awaited increase in M&A in consolidation activity or not, but this is one the positive signs in an otherwise challenging environment.

Secondly, the volume of new debt and equity issuance has been slow in the first quarter of 2016. That being said, as you know, market conditions in that segment can change very rapidly. We remain very well positioned to seize opportunities when markets improve.

Lastly, in Q1 2016, National Bank wrote off its investment in Maple financial Group. National Bank's advisor driven authorities and if it is determined, a portion of dividends received from Maple group could be reasonably attributable to tax draw by Maple bank, arrangement will be made to repay those amounts to the relevant authority. If any repayments are required, they are not expected to be material to National Bank. This summarizes what we see in terms of operating environments for the next few quarters.

Now, for the next few years, we expect to operate in the following environment. One, we see continuing low economic growth in Canada and in the U.S. for the next three years, 1% to 2% real through year. No recession but low growth. Second, we continue to see high volatility in financial markets caused by fundamental and structural factors. Thirdly, we expect to see continuing change and adaptation in business models, caused by the technology revolution. How does National Bank play to win in this environment. First, we will continue to invest in the skills and expertise of our people and in technology to improve our customer experience and our efficiency. While all of our business lines and particularly in Retail and Commercial Banking, we will continue to execute our transformation plans, which so far are tracking well in line when we represented at our last Investor Day. Investing less in technology and processes at this stage will be a big mistake.

Second, we won't allow ourselves to be distracted by the market volatility, rather we will endeavor to remain disciplined in our capital management, while being opportunistic, both tactically and strategically. Lastly, we will adapt being agile and flexible in this environment is becoming as important as scale, if not more important. That means executing well and also spending a lot of time with employees developing a culture adapted to change. In short, expect us to continue with our planned investments and technology people and selective acquisitions.

Our capital base remains solid with Common Equity Tier 1 ratio under Basel III at 9.7%. We stayed within our guideline of [indiscernible] quarters for fiscal 2016. As usual, we'll provide an update on our dividend policy next quarter.

On that, I will turn things over to Ghislain for the financial and capital review. Ghislain?

Ghislain Parent

Thank you, Louis. So, we'll begin on slide five which provides our key financial performance metrics. First, on an adjusted basis, total revenues amounted to C$1.5 billion in the first quarter, up 5% from the same period last year, thanks to revenue growth in all three business lines. Net income amounted to C$427 million or C$1.17 representing a 3% increase from the same period of last year. Return on equity remains solid at 16.4%.

On a reported basis now, net income reached $261 million or C$0.67 a share. During the quarter the bank recorded after tax specified items of negative C$166 million or C$0.50 per share. The main item was the write-off of the investments in Maple Financial Group amounting to C$145 million after tax.

Turning to slide six for the Q1 income statement overview. P&C Banking and Wealth Management represented 70% of total revenues in Q1, while Financial Markets and Credigy stood at 23% and 7%, respectively. All business lines increased their net income on a year-over-year basis with P&C Banking leading the group with an increase of 8%, thanks to strong volumes and tight cost control. For the other segment, the net loss increase was mainly driven by higher provincial tax on salaries, business development expenses and some reversal of provisions in Q1 2015.

Turning to slide seven for the expense overview. Operating expenses amounted to C$896 million in Q1, a 5% increase from the same quarter last year was due to higher investments in technology, higher servicing fees related to Credigy, higher tax on salaries and other fees partly offset by lower compensation and employee benefits. The operating leverage was slightly positive for the quarter and we maintain our objective of neutral to slightly positive operating leverage for fiscal year 2016. Our efficiency ratio improved by 10 basis point at 58.6% on a year-over-year basis. The entire executive team continues to be strongly committed to maintain a tight control over expenses and to improve efficiency.

Turning to slide eight for the capital overview. CET1 ratio reached 9.7%, down 21-basis points on a sequential basis. The net income had 28-basis points to the ratio while the right up of Maple Financial Group removed 13 basis points. Business growth increased the risk-weighted assets by 1.3% in Q1 reducing the CET1 ratio by 18 basis points. Also, the weaker Canadian dollar led to higher risk-weighted on U.S. denominated assets removing eight basis points from the ratio.

The volatility of trend on provincial bonds in the liquidity portfolio impacted the CET1 ratio in the first quarter. Over the last two quarters, the widening of spread has resulted in a CET1 impact of 27 basis points for the bank, some comments on this.

In recent years, we increased our liquidity buffer held in the AFFO portfolio. This portfolio is comprised of high quality liquid assets with over 80% of the portfolio in Canada and provincial government bond. This portfolio is mark-to-market for UCI and the capital treatment. We are comfortable with the composition of the liquidity portfolio and with provincial risk in particular.

In the future to manage capital volatility, we will introduce a held to maturity portfolio, which does not impact OCI. Credit spreads are recently stabilized along with general market conditions. A normalization of spreads would provide tailwinds to the capital ratio in the coming quarters. As we mentioned earlier, our guidance for fiscal 2016 is a CET1 of 9.75%.

On this, I'll turn the call over to Bill for the risk review.

William Bonnell

Merci, Ghislain. Good morning, everyone. I invite you to turn to slide 10 to review our loan portfolio, which grew to C$119 billion in the first quarter. The retail book reached C$68.5 billion, including C$54.8 billion of mortgages and HELOCs. The wholesale book represented 42% of the total and remains well diversified across industrial sectors with no one sector accounting for more than 7%.

Details of the loans to the oil and gas sector are provided. Loan outstanding were stable quarter-over-quarter at C$3.2 billion or 2.7% of our loan book. The majority of loans in this portfolio were subject to a borrowing base more than 99% are in Canada and less than C$200 million are in the services sector. In this challenging environment, we have seen clients continued to take additional actions to reduce costs, to get cash flow, and to raise alternative financing.

During the quarter, two loans are on our watch list in this portfolio became impaired and we took provisions for credit losses. Given the current pricing environment, the portfolio is performing within expectation.

On slide 11, the regional distribution of Canadian loans highlights the Central Canada focus of our lending portfolio, with more than 82% to borrowers in Ontario and Québec. The Bank's exposure in the oil region remained low, with the largest portion being residential mortgages, of which about 60% are insured and HELOCs. The unsecured retail portfolio in the region is small, accounting for only 0.4% of the loan book.

During the quarter, we did observe an increase in delinquencies in this portfolio, most notably in credit cards, as was expected given higher levels of unemployment in Alberta. However, as our credit card balances in that province were only about C$25 million, we don't expect a material impact on our overall portfolio.

On slide 12, a geographical breakdown of the residential mortgage in HELOC portfolio is provided. At year end, Quebec and Ontario accounted for 63% and 23% of the mortgage book, while Alberta represented only 6%. The insured portion represented 42% of the book while HELOCs and the uninsured mortgages accounted for 34% and 24% respectively.

The average loan to value on the HELOC and uninsured portfolio was unchanged at 59%. Second lien loans accounted for less than C$300 million or about 0.5% of that portfolio.

I invite you to turn to slide 13. In the first quarter, provisions for credit losses amounted to C$63 million or 21 basis points. Retail banking PCLs amounted to C$41 million or 27 basis points, in line with previous quarters. PCLs in the commercial book were C$21 million or 28 basis points, up C$2 million from last quarter. C$17 million of these commercial provisions were in the oil and gas portfolio. Wealth Management provisions were stable at C$1 million and no provisions were taken in the corporate loan portfolio.

Looking ahead, we see two things playing out in our credit portfolio. First, the situation for oil producers has not improved. Oil prices continue to decline during the quarter and low prices are likely to persist longer than initially forecasted. Absent and improvement in prices, we expect some producer loans on our watch list will migrate to impaired and additional provisions could be incurred. The second thing we see is that our core loan portfolio, which is concentrated in Central Canada is benefiting from low interest rates and the weak dollar which were supporting stable growth and decent employment gains. More than 80% of our loan portfolio is in the regions that accounted for more than 80% of job growth in Canada last year. It is this geographic mix coupled with our business mix of relatively low unsecured consumer lending that is generating the strong credit performance.

Weighing these two themes in the balance, we have adjusted our target range for DCL upwards by 5 bps, to 25 bps to 35 bps for fiscal 2016. Whether we end up at the lower end of this range or not is largely dependent on the path of energy prices and M&A activity in the oil and gas sector.

We continue to see the potential losses from our more stressed price scenarios as manageable in close to the high end of our historical loss range or about 40 basis points.

On slide 14,we see the gross impairments declined to C$434 million or 36 basis points of total loans. Retail formations in the quarter amounted to C$23 million in line with previous quarters. The commercial book had net recoveries of C$5 million. There were no formations in the corporate's book and C$4 million in wealth management.

On slide 15 and slide 16, you'll find highlights of our market risk exposure. Trading VaR averaged to C$6.4 million in the first quarter and we registered six days with trading losses.

And on that, I will turn things over to Jean Dagenais for the business review.

Jean Dagenais

Thank you, Bill and good morning. I invite you to turn to slide 18 to review the Personal and Commercial Banking segment. Revenues reached C$724 million in the first quarter of 2016, up 5% on a year-over-year basis.

Personal Banking revenues amounted to C$341 million, up 6% year-over-year stemming from good growth in mortgages, CLOC and personal loans. Commercial banking revenues reached C$265 million, up 5%, thanks to a loan and deposit growth as well as derivative product and foreign exchange activity. On a year-over-year basis, credit card revenues increased by 2% to C$91 million, while insurance revenues amounted to C$27 million in line with the same period last year.

Operating expenses were up by only 1% from the same period last year due to efficiency gains resulting in a 4% positive operating leverage. Provision for credit losses amounted to C$62 million up C$8 million from the same period last year due to higher provisions for credit losses on credit card and commercial loans to the energy sector.

P&C's net income reached C$184 million, representing a 8% increase from Q1 2015. Looking at the P&C key metrics for the quarter, loans and BAs continued to grow at a solid pace, up 7% on a year-over-year basis. Volume from deposit also showed good momentum rising by 6% compared to Q1 2015. On a sequential basis, net interest margin was down by three basis points to 2.22% due to the narrower prime rate cost of funds spread, which impacted those margins partly offset by a three basis points increase in deposit margin.

Finally, the efficiency ratio was at 56.6%, a 180 basis points improvement from Q1 2015. Overall, the P&C segment continued to deliver good volume growth and achieved great progress in its efficiency program.

Please turn now to slide 19 for the Wealth Management review. Despite difficult market conditions in the first quarter of 2016, revenues totaled C$358 million, up 3% from the same quarter last year higher fee-based revenue and net interest income more than offset lower transactional revenue.

Fee-based revenues were up 9% at C$196 million, thanks to customers' migration to fee-based accounts. Net interest income was up 7% at C$89 million, driven by the CashPerformer account and investor maintaining cash balances due to market volatility. Expenses were up by 3% to C$242 million, mainly from higher variable compensation and operating support charges. The efficiency ratio was at 67.9%, a 30 basis points improvement on a year-over-year basis. Net income amounted to C$84 million, up 4% from the corresponding quarter in 2015.

Loan and BAs reached C$9.3 billion, up 8% from last year, while deposit increased 7% year-over-year to C$26.2 billion. Asset under administration stood at C$303 million, down 3% from last year due to market conditions, while asset under management rose by 7% to C$50 billion.

One of the highlight of the quarter is the official opening of the Private Banking 1859 branch in Calgary. The Bank expects to open another Private Banking 1859 branch in Vancouver in the coming month.

Now, I invite you to turn to slide 20 for the Financial Markets review. Financial Markets delivered solid revenue growth of 12% on a sequential basis and 8% on a year-over-year basis, reaching C$451 million. The year-over-year rise was due mainly to the strong contribution from Credigy. Trading revenues amounted to C$216 million, down 7% from the same period last year, mainly from commodity trading activities.

On a sequential basis, trading revenues were up 11%, due to increase from agent activities by clients in equity derivative, interest rates and foreign exchange.

Financial Markets fees were down C$8 million to C$50 million due to lower new issue in fixed income. Credit risk revenues were up C$ 62 million from last year, thanks to the acquisition of new portfolios in previous quarters, as well as favorable collection [indiscernible] on a few portfolio. The other adding was down C$14 million due to a dividend received in the corresponding quarter up 2015.

The increase in operating expense was mainly due to stronger revenue growth at credit. The efficiency ratio remains single year-over-year at 42.1%. So for Q1 2016, financial markets delivered net income of C$186 million up 5% from the corresponding quarter of 2015.

This complete my remarks. I will now turn the call over to the operator for the question period.

Question-and-Answer Session

Operator

Thank you. So we'll now take questions from the telephone lines. [Operator Instructions] Our first question is from John Aiken from Barclays. Please go ahead.

John Aiken

Good morning, Bill. I hate to do this to you considering the nationals, probably going to come out of this with the highest reserve levels against the energy portfolio, but since you guys elected to do your call first, how do you view the reserving the provisioning on the energy portfolio vis-à-vis what we've seen coming out at the U.S. banking sector where we're seeing markedly higher level of reserves taken against their portfolios?

William Bonnell

Thanks, John for the question. Maybe the reserving - first time I'd say I'm not an expert in the U.S. practices, but from - I've looked at a lot over the last month for sure and it seems like one of the differences is that their reported numbers combined, the specific provisions and the collective allowance and the methodology you seem similar. So for the collective allowance, it's a model to expected to loss, plus, some buffers of a discovery period and unallocated allowance based on macro factors, but effectively it's impacted by the change in the nature of risk in the portfolio. When I look at the U.S. disclosures, if their portfolio has typically higher level of leverage and higher level of risk and I would expect to see a higher level of impact on the collective allowance. For us, we review the collective allowance every quarter and as I could mention in the comments, you really see the two themes in the portfolio playing out. We have a very, very well-performing commercial and stable retail portfolio and for Canada and this has helped to offset some of the deterioration in the oil and gas portfolio.

Louis Vachon

Does that answer your question, John?

John Aiken

Yes, it is, Bill. But just as a follow-on, when you take a look at stress testing within the energy portfolio, how have the parameters within your testing changed from a year ago when we realistically first started talking about the energy, concerns around the energy portfolio?

William Bonnell

See, the parameter which has changed the most is the price estimate and certainly over the quarters, the price estimate is continued to reduce and the scenarios is continued to decrease. So that will be the parameters changed most.

John Aiken

One, Bill, in terms of the disclosure you gave us in terms of the 40 basis points within your stress testing, can you let us know what the lower bound is in terms of that testing?

William Bonnell

Yes, sure, John. So, on the stress testing, we have a Canadian portfolio. So, we use Canadian price curves and we sharp them lower, and significantly below the current prices. So, one of the main scenarios that we use if we translate it into WTI terms, it has to strip at around C$30 in 2016, C$35 in 2017 and C$38 in 2018. But we also work backwards looking at the scenario starting with WTI prices and during your reverse conversion into Canadian dollar prices. So, we did a scenario about C$25 for 2016, C$35 for 2017, and not increasing beyond C$40 until 2018.

And the sum of it looking at all the different scenarios that we ran, it's made us comfortable to maintain the guidance that we gave.

John Aiken

Okay. Thanks. But I'll reach you.

William Bonnell

Sure.

Operator

Thank you. Our next question is from Steve Theriault from Bank of America Merrill Lynch. Please go ahead.

Stephen Theriault

Thanks very much. First, if I could just follow-on a little bit with John's question. Thanks for the amended details on the stress test, what is the - I mean the - again to go back a bit to the U.S. banks, U.S. banks are reserving at around 10% level, I don't think that's a stress case per se. So, the interest - I'd be interested if you could tell me what the stress losses and within what the stress losses are within the oil and gas portfolio in the context of that analysis you just walked us through?

Louis Vachon

The 40 basis points is what I refer to as the potential stress losses, but we think ...

Stephen Theriault

But that...

Louis Vachon

Just to remind you to that we're not talking you a base case here in terms of our assessment, we're talking you about stress scenario and when we look ahead over the next eight to 10 quarters, we think that scenario that we've used are appropriate stress scenarios, and we think that the 40 basis points is [indiscernible] of results.

Stephen Theriault

Right, so the 40 basis points, those from on all bank basis, how would that translate into just relative, because I think there are a number of moving parts in there I suppose, but how would that translate into net losses just on the oil and gas portfolio?

Louis Vachon

You're right. It's the biggest impact on the delta. It's certainly coming from that portfolio. The impact from the oil regions consumer and particularly unsecured consumer don't have as nearly as big an impact as the direct exposure in oil and gas.

Stephen Theriault

So if I try to reserve engineer that it's three quarters or more or not quite that much?

Louis Vachon

The oil and gas would be probably a little bit less than that probably, thinking about - if you think about our run rate in the last couple of years that's low 20 bps overall and if it is going to 40 bps then you got a pretty decent ratio there.

Stephen Theriault

Okay. I may follow-up. But that's okay. The - just changing gears just for a moment going to Canadian Banking for DN maybe, the margin compressing three basis points in the quarter, maybe if you could just refresh us on your outlook for the rest of the year after maybe a little bit of bumpier start than expected to the year?

Louis Vachon

You're right. Steve it actually is. And our organic for the year is still 5 bps. We certainly believe that the pricing, the way it is right now and the business mix, it should be all right for us, it should work in our favor for the rest of the year. So 5 bps less at year end would be our guidance.

Stephen Theriault

5 bps from the end of Q1?

Louis Vachon

No, 5 bps from the beginning of the year.

Stephen Theriault

For the full year?

Louis Vachon

Exactly.

Stephen Theriault

Okay. Thanks very much.

Operator

Thank you. The next question is from Robert Sedran from CIBC Capital Markets. Please go ahead.

Robert Sedran

Hi, good afternoon. I just wanted to follow up on the comment you made on Maple and are there any risks beyond the small and I guess you said immaterial potential for dividends to be recaptured theoretically. Are there any regulatory risks or anything else that you need to worry about or is this more or less behind you as an issue?

Louis Vachon

We've had six months to since we started discussing this with the market in October, we had six months to in license. At this stage, Rob, this is still our best estimate of what the potential losses are on the different scenarios, we've looked at. So we're comfortable with that assessment.

Robert Sedran

Okay. And Bill, just to follow up with you, I mean the 25 basis points to 35 basis points after you did 21 basis points in Q1 would imply even to get to the low end, a pretty meaningful deterioration from here to year end. I mean is this something that you think is prudent? I mean or is it something that you're actually seeing, like this is a storm that's coming or a storm you think might be coming?

William Bonnell

Thanks for the question. I think there were two reasons and I described why we changed the target. And as you noted there is a change in the period, so no longer is it for the next two quarters but it's for fiscal year and that's really because, it is difficult to predict the exact timing of the potential provisions. We don't expect to straight line on the DCLs as they can be lumpy. There's some quarters where there would be, maybe no loans that will become impaired, in some quarters that there might be a few come impaired at the same time. So that's the reason why we think 2016 as a target is more appropriate in that context.

The Reason why we increased it and as I said in my comments is we've got two themes in the portfolio, and certainly the environment for the oil and gas producers hasn't improved but if you look overall, however that the enterprise wide metrics, it looks pretty benign. Total impairments decreased in the quarter. The size of the watch list was pretty stable. However, the trends in the watch list has changed. There're more files that had improving trends that ended up being repaid or come off the list and the concentration of oil and gas loans on that list increased and these had deteriorating trends. So, I guess to answer your question surely when looking at the range or rather be conservative and outperform then not be conservative and whether we end up at the low end of the range or not, it's really dependent on the path of energy prices and M&A activity in the quarter - in the sector, sorry.

Robert Sedran

In other words, M&A activity will potentially for solve some of these loan losses from happening?

William Bonnell

Absolutely.

Louis Vachon

Absolutely, yeah.

Robert Sedran

Yeah. Okay. Thank you.

William Bonnell

And just for that Rob to, we have seen small amounts of that and in that quarter, we had three files which left the portfolio because they were acquired by larger producers. It's certainly not really active space for that now, but perhaps with some stability in prices and in the markets, that may pick up.

Louis Vachon

And then Rob, that's why I put that - it's Louis, Rob. That's why I put that in my opening remarks, because some of these files - were files that were considered high risk on internally and we did end up being 100% repaid, because of strategic activity in these names. So, I think what's going on a little bit too and I think for all of you looking to do stress test, when you're hitting prices in the 20s, in terms of the WTI, I think at some point, we have to realize that potential acquirers are not just discounting the forward curve, because none of them intend to hedge the oil prices for next 10 years at the current price level. So there is optionality level - there is optionality value in the production streams and even in non-producing reserves and what we're seeing is some of these acquirers are paying some optionality value for eventually capturing the upside on oil prices, particularly when you're dealing with low, very low prices as we see today. So that's why putting a number on exactly what could be a losses and going forward is quite difficult.

What you do need to see is some stability in price, nobody wants to capture falling knife. So, it's quite stabilizing around the C$30 level right now, I think, is relatively positive. Hopefully, it'll stabilize at higher level, but at least it's stabilizing. And secondly, to protect the value of our collateral, we need flow of funds. We need money coming into the space, either people raising equity, like one of our clients did today or strategic buyers coming in or different things, and that in a sense is that flow of funds will protect a good portion of our collateral value. So putting a precise estimate on exactly the losses, even in a very fluctuating environment is quite difficult. We've seen actually some pretty even in the very bad environment that we saw in Q1, we've seen some positive outcomes in some of the files.

Robert Sedran

Understood. Thank you.

Operator

Thank you. The next question is from Meny Grauman from CIBC Capital Markets. Please go ahead.

Meny Grauman

Hi, good afternoon. Just want to ask about coming borrowing base reviews last year. Borrowing base reviews were kind of, we held our breadth and then it turned out to be nonevents. So I'm wondering, as we look forward to the next borrowing base review, what - what do you expect. Do you see this as being more meaningful.

Louis Vachon

I wouldn't have characterized last autumn's borrowing base review as a nonevent. There was reduction in authorization certainly and I think in the price environment that we're seeing, it's reasonable to assume that there will be additional reduction in availability. So maybe, it will be similar to the last autumn, last time review, but more challenging prices.

Meny Grauman

And then just wanted to ask about the stress tests and I apologize if I missed it. In this stress tests, what do you assuming for real GDP growth for Candex, Alberta is that something that you've talked about?

Ghislain Parent

Yeah, I did in my opening remarks, I think for Canada, we're looking at in the range of 1% to 1.5%. So, we're not looking for very high growth in Canada maybe 1.5% for Québec and Ontario and maybe bit stronger for BC and then pretty challenged for Alberta and Saskatchewan in this environment.

Meny Grauman

And would you be able to comment on the sensitivity to that specific variable like if you assume that's a flat growth ex-Alberta what kind of loan loss ratios would you got to?

Ghislain Parent

We don't have that at hand, I think you know you may want to we can call, you can talk to Bill after this call. I would say, as I assume we have some element of positive growth international level, I don't think it will have a huge difference, and for instance, between 0.7% Canada versus 1%, maybe I don't think it will have a huge difference, of course, if it gets to real recession globally then clearly that's the difference - different type of scenario.

Meny Grauman

Thank you.

Operator

Thank you. The next question is from Sumit Malhotra from Scotia Capital. Please go ahead.

Sumit Malhotra

Thanks, good afternoon. Couple of questions on capital and I'll start with Louis. So you ended the quarter at 9.67% CET1 ratio. And your forecast for the end of the year is 9.75%. I know this sector hasn't been generating capital at the same pace it used to, but that certainly doesn't sound like much of a build at all. Could you talk about what you're contemplating in that number?

Louis Vachon

Yeah, I think we're not contemplating what we're expecting or hoping for which is a reversal of the headwinds we've had on the AFS portfolio. So, clearly if we had any kind of reversal on the AFS portfolio, we certainly expect to be higher than that in two quarters. So that's why I'm being conservative because the last two quarters we've had headwinds in terms of some of the accounting treatment and the impact on our regulatory capital despite the fact that as you know, there is no permanent impairment and at risk in terms of these of our liquidity portfolio. So, that's why we're being a little bit more conservative on to that front. As you suspect with still excluding the Maple write down, our results were still very good. So, with that, I mean, we are generating still some excess capital on a quarterly basis.

Ghislain Parent

But - oh, sorry.

Louis Vachon

As long as we don't chew it away from - either from the Canadian dollar or from government spreads going up, I think we should be - not in two quarters should easily be matched.

Sumit Malhotra

But just to be clear, I mean leaving all else equal, if we froze the Canadian dollar and the provincial bond spreads at January 31st levels and those were non-factor for the rest of the year, pro or con. I think it's fair to say your capital generation should be a lot better than an aggregate 8 basis points.

Louis Vachon

I agree. Agree. So, we should be - I would try to tend to be - try to be a little higher than that, that's what we said in the past. But, I'm just being conservative here because the last two quarters have not moved our way in terms of some of the regulatory capital treatment of some of the investment portfolios we have. So, take that inter quarters of the conservative number.

Sumit Malhotra

That's understood. And I just want to make sure I understand the part that just William was talking about in terms of how this portfolio is going to be treated? You talked about some of the liquidity book is now going to move to - held towards maturity. So just a couple of things, when I look at your provincials and your liquidity portfolio, over the last two quarters, since we first started to talking about this, it doesn't look like you've reduced the balance of anything by looking at Q3, and then today's number, provincials are actually C$3 billion higher than your liquidity. So that's one question, how - are you contemplating any reduction in the size of the book? And then number two, what exactly does this held to maturity reclassification do, is this strict transfer from where you are now? And how does that impact the capital trend?

Louis Vachon

Well, I'll start and essentially, what we want to do Sumit is, it's essentially not to move from the current AFS portfolio due to held to maturity. Its new liquidity that we will book in held to maturity. And held to maturity is - there's other banks in Canada using their held to maturity essentially is, you know, you're keeping the liquidity until the maturity and it doesn't affect the OCI. So, it's essentially you look at that discount and then you are going to the value at the end of the maturity.

Sumit Malhotra

So not a re-class, more as you put new securities into your liquidity portfolio, they will be termed as held to maturity and that will change the - for lack of better term the mark-to-market treatment for capital?

Louis Vachon

Exactly. That's going forward.

Sumit Malhotra

That's going forward, I got it.

Louis Vachon

Yeah. Okay.

Sumit Malhotra

And then just last one, which is on just disclosure, I want to - I just want to make sure I have this ready could be for [indiscernible], it look like as we're going through the numbers here, there was changes in the segments that all of the old numbers for 2015 in the segments and the three segments look lower and then there was some re-class on other, I didn't see any notes, what, is there anything significant, you guys are changing in terms of methodology?

Louis Vachon

No, there is no change, but every year we refresh our cost allocations adjustment, so and to make it comparable for 2015, we readjusted 2015 based on the same cost allocation that we use in 2016. So, it's only to align the cost allocation with [indiscernible] to use.

Sumit Malhotra

Okay. So the three segments are lower in the past and other is up, so that's a change, that comes through in Q1 and that is static for the year?

Louis Vachon

The change affect every quarters of 2015, but it is read on all quarters. So, you are getting the supplemental adjusted for that.

Sumit Malhotra

Thanks for your time.

Louis Vachon

No problem.

Operator

Thank you. The next question is from Gabriel Dechaine, Canaccord Genuity. Please go ahead.

Gabriel Dechaine

Hi. I just want to talk about the credited outlook and capital, so just so I understand your guidance on the 25 basis points to 35 basis points, if we don't see oil prices moving significantly higher and if we don't see meaningful pickup in M&A activity, would you guide us to the higher end of that PCL range?

Louis Vachon

The - it's really difficult to know the exact timing, but mid of that range, if we don't see improvements in oil and gas, it's probably is good to guess, good estimate is I could give. And just on that as well if you to confirm one of the performance of the two portfolios, oil and gas specific and the others, if you look at last quarter, if you remove the oil and gas losses and the rest portfolio would have been in the mid-teens rather than 21 basis points. So, it is - the rest is performing very well, and the oil and gas perhaps dependent.

Gabriel Dechaine

And just I was a bit surprised to your answer to Manny's question on the redetermination outlook for spring where you expect credit lines to be adjusted similarly to what we saw last fall and I haven't might note you that last fall you cut credit lines by 2% on average, it was really nothing is that, is that reasonable to expect through spring?

Louis Vachon

The same direction as last fall.

Gabriel Dechaine

Same direction, okay. What the - what would be your - maybe Ricardo or Bill, if you can answer this one. What do you expect credit lines to be reduced by this spring and - yes, go ahead.

William Bonnell

And Gabriel it's Bill. The redetermination, if you look at updated engineering, you look at production result, the last autumn we were surprised, pleasantly surprised that many were very, very efficient, many of the clients were very efficient at having higher production than we would have forecast. Coming to the spring redetermination, I'd be shy to try to predict whether that would continue, whether we'll have many positive surprises, or negative surprises, but it's clearly too early to know or too early to say what the percentage impact would be.

Louis Vachon

But did that not factor into your change in guidance on PCLs. The changed in guidance on the PCLs is really determined by, as you said the watch list, the clients have been not yet impaired, but on the watch list has increased. It's difficult to know exactly whether there will be a mid-2016 or an early 2017 event for many if prices stayed as low, so for that reason we changed the guidance.

Gabriel Dechaine

What have been the fluctuation in the watch list then?

Louis Vachon

It said overall size has been stable. The dollar value was plus or minus C$10 million, I think quarter-over-quarter, but the fluctuations have been, there's non-oil and gas by loans coming out and there's more oil and gas loans going in.

Gabriel Dechaine

Okay. And then for Louis and thanks for the question - answers on the capital position. I'm just wondering, 9.7%, how comfortable are you and are you looking at levers you can pull to kind of provide a bit of a boost to that ratio in the coming quarters, I know I think you have some expectation that record some gains on the ABCP stuff. How about shrinking the size of the trading book, anything like that you're exploring to boost your capital ratio?

Louis Vachon

Not, at this stage, but if some of the headwinds continue on some of the accounting treatments, that's - I think there is - I think you're right and there's probably a number of levers, we could pull to improve our capital, which would have relatively marginal impact on our revenues. So, we'll get to that if we have to, but - and also, I think on the ABCP, I think last guidance we gave it was about 8 bps or 9 bps, which we expect between probably in December. A recuperation on the maturity of the ABCP in the MAVs and the reduction in risk weighted assets. So, we have some of the rules and that's why we said right now at nine in three quarters where we are comfortable because we do feel that we have a number of levers to operate in different scenarios.

Gabriel Dechaine

How far down the list does the fewer lever rank?

Louis Vachon

It's on the list. It's not on the list. Yes, because we were quite clear on that and in a sense that between we felt that given the capital treatment of minority position, the costs are gone up. So for us to reduce from 35 to the low 20s, I think it's something we could do without losing the key - our key governance privileges we have with the company. Going below 20%, I think we would lose some of those key governance privileges and also we do have $20 billion of our clients’ money, management accompanies, so I think we have complete confidence in them, but we do like sitting around the table and being at the Board level. So, it's not an option, I think we said that for us in the low 20s, that's where we want to stay for now.

Gabriel Dechaine

Thanks for that. My last one is with the number as to one understanding the change in the Credigy revenues. It was $40 million last year, $70 million this quarter, and then a $100 million in Q1. I expect that FX has a bit of an impact there, but when you're talking about portfolio growth and better collection practices, can you provide some explanation behind those items? What these better collection practices means and is it one time-ish in nature?

Ricardo Pascoe

It's Ricardo, Gabriel. There's definitely $1 impact in those revenues, you can back that out or I'm sure Jean can give you exact numbers. I think the trend in Credigy is good. This quarter is probably a little bit above trend again because of these portfolios that performed better than we expected and when that happens we value these portfolios and that's happened a couple of times before, it could happen again, but it's really - this quarter is above trend, but I think we gave guidance two-and-a-half years ago on our investor day that we wanted that business to generate $100 million pre-tax Canadian and I think we're probably going to be ahead of our schedule and deliver that this year. So, the trend I think is pretty solid.

Gabriel Dechaine

Okay. Thank you.

Operator

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

Sohrab Movahedi

I'm going to assume that was Sohrab Movahedi from BMO Capital Markets. Just a couple of quickies. In the PNC Bank residential mortgage loan growth year-over-year double-digits, very nice. In this assumption of a GDP growth of no more than 1.5-ish let's say in Canada. What is a realistic volume growth specially in mortgages?

Louis Vachon

Yes, first of all let me correct you. We've actually shown a growth of about 6% in our year-over-year in our mortgage portfolio.

Sohrab Movahedi

Okay.

Louis Vachon

And we - our guidance of it will be just about that in the upcoming year. So, we'll probably finish the year at 6% growth. Now, we do have a number of initiatives that are underway and one of their moves is actually getting closer to realtors with our own sales force. So we do have mortgage development managers that they cater through that segment and that actually has been a winning formula for us. So that can use were actually much better at retention. We're leveraging some functionalities and new capacity in our call center to contact our clients, so that has actually worked well for us. And third, we see a whole lot of activities in the refinancing aspect. So a lot of our clients are taking advantage of their low loan to value ratio and upgrading whether the house or paying off other debt, but we've seen much more activities there. So most of the business has actually been driven by our internal sales force and that should continue for the course of the year.

Sohrab Movahedi

Okay. And just on that, do you think you can continue - I mean obviously, very good revenue growth relative to expense growth. Is that repeatable?

Louis Vachon

On the top line, we're expecting this to continue for the bulk of the year. I think on the net income side, we'll see how it - how everything else plays into a play, but I think our expense management will still continue to be well managed albeit maybe at a more significant than it has been for Q1. So you can expect top line growth to pretty much continue as it is in Q1 and perhaps see a little bit more uptick on the expense side but looking good on the net income.

Sohrab Movahedi

And if I can, just same questions of Ricardo, 8% revenue growth, do you think that's repeatable?

Ricardo Pascoe

Well, I think volatility in the markets impacts us in different ways. We expect to see continued volatility. On the one hand it brings, needs from our clients, so that they have hedging needs and others, but it also has like this quarter prevented or slowdown 00:53:23 activity in the fixed income side. So, it's hard - very hard for me to predict going forward. But I think this quarter also we had the big help of Credigy, so I would say, it was a good quarter and just looking at volatility going forward.

Sohrab Movahedi

And so what about the expenses then Ricardo, I mean you had to help from Credigy this quarter on the revenue side, but your expenses were also up around 8%. Do you think you can control your expenses better?

Ricardo Pascoe

Yeah, big part of that was also Credigy, its expenses related to their servicing of portfolios. And we run a very tight control on our financial markets expenses overall and I'm pretty comfortable with it.

Sohrab Movahedi

Okay. Thank you very much.

Operator

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

Doug Young

Hi, good afternoon. Sorry, most of my questions have been asked and answered. Just one sorry to go back to this. But on the oil and gas loan portfolio and I apologize that's in the disclosure, but I haven't seen anything on the undrawn, the size of the undrawn facility and I guess maybe Bill, what you're seeing in terms of drawdowns on that undrawn facilities?

Ghislain Parent

Yeah, utilization has been in the mid 50%s, I think 56%. And I think it's in the sub pack..

Louis Vachon

For capital, the sub pack for capital, I just trying to figure out, which...

Ghislain Parent

So you can see it page 18 I think.

Louis Vachon

Doug I can get back

Ghislain Parent

[Indiscernible] in the capital.

Doug Young

Okay. Yes. I have got that rate.

Ghislain Parent

It is around C$5 billion.

Doug Young

Okay.

Ghislain Parent

It's a total undrawn and drawn.

Doug Young

The total undrawn and then drawn, okay. And in terms of the - can you remind me and I apologize in terms of your ability to cut-off utilization of undrawn facility, it's a contractual, I guess agreement and if your clients come to you and draw down, what's your ability to cut-off if you do have some concerns?

Louis Vachon

Generally, as you said the change in the undrawn and authorizations happens twice the year. There are cases where it can happen more frequently than that, but typically it's twice a year or going into the period where that will be happening. So the general loans are most are demand is a lease, so there is the ability to limit, but as impacted it's a twice a year evaluation.

Doug Young

Okay. Great. Thank you very much.

Operator

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

Mario Mendonca

Good afternoon. I have a few questions. So I wanted to try to go fairly quickly to this first on Maple, is there any outstanding litigation where nationals been named as a definite?

Louis Vachon

No.

Mario Mendonca

Do you anticipate anything?

Louis Vachon

No.

Mario Mendonca

Let's go to the oil and gas, there was C$17 million in credit charges this quarter, could we talk about what the total value of the impairments were on those two. I am trying to get a sense of the sort of the coverage you have on those two loans?

Ghislain Parent

Yeah. So, for those two loans the provisions were in the 25% or 20% to 30%, but we did also increase provisions for existing loans that are already impaired. So, we tried to - and this is one of the earlier questions, we tried to be conservative in terms of the level of provisioning, and if you look at the provisioning level of our overall impaired, it's quite high relatively to the others.

Mario Mendonca

And then arriving at 20% to 30%, what are you doing there like, is this not more binary than that, either you get or you don't or help me think through that decision to go 20% to 30%?

Ghislain Parent

It's really file by file - the assets that are held by the producers, some of them can have significant non-producing reserves that have some - some option value that Louis described earlier. So, some are more easily sold and more quickly essential to be liquidated. It really - it's file by file and each one is assessed on its own merit.

Mario Mendonca

Okay. Now sort of on a related basis, there have been - there is a - there is a good amount of speculation, I've heard this admittedly from - mostly from international investors that I meet with. The Canadian banks have a propensity to be a lot more accommodating with their borrowers as it relates to covenants, it's essentially providing lot of covenant relief and the case of the reserves, allowing a borrower to borrow beyond the reserve value, so you mark down the reserve, but you let them go through it anywhere temporarily. So, the first question I have is, to what extent is that - is that even a reasonable thing to suggest? Does that play out for national bank?

Louis Vachon

Tough for us to Mario, it's Louis. We don't run a business as you know in the U.S. and we're not...

Mario Mendonca

No, no, I'm referring to National Bank - I'm not referring - all I said is that the U.S. investors have made that claim about Canadian banks and I'm asking if that claim is true for National Bank specifically?

Louis Vachon

Yeah. I think you're referring to U.S. short-sellers as well to investors, but how would I can answer that, I mean that's...

Mario Mendonca

But Louis, it's a simple question, are there cases where the bank has provided covenant relief, because you don't want to call it imperative at this time or you just - you sort of hoping things are going to improve?

Louis Vachon

No, I don't think so.

Mario Mendonca

That never happens then for National Bank, you had never provide covenant relief to borrowing?

Louis Vachon

When an account is impaired, it is impaired and work up people tell us that, we have to take provisions, and take them, Mario. I think that's pretty straight forward and as you know, as we're reminded on a regular basis, this is a regulated industry. So and I think we have to be conservative the way we approach this and this is what you describe, I don't think is our reality here.

Mario Mendonca

Okay.

Louis Vachon

Not when you assuming, now as you saying when you get to impaired, it’s imperative, so certainly the assessment of the borrowing value and take into account the proven producing, some producers have significant non-producing assets, which may be considered in assessing a mature value will be assess, but now as Louis said, when the account becomes imperative, become...

Mario Mendonca

Right, but can you just change the definition of impaired by providing covenant relief, but I guess that's the point I'm making like I'm not as interested whether you've impaired something or not, what I'm saying is do you provide the covenant relief?

Louis Vachon

Well, I think there has been compared to the U.S. if you are - if that so I think your...

Mario Mendonca

No, I'm not comparing to the U.S. at all, I'm just asking if that's a National Bank, something National Bank would do it, forget the U.S. reference, all I was referring to is there some international investors that have made that claim and I'm trying to test this whether that's a sensible claim or not?

Louis Vachon

No, I don't recognize what you are describing.

Mario Mendonca

Okay. I'll describe it again. Does the bank provide covenant relief to borrowers at any stage, I'm referring to these oil and gas companies?

Louis Vachon

Generally not. I guess I could say no, when the covenant is breached like in any files. If there's a covenant that's breached and the covenant are typically in the corporate files and the larger corporate versus the borrowing base. And the borrowing base, the reviews were done at least twice a year and the borrowing value has assessed. So, no, the covenant breaches are not tolerated.

Mario Mendonca

Okay.

William Bonnell

Mario, let me answer to your question in other way. I think you've known us for a long period of time.

Mario Mendonca

I have. Yeah.

William Bonnell

Yeah, Mario - and you've seen the way we moved in the ABCP file to take losses. You've seen how quickly we moved on the Maple file to take losses. When we're facing losses and think we don't hide them. We take them and we move on. That's a good way to - it's one of the lessons that we've learned over the many, many years, we've operated all of the banks here and I think that's the way we approach this. So, I think I'm surprised you're asking that question, but anyways the answer is I think we're being quite straightforward and when we see an account, we don't play games to reduce our non-performing.

Mario Mendonca

Louis, don't mistake my question for an acquisition. I'm asking the question because there is a high degree of skepticism around the Canadian banks, the reserving practice, and I think you could pick that up for the nature of the questions that are coming on this call...

William Bonnell

Yes.

Mario Mendonca

So, this is an acquisition. This is me trying to get to the bottom of this increasing skepticism on our Canadian banks and how proactive they're being in taking their lumps. And the unfortunate thing is if two quarters or three quarters from now we encounter big charges, it will do a lot of harm to the creditability of our Canadian banks and that's why I'm asking the questions.

William Bonnell

Mario, we just increased our guidance there is losses and help you guys supplies that we're increasing them.

Mario Mendonca

Not me.

William Bonnell

So, I know, but there is - we're surprised.

Ghislain Parent

Certainly. Let me drive on - the C$103 million in credity, that C$103 million in revenue, that's a big number. Perhaps it was already addressed. What I'm trying to understand is what proportion of that C$103 million would have been actual gains on sale versus just the mark-to-market in a quarter because collections have improved [indiscernible].

Mario Mendonca

You mean remarking of the portfolio?

Ghislain Parent

Right, that's what I meant.

William Bonnell

There is no gain on sales. We didn't sell anything.

Mario Mendonca

That's all, just the mark-to-market and what size of portfolio you're referring to?

William Bonnell

It's one of the portfolios, right, it was not all of the portfolios.

Ghislain Parent

Two portfolios, but that big - but we had very good performance on collection for certain amount of time, and then we had to, we just recognized this collection because it was above the internal rate of return, which is used to account revenues on those portfolios. It's only a portion of the increased C$100 million and majority of the increase C$100 million comes from new portfolio that we bought at the end of 2015 and that R&R get generating revenues and cost for servicing them also altogether.

Mario Mendonca

Thanks for the response and Louis, thank you for responses on the credit questions.

Ghislain Parent

Not a problem.

Operator

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

Darko Mihelic

Hi, thank you. I'll try to be brief as well, but I wanted to follow up on Mario's questioning and line of questioning there because I just want to make sure because I'm clearly Mario and I probably talk to very similar investors, that questions come up quite a bit and maybe we're using the incorrect terminology here. For example, on January 27, there was a press release from an oil and gas company that said he had renegotiated certain amendments to credit facility naming your bank and the amended facility had less restrictive financial covenants then the prior facility terms. So clearly this has happened, we can see some public documents to this effect is and I guess the line of questioning, I just want to make sure, you could amend prior to covenant breach and that is something that you likely do, would that be a fair statement, but once the covenant is breach, there is no going back, is that maybe a better way to think of this?

Ghislain Parent

The - I think that's probably a fair way to think about that. There is certainly an all corporate files and reviewing the files, there can be a changes to the terms of files. So there is nothing unusual about that for corporate flooring. So I think the - that's a normal process different than company is defaulting and you ignore the covenant breaches and you say it's not impaired.

Darko Mihelic

Okay, okay, I think that's probably, okay that's very helpful. And then just a last question, I appreciate the new purchases of provincial bonds of the classified is held to maturity and that accounting classification helps you out on the capital side reducing the volatility of spread widening. What I'm a little unclear on is how the accounting treatment of how the maturity is still allows it to be consider a liquid asset for liquidity purposes. How was that the accounting treatment helps you on the capital side and doesn't harm you in the liquidity side?

Ghislain Parent

Yeah, the accounting tweaking does not designed if it's a liquidity or not the liquidity, the liquidity remains however, because there is no change to the value at costs, there is no fluctuation in other comprehensive income though therefore it doesn't affect capital.

Darko Mihelic

Why ever having it at an AFS to start.

Ghislain Parent

The reason it because when you have held to maturity, you're not allowed to sell them before maturity. If you do that, you'll lose the right to classify held to maturity. Therefore, if you want to take a gain on it, you cannot, you'll have to wait until maturity. So it'll reduce some flexibility in managing your portfolio. So you have to do choice. Some of them are held to maturity. Some other will be kept as available for sale, to manage the possibility of creating some gains when the interest rate is good.

Darko Mihelic

Right. And so I guess that's - so, the accounting treatment makes it difficult for you to sell, but from a capital perspective, the higher quality liquid assets, it's still considered high quality liquid assets in the story?

Ghislain Parent

Yeah. We could. The definition of high-quality liquid asset is not related to capital. It's related to guidance from Basel.

Darko Mihelic

No. Understood. Understood. I just...

Ghislain Parent

That's why you couldn't move all portfolio May 1 to held to maturity for the very reasons, you just described. All we're saying is going forward, maybe 10% or 20% of the liquidity portfolio could be in the held to maturity and the rest will be AFS, but it'll still reduce on a relative basis over time, the volatility on capital coming from that.

Darko Mihelic

Okay. Okay. And last question, Louis, a 9.67% capital ratio, I understand your view on capital, I certainly have you're generating more, but what if something does occur, I mean and it gets you down 9.5% or below, is that a strict cutoff point for you again to issue equity or not?

Louis Vachon

No. I think you really need to understand what the circumstances are. As you know, we move very quickly in October that there was a series of circumstances that we saw it was necessary to issue capital. But it's not an automatic, put it this way.

Darko Mihelic

Okay. Great. Thank you, very much.

Louis Vachon

Yes.

Operator

Thank you. The next question is from Peter Routledge from National Bank. Please go ahead.

Peter Routledge

I'm going to ask a question on covenant, which seem to be related to whether the company is actually in default or not. The question is related to loss given default. I'm looking at some high yield Canadian bonds, which have really low prices, which suggest a pretty severe loss given default. Some will get bonds prices in 30s. What levers - for your oil and gas borrowers, what levers do you have to mitigate or lower loss given default that may be the high yield bond market doesn't quite understand?

Louis Vachon

I think in terms of loss given default, we've answered the question, when the bond holders were typically below the bank debt and intact. So the difference in loss given default should be substantial.

Peter Routledge

Okay. The seniority of your claims and your oil and gas borrowers would typically be senior to the bonds issued by, say, high yield companies.

Louis Vachon

I think typically, yeah, certainly in the oil and gas specifically. In the corporate space, we are very advanced to and the investment grade, but when you get outside investment grade and certainly in certain sectors like oil and gas it's almost always subordinate.

Peter Routledge

And do you have a range, you be willing to disclose a range of loss given defaults you used when you think about oil and gas exposures?

Louis Vachon

Yeah. There are different lines, Peter, when we think about expected loss given defaults for certain of the calculations for things like collective allowance. It's less severe than the downturn loss given default, which is what used in the capital numbers, which is different and the stress test loss given default which we assume more severe.

Peter Routledge

I mean this - through your cumulated probability of default for oil and gas credits or rather just for all senior loans in rating agency data base that I saw was about 50%, is that a realistic explanation for oil and gas for your portfolio or is that similarity you're claiming that that's too high?

Louis Vachon

Let's say, it's path dependent as well on pricing. In our stress assumptions, we're looking more severe than that or expected would be not as severe as that and historically it's been much less severe than that.

Peter Routledge

Okay. Thank you very much.

Louis Vachon

Does that answer your question, Peter?

Peter Routledge

Yeah, it does. It does.

Louis Vachon

Okay.

Operator

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

Louis Vachon

Thank you, everyone, and we'll talk to you for the Q2 result. 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.

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