Canadian Imperial Bank of Commerce (CM) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CIBC second quarter 2002 earnings conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. At that time if you have a question, please press the one, followed by the four, on your telephone. As a reminder this conference is being recorded, Tuesday, May 21st, 2002. I would now like to turn the conference over to Kathy Humber, Senior Vice President, Investor Relations with CIBC. Please go ahead ma'am.

Thank you, . Good afternoon, and welcome everybody. Our call is open to everyone through our live video Webcast, as has been our practice for the last number of quarters. We have had over the last couple of quarters over 1,000 people on the call, so welcome to everybody. For those of you interested, you will be able to access an archive of the meeting on CIBC.com later today.

Here to speak to you about our second quarter results are John Hunkin, Chairman and CEO, Tom Woods, CFO, Wayne Fox, Vice Chair, Treasury, Balance Sheet and Risk Management. Following their formal remarks, David Kassie, Head of World Markets, and Jill Denham, Head of Retail Markets, will provide some brief commentary on their respective businesses. In addition, we have a number of executives here to answer questions, , Head of Credit Risk Management, David Marshall, Retail Products, Gerry McCaughey, Wealth Management. Following our formal remarks we will open the meeting to questions. Kindly identify yourself before asking your question.

Finally, before turning over to John, I would ask that you note the full forward-looking statement in the slide presentation. To summarize it now, some of our comments today may include forward-looking statements that are subject to a variety of risks and uncertainties. Actual results may differ due to a variety of factors as detailed in our quarterly and annual reports. Thanks for your attention, and I'll now turn it over to John Hunkin.

Thanks, Kathy. Good afternoon, everyone. I believe that I've been delivering a consistent message each quarter for the last ten quarters. Our objective is to generate the best total shareholder returns of all major Canadian banks. Now clearly this has been a more difficult quarter, but the reason to set high hurdles is to keep focused, and I assure you, we're very focused.

My operating premise has been that in order to deliver better returns, we have to do two things. One, run the business better on the day-to-day basis, I mean, in terms of costs, risks and capital. And stay focused on key growth initiatives. Our attention to running the businesses better led us to greater financial transparency. I think at 19 revenue lines we provide more layers of segment reporting than any of our competitors. More important - more importantly, our attention to running our business in a more rigorous manner led us to a really solid performance this quarter in our retail and wealth management businesses.

Finally, it also resulted in a clear action plan with respect to certain areas, most particularly our wholesale business, and David Kassie will be talking about this later. On the wholesale side, we, like our competitors, are fighting what we believe to be a late-stage weakness in the credit cycle, coupled with weak equity markets. I say David Kassie will speak in a few moments, but the point I want to make is that we are very aware that we need to address the issue of balance between retail and wholesale parts of our business.

We are not comfortable with the volatility of our earnings, and are committed to directing a greater proportion of our capital and shifting our business mix to less volatile retail activities. Speaking of our retail banking business, we had a very strong quarter. Our operating ROE in retail was 44 percent. We continued to demonstrate the strength of our card franchise with a strong number one market share position. And in mortgages and consumer deposits, we won market share again in this quarter.

We've had a strong response to our new entourage Amex card, resulting in 50,000 new customers, as at the end of the second quarter. We continue to aggressively upgrade our retail branches. At quarter end, we had completed 71 percent of the full infrastructure rollout, with 400 remaining branches scheduled for completion during the third quarter.

In wealth management, the integration of Merrill Lynch is ahead of schedule. CIBC Imperial Service continued to gain competitive advantage in Canadian retail banking by licensing its branch-based financial advisors. At quarter end more than 650 financial advisors were licensed to sell third party funds. Registered customers of Amicus grew another seven percent this quarter, 1,073,000, and the number of pavilions increased to 507.

We continue to have discussions with parties in the U.S. that are strategically well placed to help us with our U.S. operations. We also continued to demonstrate our commitment to effective capital management. Risk weighted assets have fallen more than 15 billion since the fourth quarter in 1998, and our core loan book fell another 1.2 billion this quarter. We repurchased 4.7 million shares during the quarter, and 5.6 million year to date. And our tier one capital ratio and total capital ratios remain strong at 8.9 percent and 12.1 percent respectively.

And we are taking steps to address ongoing capital market and credit quality weakness. Just as we took aggressive steps to reduce market risk some time ago, we are now taking an even more aggressive stance with respect to reducing exposures to non-core loans and merchant banking. And I say, David will elaborate. We are taking a conservative position with respect to write-downs, and merchant banking. We have eliminated more than 100 positions in CIBC World Markets, and are taking an aggressive approach to managing controllable expenses and deferring all non-essential spending.

So, our overall objectives are unchanged, and our prospects for the future are good. But we are not satisfied with the degree of earnings volatility that this quarter reflects. I want you to go away from this meeting with three things. One, we are very committed to rebalancing the business mix of CIBC. We have already made good progress, and will establish even more aggressive targets going forward. We are very confident about the growth strategies we have in place in wealth management and retail banking. And, we have an excellent corporate and investment banking franchise. I think all of you, being in the business, will know that on the investment and wholesale banking side, at this point in the cycle, it looks like a very difficult business.

But we also know that it will turn around - that I believe over the course of the next year we will see such a turnaround, and at that time, it can look like a very attractive business.

At this point, I'd like to turn the mic over to Tom Woods to give a full report on our earnings. Thank you.

Thanks John, and good afternoon, everybody. On slide four, you can see the CIBC's second quarter fully diluted earnings per share were 53 cents, at the top end of the guidance range of 47 to 54 cents we provided on May 2nd.

Adjusted EPS, which excludes the integration costs for the Merrill Lynch businesses we acquired in December, was 64 cents. And operating EPS, which further excludes the impact of the continuing investment in our Amicus electronic banking rollout, was 81 cents. If the fair-value method of accounting for stock options had been in place in 2002, earnings per share would have been reduced $0.02 per share in Q2, or approximately $0.07 per share for 2002 as a whole, going to roughly $0.12 per annum by 2005.

Following my comments, Wayne Fox will review our loan portfolio and balance sheet measures, some of which are summarized at the bottom of this slide. On slide five, I would summarize Q2 as follows. On the plus side, we continue to have strong momentum in retail banking. In wealth management, the Merrill Lynch integration is going quite well, and in our bank branches, 655 advisors are now licensed to sell both loan and third party investment products.

We put in place a plan, as John alluded to, to reduce the earnings volatility in our merchant banking and corporate loan book, and we continue to have a very strong balance sheet. On the flip side, our capital markets revenues were down considerably from Q1. Our loan losses to date were higher than we anticipated, as were merchant banking write downs.

On slide twelve, in retail products revenue of $647 million was down from the record level of Q1, back to the run rate we saw in the last half of 2001. Current revenue of $302 million was down marginally in Q2, but up 18 percent versus a year ago.

Interest income, which makes up well over half of revenue, was the same as in Q1, as balances were down 3 percent due largely to seasonality, and spreads were up 8 percent, driven by the higher rates typical in Q2.

Interchange revenue in was down 8 percent versus Q1, due to seasonality and three fewer days in the quarter. Our market share continued to be a strong number one, at 21.7 percent of outstandings, down somewhat from Q1. And 32 percent of purchase volumes, up versus our Q1 share. We're continuing to see a small amount of migration into our select cards and the various loyalty reward program cards that carry higher interest rates. And we're also seeing a more competitive environment, with direct mail campaigns offering low interest rates for balance transfers.

Despite this, our card franchise, particularly Aerogold card, continues to maintain its dominant position, reflected by the market share numbers I just referred to. For the rest of the year, we expect volumes to be higher and spreads to be narrower, essentially offsetting each other.

Mortgage revenue was down from the record level set in Q1, but up 29 percent from a year ago. In Q2, balances were up 3 percent versus Q1, but spreads were down 18 percent because of the narrowing prime BA rate spread. Also, pre-payment fees were down, as was the impact of hedging the pre-payment risk, and the shorter quarter had the usual adverse effect in Q2. Our residential mortgage market share increased from 13.3 to 13.6 percent on the quarter, and is up from 12.2 - 12.4 percent, rather, at the end of 2000.

Share appears to be coming less from the other banks, financial institutions. The strength of our mortgage product comes from the multi-channel, multi-product approach, unique in Canada, with mortgages being originated by CIBC customer service reps, dedicated mortgage specialists, and the financial and first line mortgage brands.

For the rest of the year, we expect more spread compression to offset, perhaps more than offset, volume growth. In retail lending products, revenue was lower at $149 million, despite balances being up 2.5 percent on the quarter. Spreads were down 3 percent, and significantly more revenue was transferred to our customer businesses because of strong sales of overdraft protection and lines of credit, as well as much-improved performance on the front lines undiscretionary pricing, where the customer businesses get rewarded from the product groups.

Market share on term loans was up at 16.5 percent, and lines of credit down marginally 14.2 percent. We feel good about the outlook for this business for the rest of the year, as balance increases and three more days per quarter should offset expected margin compression.

Insurance revenue was up as creditor sales penetration increased and ) continued at relatively favorable levels. The other line relates mainly to treasury revenue allocation, which was down this quarter, as interest rates rose, particularly in the middle part of the curve in Canada.

On slide 13, you can see net income for retail products of $196 million versus $220 million in Q1. Revenue was down by 91 million, as I just took you through. This was mitigated to a large degree, however, by expenses that were lower by $12 million, improved loan loss performance that was better by $32 million, and taxes, which were lower by $23 million.

Slide 18 looks out our second business group, retail markets, where revenue of $513 million was up from $504 million in Q1. The first line retail banking is our customer segment for all retail branch banking customers, with the exception of the 15 percent under Imperial service. About 60 percent of its revenues is deposit spreads, with the rest being failed commissions and trailers from the product groups.

In Q2, revenue was up at $266 million, as deposit balances were up 4 percent and spreads were flat. Balances are up 25 percent versus Q2 last year, and although a lot of this is due to migration from GIC's with the falling rates, part of it is the continuing strong sales performance of the wave and premium growth accounts we introduced last year.

Consumer deposit market share, as John said, was up at 17.8 percent versus Q1's number of 17.4 percent. The next line small business banking, revenue held steady versus Q1, up from last year's slightly higher deposit spreads offset somewhat lower balances. West Indies revenue was down $6 million from Q1, as balances were down 2 percent on the deposit side. Loan balances were down 3 percent, and spreads tighter by 7. The falloff in tourism over the past six months has had an impact on balances, and has also put some pressure on our rate structures.

Regarding the merger with Barclay's operations there, we continue to work with regulators in the region, and expect to close in Q3 or Q4. On closing, we'll have a one-time dilution gain, as I've mentioned earlier - in earlier presentations - in excess of $100 million, which will have a small benefit on our capital ratios but which we'll as an unusual item for P and L purposes.

On slide 19, you see retail market's net income of $15 million, up from $44 million in Q1. The $6 million increase was made up of $9 million in revenues, as discussed, offsetting $8 million in higher costs, mainly higher tech and advertising spend. $8 million better loan loss performance and $3 million, higher taxes.

The outlook for all our retail markets businesses for the rest of the year is positive, particularly in the West Indies. Slide 20 allows you to compare our combined retail products and customer businesses with those of other banks who present their numbers on a consolidated basis for retail. Top line revenue growth has been 13 percent over the past 12 months and NIAT grew 17 percent.

Though we don't see being able to maintain quite this pace for the next 12 months, I wanted to highlight it because it shows the momentum we have at the moment in retail banking, and Jill Denham will elaborate on this a little later.

Turning to our third business group, wealth management, on slide 23. In private investment, which is our full service brokerage business, Q1 included only one month of revenue from the sales force acquired from Merrill Lynch Canada, where Q2 had the full months of revenue for this sales force.

Private client the Merrill sales force was flat in the quarter, and the former Merrill sales force revenue in Q2 was at the same run rate as it was in Q1. Our U.S. numbers, which now represent about 40 percent of the total, were down 7 percent on the quarter, as our trade counts neared the lower volumes on the NYSE and the Nasdaq. Expressed another way, if the 7 - if the $378 million revenue number you see for Q2 were put on an apples to apples basis with the Q1 number, it would be down about 3 percent.

Private client in our management were a little higher than they were in Q1 in a market where the TSE was flat, the Dow up marginally, and the NASDAQ down 15 percent. Predicting the future in this business is difficult because it's driven primarily by market levels and trade volumes.

Near term, the new issues side of the revenue stream, which can be ten to 20 percent, doesn't appear terribly robust. However, volatility in the remainder of the revenue stream will continue to be dampened over time as more business migrates to fee based.

In Imperial Service, which is the customer segment containing the top 15 percent of our retail branch banking customers revenue shown in the second line was up from 158 million in Q1 to 164 million in Q2. About 50 percent of this comes from deposit spread revenue which is flat for Q1. Slightly higher balances were offset by the while margins were flat. Commissions on higher sales of loan and investment products from the product groups accounted for the higher revenue. Driven mainly by the improving performance of our dually licensed branch based advisors we believe Imperial Service revenues in the rest of the year comfortably above our first half numbers - wealth products, now include CM Investment Management. And this is the renamed Merrill Lynch investment management, the acquisition of which closed at the start of Q2. This accounted for the $14 million revenue increase you see to 162 million on the third line. Discount brokerage was up. TAL and our mutual funds businesses were flat. And our USF management and GIC businesses were down a small amount. GIC market share was down a bit to 16 percent. And our mutual fund held steady at 8.3 percent among all mutual fund originators, banks and others in Canada.

The outlook for these businesses in the short term is positive, particularly in GICs where spreads seem to have come off the floor and should continue to widen as rates increase. Revenue in total for wealth management in Q2 was 751 million or 650 million on a comparable basis to the Q1 revenue number. The 650 number excludes the former Merrill Lynch investment management, which as I said, was acquired at the start of Q2 and the former Merrill Lynch private client business, which was in Q1 for only a month.

Slide 24 shows wealth management net income of 74 million in Q2 versus 84 million in Q1 excluding the Merrill Lynch integration costs which we show in the footnotes. Expenses increased from 600 million in Q1 to 700 million in Q2, virtually entirely because of the full quarter effect of the Merrill Lynch acquisitions.

On slide 25, the integration of the former Merrill businesses continue to go well, as John said. And we had minimal turnover in Q2. On slide 26, the Merrill integration charges this quarter of 68 million pre-tax consisted of 55 million in retention related costs and 13 million in systems integration and other charges. We expect retention charges in Q3 and Q4 to be about 44 million per quarter and systems integration to be about 17 million in Q3 and 4 million in Q4.

In slide 27, the EPS numbers we gave you last quarter haven't changed except for the fact that the $0.44 per share dilution we originally anticipated for this year will likely come in better than that, probably in the low forties, 41, 42, probably. And we continue to see the earnings next year. We expect the $0.45 swing in EPS to be driven by the following, 35 million of higher revenue, 45 million or more in cost savings and the absence of about 140 million in retention related payments and 53 million in other integration costs being charged in 2002.

Some of you last quarter asked us to calculate wealth management's net income excluding all the revenue and expenses for TAL and the former Merrill business, as we acquired. In Q1 the number we showed you was 88 million . The comparable number in Q2 would be 73 million.

Turning to world markets on slide 33, markets revenue of 307 million was back down near to where it was in Q4. This quarter the equities debt mix in that line was roughly 55 percent equities, 45 percent debt versus 60/ 40 in favor of equities in Q1, as both were down on the quarter, equity more than debt. Equity structured products were well down in Q2, as their various strategies, particularly in were hurt by lower volatilities and lower liquidity. The equity agency business was down only a small amount from Q1. Our debt revenue in that line was 12 percent lower versus Q1 due primarily to reduced origination opportunities in structured derivative and other products.

Market share and debt origination in Canada fell from 15 percent in Q1 to 13 percent and fell on the US on the equity side from 1.2 percent to 1.0 percent.

The outlook for our markets business for the rest of the year is for the same or better performance than we saw in Q2 although this will obviously be driven by market conditions. The outlook for equities appears better than that for debt, where higher rates may lead to less client flow business.

Investment banking and credit revenue was up six percent on the quarter to 354 million. This number breaks down roughly 55 percent US, 35 percent Canada and ten percent for Europe. Our US business was somewhat weaker in both new issue equity and , particularly in our lease origination business. Canada and Europe were up across the board. Market shares across the various product lines generally increased in Canada and fell marginally in the US.

The outlook is positive for most - for the most part in the US, especially in new issue equity and high yield. In Canada we are unlikely to be able to maintain the strong pace we've seen to date, as the income trust and new issue market may lose a little steam.

In merchant banking, as you know, we pre-announced on May second the sale of the Global Crossing shares underlying our remaining hedge contracts. Revenue in Q2 of 220 million consisted of 485 million in gains, 268 million in write downs and 3 million in net revenue from interest in dividends less funding charges.

Slides 37 and 38 provide a drill down on our merchant banking portfolio.

David Kassie will comment on the outlook for merchant banking and world markets generally, following Wayne Fox's presentation.

Commercial banking our mid-market lending and advisory business in Canada continues to deliver a consistent revenue stream, this quarter 109 million. The outlook for this business is good for the rest of the year, as revenue from new opportunities will probably more than offset the drop off in interest rates - in interest income coming from further pruning of our loan book.

Slide 34 shows CIBC's world market net income of 57 million. The 84 million decline from Q1 was made up of the following, 193 less revenue as I've just reviewed, 39 million higher expense, most of which was higher severance charges as we continue to reduce staff levels, offset in part by 110 million in lower loan losses and 38 million in higher tax

And finally, turning to Amicus on slide 39, the loss of 64 million in Q2 compares to 67 million in Q1, for an EPS reg of $0.17 this quarter, $0.05 for Amicus Canada. The net loss assumption of 53 million in 2002 still seems achievable. Assuming we continue to see interest rates climbing higher, we expect to be earnings positive in Amicus Canada by Q4 2003, however being profitable for 2003 as a whole while still our objective will probably be challenging.

Here's an update on the main earnings drivers for Amicus Canada in the short term, say, the next 12 to 18 months versus the numbers we showed you on the December seventh Webcast. Net interest income will likely be lower than had been assumed, driven by slightly lower expected customer counts, personal loan balances and spreads. However, mortgage and checking account balances are likely to be stronger than we showed you in December. Fee income will be lower than expected, primarily because the introduction of higher NSF charges has reduced the usage of this product more than anticipated, at least thus far. And finally, costs are better, i.e. lower than had been assumed in December.

In Amicus US we built 28 pavilions in the quarter versus 33 in Q1 to bring our total number of pavilions there to 300 versus 207 in Canada. We now have over 150,000 customers in the US and 922,000 in Canada. We have over $7 billion of funds under management in Amicus, 14 percent of which is in the US. Although deposit origination continues to be reasonably strong in the US, the asset side of the balance sheet has not shown comparable growth there continue with prospective investment/ business partners and our goal is to have this resolved by the end of the year, fiscal year. Our objective continues to be to have an EPS reg and Amicus this year no worse than the $0.67 we had

Thank you very much, Tom. Good afternoon, ladies and gentlemen. As Tom pointed out, in consistence with our May second public disclosure, our specific provisions for the second quarter totaled 390 million, down 150 million from the first quarter. Q2 corporate credit losses were largely attributable to the telecommunications and oil and gas sectors, with credit card losses driving the consumer specific provisions. Business and government credit specific provisions totaled 293 million, down 126 million from the first quarter.

Consumer credit specific provisions of 97 million were an improvement of 24 million from Q1, and were consistent with the second quarter of fiscal '01. The improved consumer credit performance reflects the strengthening Canadian economy, as well as advancements in both our underwriting and high-risk account management activities, particularly in the credit card sector.

General allowance remained unchanged at 1.25 billion. That is 96 basis points of risk-weighted assets. Overall our allowance for credit losses now totals 2.47 billion, and provides us with a conservative coverage ration of 115 percent of our growth impaired loans. Based on anticipated future trends, total loan loss provision for the fiscal 2002 year is expected to fall in the range of 1.45 to 1.5 billion, consistent with the guidance we provided on May the 2nd. Given our year to date performance, the inference is that our combined third and fourth quarter provisions will total between 520 and 570 million.

In this regard, approximately 70 percent, or 501 million of our year to date corporate credit provisions of 712 million relate to a combination of Enron, Global Crossing and TeleGlobe, indicating that the remainder of our corporate credit provisions for the first six months have been 211 million. This experience, combined with our consumer credit loss experience, has factored into our full year guidance.

Also incorporated within our forward projections is the fact that through a combination of write-offs and outright sales, our remaining net Enron and Global Crossing credit exposures have been reduced to Canadian 67 million in the case of Enron, and three million in the case of Global Crossing.

Debt loans and acceptances before general allowance totaled 1.43, or 143.2 billion at quarter end, up 2.3 billion from levels at October 31st, 2001. Residential mortgages, as shown on the left hand side of the slide, continued to grow and represent the largest credit product exposure at 62.7 billion, up 1.5 billion from the first quarter.

Personal loans also continued to grow, increasing 780 million during the quarter. Credit card outstandings increased slightly, by approximately 83 million in the second quarter, while business and government loans and acceptances reduced by a further 450 million in Q2, taking the year to date reduction to 3.5 billion since the fiscal 2001 year end.

As of the end of Q2, retail assets represented 65 percent of total net loans and acceptances, as compared to 60 percent a year ago. This substantial shift in our portfolio continues to be reflective of our strategy to shift our credit mix in favor of retail, in conjunction with our ongoing focus on balance sheet and capital management.

We continue to view corporate credit diversification as an important objective, and are continuing to place greater emphasis on more active loan portfolio management, to groom the portfolio to improve our returns. Our business and government portfolio continues to be reasonably well diversified from an industry perspective, as evidenced by the breakdown on the current slide.

Business services is the largest industry segment, at 5.8 million, or approximately 11 percent of the portfolio, as displayed on the right hand side of this slide. Reflecting the reductions in our corporate credit book year to date, the largest industry reductions have been in the financial institutions, oil and gas, and telecommunications and cable sectors. Specifically, with respect to telecommunications and cable, our Q2 exposure decreased for a fifth consecutive quarter by a further 163 million from the first quarter to $4.1 billion. Our exposure to this sector is spread amongst various industry subgroups, as broken out on this slide, as Q2 reductions were primarily driven by the wireless and unregulated other sub sectors.

Net impaired telecommunications and cable loans totaled 135 million at quarter end, up $7 million from last quarter, and 51 million from year-end, October 31st, '01. Our quarter end high-yield portfolio telecommunications exposure of 67 million continues to reduce, and is down from 138 million as said October 31, '01. The net impaired amount is gross of $63 mi

First question for David. I was wondering why did it come to this? You kind of started with a why, and I want to know for the bank, was there a lapse in terms of you've got all these new credit risk management tools at your disposal today, yet we've seen these piece sales get to a pretty high level, much greater than what your RAROC models were telling you, so why did it come to this?

Well first of all, the models work, because the average over six years if you want to arbitrarily call that a cycle, and you can call five years or seven years or whatever you like. The actual loan losses are a little bit less than the expected loan losses. But you're running an expected loan loss model that's got an average number and you're reporting on actual loan losses. So the volatility is quite, is quite significant, and certainly at the size of loan book that we're running, and relative to the size of business, it's quite impactful. So notwithstanding, we're doing a lot better than say we would have done three to five years ago.

In order to reduce the volatility from plus or minus 500 million, say to a more acceptable plus or minus 200 million, which would be, I don't know, pick a number, 100 million of NIAT volatility, we're going to have to do the things we're talking about, because what we just found out is the volatility in a bad year can give you a billion dollars of loan losses at the rate of hedging that we've been doing.

Let's say three to five years ago, like you wouldn't have had the tools that you have today, so let's say over that cycle average you should be much more capable than you were, so let's say if you had the tools of five years ago, I think the losses would have been even higher.

No, wait say that again?

Well you've got better tools today, than you did five years ago, and you're saying that ...

That's true.

... short cycle, and so if you didn't have, let's say the liquidity of the secondary loan market, better credit derivatives and what not, that you do today ...

I would say ...

... can you answer, things could have been a heck of a lot worse than they were just five years ago.

Well I'd say, I'd say if had had the tools and the wisdom, and the will to do even more than we did five years ago, the results showing up today would be much better around the, around the loan losses. You know, I mean a very good example, TeleGlobe we should have hedged the whole thing. Another example I like to give is in the year, fiscal year 2000, just to demonstrate the philosophy that I'm talking about, it is in World Markets we made a billion 150 and a 26.5 percent ROE. I would argue that 150 million of NIAT, 300 million or whatever, 250 million pre-tax, and 6.5 percent ROE was a waste of money. I.E., nobody's going to give us credit in our business for sustaining 26.5 percent ROE and the billion 150, and we should have been taking those types of bottom line profits, and that extra ROE, and reducing risk, and smoothing out the volatility around our loan book.

Hindsight's 20/20, we did some of that, but obviously not nearly enough. So having lived through that, and been more experienced now, have learned, that's what we're going to do in the future. So it's not like we didn't do anything, but everything we did, that we see, we should have done in much greater, to a greater extent, greater magnitude, greater volume.

Or just Wayne, I'll ask one more question. Your formation, do you see the light at the end of the tunnel? How is, how are you just overall in terms of the cycle, can you tell us where you think a peak will hit?

I don't think we, our crystal ball is that good unfortunately. But as you well know, credit's a lagging economic indicator. I think experience proves out that from the turn of the real economy to the troughing out if you like, or the peaking, whichever way you like to look at the credit cycle, is anywhere from three to four to five quarters perhaps. If you believe that, that means we'll have another couple of quarters in front of us that will be somewhat erratic and difficult.

But what we are trying to do as vigilant if you will around reality, and where we sit, you know, with our, with our loan books or our asset quality if you like, and I think that's reflected in the conservative nature of our provisioning. But I welcome any comments you'd like to add.

What I would add to Wayne's comments, and good afternoon everyone, is similarly to the disclosure that Wayne provided on the materiality of three credits, and their impact on our provisioning, those same three credits represent effectively two-thirds of our corporate formations for this year. So in the context of some aspects of what's going on, with respect to certainly the consumer side, which Wayne has highlighted, as well as the commercial banking Canada side, we've actually been overall pleasantly surprised with the recovery within that segment of the marketplace.

Where we've obviously had the challenges is in terms of the event risk aspects of those three credits, two of which I would say are fairly unusual in the context of Enron and TeleGlobe, with respect to some of the history around those two, those two clients. So in the context of the decomposition on the formation side, I think there are some initial positive signs that are occurring, but similarly to Wayne as we've disclosed previously in our guidance, we're basically taking the view that the economy and the capital markets this year, base case will stabilize from a formations perspective, as opposed to providing an uplift or good news, and that would continue to be our perspective.

OK.

Had a follow-up on the credit question. I definitely agree that credit is a lagging indicator, but telecom appears to be a big black hole that nobody can really get their arms around. Do you all have any color I guess, on when the telecom credit cycle is set to go, or start to stabilize?

responding. If I have the answer to that question that the people would believe, I'd probably be on my own business. The frank answer is until the capital markets regain some degree of stability, with what I would describe as a business as usual model whereby underlying companies are generating free positive cash flow, and in those circumstances which would be the norm, can refinance themselves effectively within the capital markets to deal with upcoming maturities and the like. Until we reach that point, it requires a level of bravery, which I don't have, to tell you that we've hit a particular inflexion point.

And the reality is we have not hit that particular inflection point, because we aren't seeing that telcos, and particularly obviously telcos in the more challenging areas being competitive local exchange carriers, unregulated networks and the like, et cetera. That there are players within those segments that are achieving reasonable financial performance, but the capital markets in terms of new money or refinancing are at this point not prepared to support those companies with any significant new money or renewal of existing money. And that, to me, will be the key point, when the markets, as a whole, get to an inflection point where there's some reasonable support for cash flow positive business plans.

. Yes, just, I guess, two questions. One for David. In terms of your changing view, or modifying the view in terms of world markets and trying to reduce volatility, one of the things on the credit side I thought were already happening in terms of expectations sell down, primary hold positions, large name exposures hedge against event risks.

I mean, you've talked in the past about Xerox, and this goes back to several - many quarters in terms of - CIBC was putting out itself out there as being aggressive, so I'm not quite sure what's changing in the current environment. Is it just you're saying you want to do more of this more aggressively. If you could try and give us a sense of what is changing, if anything, on the platform.

kassie (?): I'd say the volume has been changing. I think we've done a lot of things I've identified, for the most part, we've done but to a relatively small extent compared to what we're forecasting about doing, and having specific targets like we're talking about. You're right about the runoff in terms of non-core. Some of the contrarian hedging we were doing a little bit on the name by name basis, and I'm talking about maybe we do it on an industry group basis.

There's a couple of industry groups - I'm not going name them - but right now, where things are going really well. We don't need to sit there earning net interest income in those books. We can free up the capital to a large extent and devote it into something more stable and with higher returns. I wish we had don that on the Telecom book when things were great whenever they were great - in '99, or whenever it ran out.

We didn't, obviously, have to be sitting there on a macro basis with that size a book. And, as I said, hindsight's 20-20, but obviously, we didn't do that. That's changed, because we didn't do that. Now, we did do it on some of the name by names, and we did it with a budget size that was smaller that - again in hindsight, and going forward - we should have done it, i.e., we were prepared to devote so much a quarter, so much per annum to the hedge.

You know, I just enunciated, on top of 2000, we should have been able - prepared to do it at three times the budget that we had and also done it more intelligently, i.e., when the credit's cheap, when the protection is cheap, not when things are a problem. That is a bit of a philosophical change.

If I can just follow up, then. How do you change - because it requires - typically the hindsight we see things perfectly clearly - so how do you change the compensation, the internal mechanisms by which you are triggering, yes, this is a top in telecom, let's get out. Yes, this is a top in X credit name, let's get out, because clearly the relationship managers always see things typically a little different when it's their credit, their industry that you're all of a sudden and pulling out of.

kassie (?): OK. Well, several things. First of all, we're doing this at the senior management level, and it has the full support of senior management. Secondly, people are not compensated, and there may be an exception or two, but generally speaking, and if there is an exception, it's about to change - people are not compensated at CIBC world markets off of net interest income line. They are compensated off of generating fees.

They may be compensated off of loan underwriting fees, but they are not compensated off of net interest income. So, nobody has a vested stake in let's have as big a loan portfolio as we can, please. And in fact, since, you know, most of the top several hundred people are pretty large, relatively speaking, for their own portfolios, CIBC shareholders, they all have a vested stake on having a higher valued business, which means shifting capital to more valuable businesses and making world markets, you know, within the CIBC context, more valuable.

So I don't see, generally speaking, a lot of opposition internally to this type of move. And, you know, when I

When you look at where, as we have been, you know, we did before, but we've really turned up the volume on this, where we have our loan positions, whether it be in Canada or in the U.S., I don't see a lot of problems implementing them. We're there because we were going to get other business

Now we're going to be around that. So you raise the bar on the standard, it's going to reduce the number of times that you're lending and make, you know, what you do better. So it's not

... you intend to free up through those two exercises alone that what you made available for deployment in other ways. And I guess secondly, are you able at this point to provide any color as to how you might spend it. Would that be through increased buy-backs with better earnings stability and higher pre-cash flow, should we expect to see your dividend payout ratios rise meaningfully, or have you already identified any areas that you'd like to be spending that money through acquisitions.

I'll take that one. It's John Hunkin. There it goes. John Hunkin speaking. First and foremost, we'd like to look for opportunities to - Tom, I don't know if you've got a number, but at any rate - we've got a few numbers, actually - a choice.

First and foremost, we obviously would like to grow the business. So we would be looking for opportunities in, you know, primarily in the retail and wealth management side of the business, so that would be where we would be looking for more growth. We would also be, as we have done all along, if we have excess capital, we will be looking to continue to do our share buyback and if it's possible, to increase it.

In terms of the dividend policy, we're right now, I think, between 30 and 40 percent of earnings, and for the time being, at any rate, I think that is an acceptable range. But if, you know, we had, you know, excessive capital, we would reconsider that.

I don't know, Tom, you got a ... ?

Well, the metacapital world markets has, with the proportion of CIBC's on a risk-adjusted basis, which is the way we look at it, is about 50 percent. And the loan book is probably a bit shy of that, about 50 percent of that number. So 4.5 billion is the economic capital of 9.2 we've got. And David, I don't have the precise number, and you may have it off the top of your head, but I'd say a little less than half the 4.5 is loan book.

So, very crudely if you were to say the objective from a balances point of view is to scale that back by a third, you could say maybe one third of 2.2 billion might be freed up - so what's that, about 700 million of capital? Is ?

Merchant banking, you know, I just don't have the number right here. It's considerably less than that, so maybe that 700 million might be, at the risk of giving you a bit of an estimate, might be upwards of another 300 million or 200 million, some number like that.

hunkin (?): Yes, that - it would be in that order of magnitude. The thing about merchant banking that's hard to predict is the way economic capital is calculated. If you get big, unrealized gains, obviously, that decreases the economic capital and that's hard to predict. So you get something that's not intuitively obvious in that calculation. But certainly, the large corporate would be exactly around 700 million by the time we get to the end of 3 years.

One of your slides looked at your diversification in your loan book, and about 11 percent of your loan book is in business services. Can you give us a little bit of a feel for what that is, what exactly companies, what type of companies, within business services?

hunkin (?): Certainly. Excuse me. I realize it's a fairly generic - fairly generic title, but basically, companies who are producing what I call, generalized services, to the industry at large. So the provision - simple example is the the provision of services to corporations in the area of farms, professional services, by way of legal accounting, et cetera without suggesting that those are particularly significant users of credit, provision of services around security and the like. So effectively, you know, generic goods and services, very diversified by way of client type and very diversified by way of segmentation of what they actually produce.

David, the concept of you know, getting the risks down on is an attractive one. But one of the offsets to that, it sounds like is actually lower earnings or earnings dollars in terms of you know, one thing you can give us was as opposed 300 to 500 on merchant banking, NII on the loans that you take off the books won't be there. So positive side effects on capital. But earnings lower. You mentioned a number of 700 million. You said it wasn't a forecast but that was sort of what the model would give you. What I'm trying to get at is how much lower earnings are you sort of forecasting? I think at the start of this year you were talking I think, $1 billion out of world markets and didn't look like a good year just in terms of everything going on. I mean, is it 300 million less of earnings?

Well, first of all, the billion dollars, that has been in aspiration and what I would describe as a stretch goal for our business. The700 million, as you correctly said is basically a scenario run at current first half levels of revenues. So I would not cut a very optimistic scenario you know, or a less than average year in capital markets where hopefully we can do better than that. And you correctly identified that if we reduced merchant banking book and we reduced the large corporate loan book there's going to be less NII and less gains you know, assuming comparable performance, less volatility and higher ROE. But that does free up the capital, which can go into either you know, other businesses within world markets if they have high ROEs and hopefully less volatility or you know, identified into retail businesses where we can deploy it or for other things like share buyback. So you know, net, net, I think CIVC will have that capital to do something that obviously enhances shareholder value. You'll just see less out of that particular business because we're going to have less exposure to it in order to get the volatilities. That's - you're right. That's the flip side of that. But the capital doesn't disappear. It gets redeployed in one way or another.

Isn't there some way to sort of , that into further valuation, presumably if your view has evaluation on the equity is going to be better?

Let me put it this way. If we've got a business that's producing the that you've seen over the last several years and more likely you know, you can see where it's heading this year that is obviously a lower multiple business on its own than if we have a you know, a more steadier earnings. So you know, I put the question back to you, "What is the multiple difference for a much steadier stream of earnings, which is

As I said, we're all you know, material shareholders. And we want to see a more highly valued business. So that's what we're trying to solve for, reduce that .

One moment, please for the first question. The first question comes from Jamie of Merrill Lynch. Please proceed.

Thank you. I got a question in sort of two volleys here. The first one would be on the merchant banking side. Wonder if you could clarify the numbers that I think I'm seeing. That is global crossings, I think we triggered 455 this quarter and the merchant banking losses - can you hear me okay? Hello?

We can hear you.

Sorry about that. The merchant's bankings writedowns over 268 - can you clarify for me what the net impact of those two numbers was, sort of after tax and what the earnings in the quarter would have been without the this quarter? And the second question is in the unrealized securities games I wondered if you could help us with what the in that total of I think, 729 is. It's the first series. I guess I'll come back to the second one if you like in a sec unless you all want to go ahead.

No, Jamie, it's Tom. On the first question, what Jamie was asking, given the numbers that we talked about for gains and losses how would you translate that into an after tax because those are revenues? We don't have an after tax number, Jamie. The challenge in trying to do a on any sub-business - and merchant banking is a perfect example - is the whole question of how you allocate expenses to that business. So you know, we don't have a number to give you. And we've never tried to go beyond the area that we've done in the past. So you can draw your own conclusions as to what a reasonable expense allocation is. But you know, there's a whole bunch of different assumptions you could use, there.

Okay. The face numbers I used are the right ones?

What was your second question?

Just the carrying amount - sorry. The unrealized securities gain portion attributable to global payments.

Yeah, we've typically called that in and around the high 200s, low 300s. Let me just see if I have that here. I mean, that's in the ball park. ) It's sort of mid-thirties. So call it 300 million in round numbers.

Terrific. And I wondered a second question is more for perhaps Wayne. But I wondered if you could help us understand how the credit protection works, a little more detail just as to the name specificity of it, if you can. And I guess what I'm really interested in is what percentage perhaps of that $496 attributable to telecom loans is in effect triggerable in your judgment either today or in the future? And it would be quite helpful if lots of it's triggerable. But if you can give us an idea of how much of that is useful going forward - and I guess, as a follow up, in this environment, would you say you have or would you give consideration to you know, once you can corral all this telecom situation whether you need or you could give consideration to a one time charge just to get this all behind you? And then the last follow up on the teleco side is are the gross impaired loans for the teleco portfolio disclosed anywhere in the package? And if not, I wondered if we could get those.

Have you got any more, Jamie?

Actually, I do have one more, if you'll allow me.

Dan Ferguson responding. I will respond to questions three and one and look for guidance on question number two, which was the big event question. On question three, our gross impaired telecommunications and cable loans as of April the thirtieth were 277, 277 million. On the first question, the overwhelming majority of our credit derivative protection purchase has occurred over the course of the past two years when the market has evolved to a fairly conventional standard in terms of defining default for the purposes of protection. The numbers that we've provided you are fully matched as to tenor. I.E. the tenor of the protection that we've acquired is matched to the underlying tenor of the physical credit that we are buying the protection on. And broadly speaking, they would be exercisable upon a material credit restructuring event occurring. They are, by definition obviously the case when there's a filing, as of the case with Teleglobe. But under the provisions with respect to credit default protection there are other specified events that can occur short of the filing which do give claim - or give rise, I'm sorry for the buyer of the protection to make a claim on the seller of the protection. On the - I'm not sure Wayne, if you or Tom would like to comment on the second question.

I don't think we have any aspirations to put a large hole in the banks, P&L balance sheet as it relates to the telecom portfolio. As you can see, it continues to be a significant size, as was disclosed in the presentation. But I would reassure you, however, that we continue to monitor it very closely and provide for it based on

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