Canadian Imperial Bank of Commerce (CM) 2003 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the CIBC third-quarter earnings conference call. I would now like to turn the meeting over to Ms. Kathy Humber, Senior Vice President, Investor Relations. Ladies and gentlemen, Ms. Humber.

Good afternoon and welcome, everybody. Before we begin, a couple of things to note. First, there has been some instability in the various communication systems related to the ongoing power issues. In the event of a breakdown in communications, we will close the meeting and issue a press release as soon as possible setting a time to reconvene. Second, our familiar refrain, could you please take note of the forward-looking statement in our slide presentation, which I will summarize as follows. 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 report.

Finally, turning to the formal presentation, here to speak to you today, John Hunkin, Chief Executive Officer; Tom Woods, CFO; Wayne Fox, Vice Chairman, Treasury, Balance Sheet and Risk Management. Also on hand to respond to questions, Gerry McCaughey, Head of Wealth Management; David Kassie, Head of World Markets; Dan Ferguson, Head of Credit Risk Management. I would ask those of you on the phones to please identify yourself before asking a question. Thanks for your attention. I'll turn it over to John Hunkin.

Welcome, everyone. Today we reported net income for the third quarter of $788 million, or $2.02 per share. As announced on July 7, our earnings benefited from the net effect of three sizable items -- an income tax recovery, an additional loan loss provision -- I'm going to start over again, because I don't think the people on the phone heard me. I didn't have my microphone on. I apologize. I will say welcome again. Today we reported net income for the third quarter of 788 million, or $2.02 per share. As announced on July 7, our earnings benefited from the net effect of three sizable items -- an income tax recovery, an additional loan loss provision resulting from the acceleration of our loan sale program, and a valuation allowance against our U.S. future income tax asset. Net of these and a $60 million reserve on Enron, EPS are $1.08, up from adjusted $1 last quarter and 49 cents a year ago.

Our message to you for several quarters has been pretty straightforward. We are committed to reducing risk and volatility and generating solid, sustainable earnings growth. In this regard, we have made several undertakings to keep us on the right path, and I will comment briefly on our progress. First, risk. All in all, a very favorable picture this quarter. Credit equality continues to improve. Allowances for credit losses exceed gross impaired loans by a wide margin, $587 million. Our loan loss provision guidance will remain unchanged at down 15 percent in fiscal 2003, including the 135 million related to our held-for-sale portfolio. We continue to successfully shift economic capital away from our large corporate loan book. The acceleration of our loan sale program will mean that we will hit the target established in the second quarter last year of reducing economic capital for large corporate loans by one-third well ahead of plan. Market risk is being managed at historically low levels, and our capital ratios are very high -- Tier 1 capital is 10.2 percent.

Second, our business mix continues to shift in favor of retail and wealth. These businesses are now supported by 60 percent of the bank's capital. Third, expenses. We have made some improvement to operating efficiency this quarter, and we have a number of new initiatives which are only now getting underway. As we build our plans for 2004 and 2005, we are very focused on achieving significant, sustained reductions in our mix ratio.

Finally, growth. Retail businesses have generated more than 1 billion in earnings year-to-date. Cars, mortgages and personal loan balances all grew this quarter. President's Choice Financial was profitable. Improved market volumes meant higher profits in Wealth Management and we continue to be quite optimistic about the potential for this business line. World Markets continued its strong number one ranking in the Canadian new issues market. The strength of our domestic franchise contributed to an increase in underlying earnings this quarter.

We are making progress, but still have some distance to go. Net of the large and unusual items noted, these are solid results. We will continue to take decisions that by the end of 2004 will put us clearly in view of the organization we know CIBC can be. With that overview, I will turn the call over to Tom and Wayne to provide more detail.

Good afternoon, everyone. I would like to direct your attention to Slide 4, my first slide in the deck. I'm only going to go through some of these slides. That is the summary. It shows the reported EPS of $2.02, as John said. It includes $1.06 EPS of benefits from the July 7 preannouncement of the tax recovery and other provisions. And $2.02 also includes a 12 cent drag from a reserve we took in respect of possible future Enron costs.

And as I will point out in a moment and be happy to comment on in the Q&A, we had higher than normal mortgage securitization and hedging gains this quarter, as well as higher interest on some tax recoveries, apart from those announced on July 7, that you may want to factor in if you're trying to normalize our Q3 results. I'd say the sum total of those two would be about five cents a share. So starting at the top, $2.02 less the $1.06 is 96 cents -- that includes Enron. If you add that back, that is $1.08, and I would say five cents of that $1.08 is probably non-sustainable, leaving about $1.03, if you want to get really precise on core, sustainable earnings.

If you go to slide 5, this is a new slide we put in given interest many of you had in NIMs, given the competitive environment we're seeing on the retail side. Although reported NIMs were higher in Q3 versus Q2, when you exclude fixed assets, trading assets, the effect of securitization and unusual interest income -- which in our case this quarter was pretty substantial, NIMs were essentially unchanged. So the favorable picture you might have inferred looking at NIMs going up reported, actually isn't correct from a pure product origination point of view -- they were essentially flat. With the widening spread between prime and BAs, most loan products spreads increase the way we transfer price. NIM and cards fell, however, with the seasonably low revolve in Q3 we always see in third quarter, and deposit products spread fell as well.

Turning now to a review of our business line performance on Slide 13. I'll give you a moment to go there. Retail markets revenue was 1.257 billion, up from 1.203 billion in Q2. Going to Slide 15, I will review briefly the revenue story in each of our main line items in Retail markets. Slide 15 -- personal banking revenue was a record 488 million, up 33 million from Q2. Deposit balances were up 3 percent, but lower spreads offset most of this benefit. Loan balances were up 7 percent and spreads increased as well. Higher service fee revenue and the benefit of three extra days versus Q2 also helped. Loan balances are up a full 9 percent from a year ago. Market share in deposits was 17.2 percent versus 17.3 last quarter. In lines of credit, it was 13.2 percent, the same as last quarter, and in term loans was 18.1 percent versus 17.9 in the last quarter. We think we can maintain this higher revenue run rate into Q4, as our loan product continues to grow and our new bonus savings account, supported by aggressive media promotion, is rolling out well above plan.

Turning to small-business banking, Slide 16. It also had record revenue in the quarter of 139 million. Loan balances were up 4 percent versus Q2 and deposit balances grew by 2 percent, more than offsetting a decline in deposits spreads. Here, we expect higher small-business revenue in Q4, with further growth in both deposit and loan balances anticipated. On Slide 17, in cards, revenue was 311 million versus the record 324 million in Q2. This is a strong performance, as revenue was pulled down in Q3 by about 15 million because the new Air Canada contract took effect at the start of the quarter, requiring us to pay higher points -- charges, which are negative revenue.

Purchase volumes were a record for any quarter and were up 13 percent from Q2. Loan balances were up over 2 percent versus Q2 and nearly 8 percent from a year ago. Revenue from the higher balances in purchase volumes in the quarter offset lower securitization revenue and the lower revolve rate we always see in Q3. Market share of outstandings was 20.3 percent versus 20.9 last quarter. In purchase volumes, share was 31.5 percent versus 32.3, maintaining our number one position in each of these. U.S. providers continue to be aggressive direct marketers, offering zero percent balance transfers, particularly in the premium card market. Our Aerogold balances and purchase volumes were both up versus Q2, however, with the number of Aerogold cards outstanding essentially unchanged on the quarter. The outlook for Q4 is for revenue at or slightly higher than what we delivered in Q3.

Slide 18. In mortgages, revenue of 195 million was up considerably from 156 million in Q2. About half of this increase was due to higher securitization and hedging revenue, and the other half to first, balances that were up 1.5 percent; second, higher margins as the prime BA widened; and third, higher prepayment fees. Market share was up from 14.6 percent in Q2 to 14.7 percent, the 10th consecutive quarter we have gained share. Our residential mortgage balances are up nearly 13 percent from a year ago. We do not expect revenue going forward to keep pace with this level because of the unusually high securitization and hedging revenue this quarter.

Slide 19, retail markets, NIAT, 247 million compared to 159 million in Q2. That 159, however, normalizes to 240 million if you take out the write-down to the Air Canada contract. So 247 this quarter, 240 last quarter normalized. The 7 million increase resulted from 54 million higher revenue, as I have just discussed, partially offset by 15 million higher loan losses, 3 million higher expenses and a higher tax rate.

Our second business group starts on Slide 23. Wealth management revenue, Slide 23, you can see was 615 million, up from 574 million in Q2. On Slide 25, Imperial Service is the retail banking group serving the top 15 percent of our customers. Revenue here was 180 million versus 173 million in Q2. Deposit balances were up 3 percent and loan balances were unchanged. The revenue increase relates primarily to higher mortgage commissions. Over 1000, or 84 percent, of our in-branch advisers are also qualified under the Investment Dealers Association, allowing them to advise on and sell equities, bonds, third-party mutual funds, as well as CIBC deposit loan and investment products. This has allowed us to consolidate our bank branch customers investments on our discount brokerage platform to an extent that wouldn't be possible if we didn't have this capability in the branches. Funds under management here on the quarter were up 1.1 billion, or 2 percent, from the previous quarter. Revenues in Imperial Service should be similar to this quarter going into Q4, driven mainly by continuing strong demand for mortgage and loan products.

Slide 26, retail brokerage revenue of 250 million, was up 5 million from Q2. This increase was due primarily to strong new issue in secondary market trading volumes in CIBC Wood Gundy, as well as higher discount brokerage volumes. This was partly offset by a reduction in clearing revenue from Oppenheimer, now that our transitional services agreement there has concluded. Slide 27,wealth products. Revenue of 128 million was up 4 million from Q2, primarily due to higher mutual funds and GIC balances. Mutual funds share among all provides was 8.5 percent versus 8.7 in Q2. GIC share was 15.1 versus 15.0 in Q2. The GIC business continues to be very price-competitive, and the effect of narrower spreads offset increased revenue from higher balances. While the outlook for wealth products will be market-driven, it will be assisted by the continued penetration of our Imperial Service customer base, with managed equity product in particular.

On slide 28, Wealth Management NIAT was 87 million in Q3 versus 69 million in Q2. The $18 million increase resulted from 41 million higher revenue, partially offset by 6 million higher expenses and a slightly higher tax trade.

And our final business group, World Markets, begins on Slide 36. Here you can see revenue was 831 million in Q3 versus 849 million in Q2. Starting on slide 38 with capital markets, revenue was 378 million compared with 391 in Q2. The equity component of capital markets revenue, which represents about 60 percent of the 378 million, was down about 5 percent from Q2, while the debt component of capital markets was flat. First, dealing with equities. New issue and secondary market revenue was up in both Canada and the U.S., while structuring and arbitrage opportunities continue to be hurt by low volatilities and wider credit spreads. Although the new issue market in convertibles has been strong in the U.S., the secondary market has been much weaker. Also of note in equities, our Canadian equity research group placed first or second in many of the principal categories in the recent industry ranking.

On the debt side, revenue, as I said, was the same in Q3 as it was in Q2. FX revenue was up due to higher flows as the Canadian dollar strengthened, but we didn't have the level of debt structured product activity we had in Q2. Volatility was very high, as long rates fell early in the quarter and then rose abruptly towards the end of the quarter. Like other dealers, we are typically long bonds in our agency business; however, our relatively low market risk levels kept our inventory losses to a minimum in July as the market deteriorated. Market share year-to-date on equity trading increased in Canada from 11.8 to 12.7 and remained constant in the U.S. at 1 percent.

Predicting the featuring in capital markets is always difficult, but the outlook for Q4 is probably for similar results in equities, with improvements in structured products offsetting what looks like a weaker new issue calendar. Debt revenue may be down a little in Q4, as higher structuring activity may not be enough to offset the effects if rates go higher.

Second line investment banking and credit product is on Slide 39. Revenue here, Slide 39, was 310 million versus 390 in Q2. The U.S. represents just over 50 percent of this number, with Canada about 30 percent and Europe about 15. In the U.S., new issue equity, M&A and high yield were all up versus Q2, but these were more than offset by lower revenue in structured finance, real estate securitization and write-downs in our held-for-sale books, including the $16 million provision which appears in this number as part of the $150 million onetime provision we took on our noncore corporate loan sale program announced on July 7. So 16 of the 150 was negative revenue; the other 135 was loan loss provision.

In Canada investment banking and credit, revenue was lower than in Q2, with new issue equity revenue up, but M&A down. Year-to-date, CIBC World Markets ranks a clear number one in Canada, leading or co-leading 75 deals, double that of the second-place firm. The outlook for Q4 in investment banking and credit is for higher revenue, with the U.S. expected to be up and Canada down a bit from Q3.

Slide 40, Merchant Banking. Revenue of 6 million and gains and other income of 46 million exceeded write-downs of 40 million. Five of the six comparable U.S. FIs had negative merchant banking revenue in their most recent quarter. Although our results here are better than we've seen in recent quarters, the challenge we continue to face in merchant banking is the relative lack of liquidity at reasonable prices to monetize unrealized gains.

Finally slide 41, Commercial Banking. Revenue of 104 million was below Q2, mainly due to a reduction in loan and deposit balances. Our noncore loan reduction program is essentially complete here. We have reduced loan balances by over six percent in the last year. We expect our loan portfolio, and therefore our revenue here, to begin to grow going forward and at higher returns than we have seen in recent years.

Slide 42 shows World Markets' NIAT of 3 million. This, however, includes the $88 million drag -- that is the after-tax effect of the 150 we pre-announced on July 7. Okay? So we reported 3 million. The 88 million needs to be added to that, as well as if that 3 million bears the drag of 44 million as it relates to the reserve after-tax we have taken on Enron. So if you were to combine those three, you would be at NIAT levels that would be the highest since Q1 last year.

That concludes my presentation. I'll hand it over to Wayne Fox now.

Thank you very much, Tom, and good afternoon. As Tom pointed out, our specific provisions for the second quarter totaled 425 million, including the 135 million for the held-for-sale transaction which I will speak to later in more detail. Excluding the held-for-sale transaction, specific provisions for the third quarter totaled 290 million, up 42 million from our second quarter and unchanged from Q3 of '02. Year-to-date specific provisions have totaled 1.012 billion, which is 17 percent lower year over year.

The general allowance remained unchanged at 1.25 billion, and as at the end of the third quarter was 104 basis points of risk-weighted assets as compared to 101 basis points at the end of Q2 and 95 basis points as of July 31, '02. Currently, total allowance for credit losses of 2.48 billion provides us with 131 percent coverage of our gross-impaired loans, a material improvement compared to 116 percent at Q2 and 111 percent a year ago.

Q3 business and government credit specific provisions totaled 299 million, including the held-for-sale portfolio and 164 million excluding it. The power generation telecommunications and cable business services and retail wholesale sectors were the principal sources of Q3 business specific credit provisions, inclusive of the held-for-sale transaction which focused on U.S. region credits.

For the nine months year-to-date fiscal '03 specific credit provisions have totaled 616 million, which is 288 million better than the prior year. Q3 consumer credit provisions of 126 million improved by 9 million from Q2. For the nine months year-to-date, consumer credit provisions totaled 396 million, which is an increase of 80 million year over year, due in large part to strong consumer credit portfolio growth, particularly credit cards, at 18.9 percent growth year over year and moderately higher default rates.

Though we have seen some increases in default rates year over year, the Q3 improvement of consumer credit provisions is co-related to an 18-basis point improvement in our domestic credit card delinquency rates which now stands at 2.61 percent. Therefore, as John stated, we reconfirm our public guidance, calling for a 15 percent year-over-year reduction of our specific provisions, inclusive of the Q3 held-for-sale provision, reflecting the positive trends within the business and government loan portfolios.

However, there continue to be some challenging conditions facing our clients, such as the ongoing Ontario power situation which we are experiencing, and we do not expect to provide firm guidance with respect to fiscal '04 until the end of Q4.

Total net loans and acceptances after the general allowance totaled 141.6 billion at the end of Q3, down 888 million from April 30th of '03. Residential mortgages increased by 1.5 billion during Q3 and now comprise 49 percent of total net loans and acceptances. Personal loans decreased slightly during the third quarter to 19.9 billion, while student loans reduced to below 2.7 billion, as planned. Credit card outstandings increased by 395 million to 8.6 billion in Q3. Business and government loans and acceptances reduced by 2.7 billion to 40.4 billion in Q3, in line with our ongoing strategy of reducing exposure and capital to this sector. 885 million of this quarter's reduction reflects the transfer to the held-for-sale portfolio. The year-over-year reduction in business and government loans is 8.8 billion.

This slide displays that our consumer credit assets represented 71 percent of the total net loans and acceptances as at July 31, as compared to 70 percent at the end of Q2. However, year-over-year, we have shifted the percentage split of our loans and acceptances by 5 full percentage points from 66/34, as noted on the slide, to 71/29, continuing to position our credit capital much more towards our retail businesses going forward, as John noted in his earlier comments. This ongoing shift in our portfolio is reflective of our strategy to shift our business mix and measure by economic capital in favor of retail.

This next slide illustrates our corporate credit portfolio industry diversification. Please note that these numbers exclude the new held-for-sale loan assets given their balance sheet recategorization. Sector diversification of the portfolio continues to be supplemented by our credit protection activities and our objective of emphasizing reductions in stressed corporate sectors.

So let's look at each of these factors for a moment. This slide recaps the amount of credit protection that we have purchased on our business and government portfolio as at July 31. Of the 1.7 billion in credit protection against outstanding loans and BAs, the largest hedged outstanding concentrations were telecom and cable at 275 million, followed by oil and gas at 259 and manufacturing, capital goods at 215 million. At the end of Q3, we had credit protection against 4.1 percent of our outstanding business and government loan book. Credit portfolio management continues to manage down the noncore corporate loan portfolio.

This quarter's activities included loan sales and purchases of credit protection providing 183 million of risk-weighted asset relief at a cost of less than 1 cent per share.

Going forward, I would like to remind you that effective November 1st of '03, i.e. the first day of the first quarter of '04, CIBC's compliance with Canadian GAAP accounting guideline 13 will require that we mark to market our credit derivative hedge book. This will occur in accrual accounting methodology. While this change may cause some initial volatility in our quarterly income statement, it remains our clear intention to be proactively involved in credit hedging in the future, given the economic risk mitigation derived from this activity over the medium-term.

This next slide provides a high-level overview of the accounting treatment of the loans transferred to the held-for-sale portfolio. Upon transfer the loans were recorded at lower of carrying value and fair value. Loans in the held-for-sale portfolio are now included under other assets on the balance sheet and not included in business and government loans. The loans -- the losses on transfer of loans held for sale determined to be credit related were charged to provisions for credit losses, while the losses determined to be related were charged to other non-interest income. Going forward, the portfolio will be regularly revalued at the lower of market and transfer cost, with realized gains and losses upon sale or repayment and unrealized losses being recorded in other non-interest income.

This slide details the financial highlights of the held for sale transfer in the third quarter. 885 million of the 1.4 billion in transferred commitments were net outstandings and were revalued downwards by 151 million. Going forward, we will provide you with a quarterly update of our progress in divesting the held-for-sale portfolio, given that we intend to proactively liquidate this portfolio so we can release capital for our growth businesses. Through the middle of August, we have contracted sales and repayments in excess of 10 percent of the outstanding portfolio for prices consistent with transfer values.

This slide provides you with a sectoral detail on the held-for-sale portfolio in general, and with respect to stressed sectors specifically. Detail slides on each of the stressed sectors are included at the back of the presentation materials, and I will speak briefly to the summary slides. For the telecom and cable sector, Q3 growth exposure reduced by 557 million to approximately 2.9 billion. Our net sectoral exposure reduced to 2.6 billion, and please note that there is an additional 220 million of telecom and cable risk in the held-for-sale book. Each of our gross and net power generation loan exposures reduced by over 300 million in Q3, with 361 million of sectoral exposure in the held-for-sale portfolio as at July 31.

While each of our gross and net loan exposures to the airlines, hospitality, and tourism sectors increased by approximately 200 million in Q3, we want to confirm that the increase is fully accounted for by the drawdown of the new $350 million loan extended to Air Canada as part of the new court-approved Visa Aerogold contract. This is consistent with our Q2 guidance, including the arrangement whereby CIBC Visa's ongoing Aeroplan point purchase payments are dedicated to repayment of this related loan. The outstanding balance of the Air Canada Aerogold loan was 264 million as at July 31.

Our gross impaired loans continued to decrease during Q3 by 182 million to 1.9 billion. The three largest new gross impaired credits recorded in the second quarter were a privately owned European retailer at 100 million, a publicly-listed international tour operator at 45 million, and a privately owned Canadian cattle operation at 35 million. As at July 31, net impaired loans were -587 million, as shown on the bottom right hand side of this chart, representing an improvement of 258 million over the prior period. As a percentage of total loans and acceptances, net impaired loans were -36 basis points at the end of Q3 as compared to -21 basis points at the end of Q2 and -15 basis points year-over-year. Business and government net impaired loans improved (indiscernible) for the third consecutive quarter, reducing by 212 million. Business and government net impaired loans before generals as at July 31, represented 1.8 percent of total business and government loans, a 36 basis point improvement over Q2.

Formations. At 364 million, business and government net new formations increased 82 million quarter-over-quarter and accounted for 57 percent of the new classifications. From an industry perspective, the largest levels of new corporate classifications were from the retail and wholesale sector at 32 percent followed by the business services sector at 20 percent.

Now we would like to look at the consumer portfolios. Our major consumer loan portfolios performed very well in the third quarter. In addition to the improving domestic credit card delinquency rate, our net impaired consumer loans improved by 46 million in Q3 to -216 million, due principally to a $31 million reduction in net impaired residential mortgages. Now turning to market risk. We show these charts every quarter. This graph displays Q3's daily trading revenue against the value at risk in our trading portfolios and shows that on no occasion did losses exceed the value at risk.

This next slide records that 85 percent of Q3 trading days provided us with positive revenue. This represents continued strong performance as customer activity generated consistently positive revenues without our having to assume incremental risk. This therefore leads to my next slide, which shows the risk in our trading books over the last three years. Value at risk in our trading books set new lows during Q3, averaging under $8 million of our significantly below historical levels, but consistent with our goal of constraining revenue volatility in our wholesale business.

This graph shows continuing stability in the bank's structural interest rate risk. We continue our strategy of retaining limited directional positions in the asset-liability gap. In combination, the past few charts are indicative of the very controlled and modest market risk profile we have maintained during the recently challenged interest rate risk markets in North America.

My final slide, and my favorite one, shows that the risk-weighted assets have declined by 24.9 billion since the end of 1998. Since 1998, wholesale risk-weighted assets have declined by 41 billion, of which 29 billion, or 71 percent, is related to the reduction in the wholesale credit portfolio. Retail risk-weighted assets have increased by approximately 16 billion, primarily due to strong growth in mortgages, credit cards and personal loans. In Q3, risk-weighted assets decreased by 2.6 billion, effectively all due to reductions in wholesale credit-related activities. That is the conclusion of my presentation, and I'll turn it back to you, Kathy.

So we are open for questions. Let's start first in the room and then go to the telephones. Any questions from the room?

Can you just expand on this Enron-related provision, why you have taken it? Are there any other possible provisions that could come in relation to this, and are there any other relationships where there may have been similar factors involved that posed a risk to you also?

We have just in assessing the situation at Enron and more recent developments, decided, based on the best advice we could get, that a provision of this size would be appropriate and prudent at this time. I really can't elaborate on it any more than that. In terms of other issues, there are none at hand right now that I am aware of. Wayne?

That's correct, John.

The bank's capital position continues to improve. Is there any thought at all given to buybacks or increasing the dividend?

What we've decided to do is wait until we have finished the full fiscal year and at that time, I have recommended to the Board that we will then review whether we will be increasing the dividend or going to a buyback then. We just feel that we would like to get through this full fiscal year and then deal with it at that time.

If you can fill us in on the fixed income trading line this quarter. I think we all thought, given the volatility, that we would see better fixed income trading, and I'm curious if we could hear a little bit as to why that didn't happen?

Some of the comments I made alluded to this, but just to elaborate a bit. Fixed income -- FX was quite strong. In July, as you know, and in early August, long spreads backed up quite a bit. Our inventories are very low. On the convert side, we in the secondary market, had some positions that went down in price, but nothing significant. There was no one thing; there were a number of areas on the structured side where volumes were not as high as they were in the second quarter. We also had -- really, that was it, because the write-downs in the high-yield held-for-sale were in the investment banking credit product line -- that number was about 20 million. So, apart from FX, most of the other line items were down because of volatility or because of lower structured product revenues. But no one area that deteriorated significantly.

Just a clarification -- maybe I have this wrong, but I thought that volatility was supposed to improve volumes particularly in structured products?

Volatility in equities is very helpful for equity structured products. On the equity side, volatilities, as you know, are very low -- I mean they're 20, 21. On the debt side, there really isn't a linkage to structuring activity. It was just that flows were lower, partly because because of the discontinuities in the markets. So the linkage is really on the equity side rather than on the --

It is not as strong on the --?

Volatility in terms of price deterioration hurts any dealer that has inventory, obviously. The U.S. banks second-quarter numbers didn't show this because this deterioration happened in July.

Okay, great. Thanks.

Your supplementary information shows that you had $423 million of commercial (indiscernible) sales and repayments in the quarter. How much of that would have actually been sales and give us a little bit of information on that?

What page are you on?

I'm on page 19 of the supplementary (ph) package. It is return to performing status, repaid or sold commercial $423 million. On the top table and the reconciliation of (indiscernible).

Your question, Michael, is how much (inaudible) to performing?

Michael, I will start with a qualitative answer, but just before I do, I will just check with my colleague in Chief Accountants division. I just want to confirm that the held for sale transaction (indiscernible) would not have had an impact on that particular number. I don't expect that it would. We basically saw a good mix of activity, both in the context of outright sales, as well as repayments performing status. They tended to happen -- they tended in particular sectors and for a particular reason. The reason was that through our third quarter, the U.S. high yield market remained quite robust in terms of new issuance activity, and that certainly was the provider of refinancing proceeds for stressed bank debt. On the outright sale activity we remain as Wayne referenced in his remarks, we remain focused in doing outright sales, and generally speaking the reasonable state of the U.S. power generation sector and to some degree the recovering state of the U.S. cable sector provided opportunities to sell out at reasonable prices.

I have one other question if I could. You had a fairly substantial improvement in unrealized equity gains during the quarter. I am just wondering how much of the unrealized equity gains are now represented by global payments and how much by call it Fahnestock or Oppenheimer?

Fahnestock Oppenheimer wouldn't be a significant number there, although that stock has gone up. The global payments would be the majority of that. That stock is now 33, 34 so that would probably be $200 million Canadian of that. That number, I should remind you, also includes unrealized losses so the aggregate gains would be bigger than that number offset in part by aggregate losses. But GPI has been the biggest component of that for some time and it remains the largest.

Are you saying that it is up 200?

No, no, no. It is unrealized gains is over 200 million Canadian. We've got about 9.6 million shares, and I think the cost base is about U.S. 17, stock is about 32 U.S.

Is it more than 200 now?

Stock's up 37, 38.

I had a number of questions relating to this held-for-sale portfolio. First of all, you had $135 million loss on transfer, and then you had 16 million which was a credit charge of a noncredit nature. What would give a noncredit nature?

I will start, and certainly if my colleagues want to provide a bit more color. Broadly speaking, if I can use a pragmatic example, a bank credit trading slightly outside of unamortized fees due to a combination of it being slightly stale, i.e. being a two-year-old type of deal. Whereby, again, buyers aren't particularly interested in it. So you sell it at a slight discount to your carrying value, but in terms of your postmortem analysis around what made up that price differential, you have concluded there was no credit related reason for it.

So that would be a similar example. It could also be a more primary deal that is very large, that where from a concentration risk perspective, you feel a bit top heavy so again you will sell it at a bit of a discount in order to reduce your outright position.

So going forward, you're going to mark this to market every quarter -- I'm sorry, not mark to market. Realized gains and losses are going to come through to income. Unrealized losses you'll book immediately. How will you determine an unrealized loss, given that you have these types of what look like liquidity-driven events that may cause the loan market to be inefficient? How are you going to determine --

Again, I'll start with the answer and finance will add as necessary. We mentioned in the disclosure that that portfolio is comprised of U.S. regional credits. That is by far the market where there is the most liquidity, price transparency and visibility. So looking at the credits that we have within that portfolio, a meaningful number of them are subject to external pricing information in the secondary loan market, so there will clearly be visible points to allow us to mark. And just to again amplify your question slightly, on the unrealized side, we will only be marking down; we will not mark up.

So aren't we -- one of the things we've tried to do, the banks try to do is reduce volatility and income. I mean, we put a portfolio in place here which unit credit spreads widen out or whatever -- you could have a fair amount of hits on this. And then you have your mark to market on your credit risk derivative book, which is going to come in soon. Is there any risk that there is going to be more volatility starting to flow through the income statement just broadly?

Let me try to answer the question in a slightly different way. Keep in mind that these are all noncore loans and they have been segregated for some little while. What we are trying to do is accelerate the dispositions. We have looked at the most marketable liquid assets that we could find. We have created this pool. We have marked it to market. And as I said in my remarks, we've been successful since quarter end in selling in excess of 10 percent of this portfolio. The accounting rules indicate that you must be in a position to dispose of this book inside of 12 months. It is a sort of accounting rules based convention, which we can discuss offline if you'd like, if you are interested in the rules. So we have no aspirations to nurse this along as it were, are going to liquidate it in an orderly fashion, and we think we have properly reflected the economics in the quarterly results. So you're absolutely right, if the market for whatever reason becomes more adverse, then there may well be some P&L volatility, but so far, things are on track.

Just to reinforce Wayne's comments on that, I've said I think consistently throughout this year that while clearly we would like to have quarter-over-quarter less volatile earnings and that is where we want to get to.

But to get to that, we may have to make decisions along the way. And I'm saying between now and the end of '04, that will create volatility quarter-by-quarter, and we are going to make those decisions in order to make sure we get the CIBC position where we want it. So this was an opportunity, given the excess capital we have onboard at this point in time, to use it, accelerate this program to get us to where we want to get to faster. And yes, it may cause some volatility, but I think it will be well-isolated and you'll be able to easily identify it. Let me just go to the phones for a minute, please. So to the telephones, operator?

(OPERATOR INSTRUCTIONS) Rob Wessel from National Bank Financial.

Actually, I have three questions. With respect to the loan portfolio that is now in the held-for-sale, just to clarify for me, that is all performing loans? Outside of the 10 percent?

All but 14 million.

All but 14 million are currently performing.

Yes, if you take a look in the supplemental financial, you will see a note -- 14 million impaired in the held-for-sale. Otherwise, all performing.

My second question is, with respect to VAR, it has fallen quite a bit, and if you look at equities trading in the supplemental on page 10, I mean in Q1 '03, it was 112 million or so and now it's 60 million. How much of that -- and I know you can't quantify by dollar but, how much of that -- or is it a important reason why that has declined because the amount of VAR has also declined? And if so, how much has VAR for the equity portfolio fallen?

I would say some of that reduction VAR undoubtedly has led to revenue that we might otherwise have captured. However, certainly the volatility I think is probably lower than it might have been had we had VARs as high as we were say two, three years ago. The real reason revenue is a little lower this quarter, as I said in response to a previous question, is volatilities were low; the amount of structured flow business was lower. Every quarter, we have additions or reductions to reserves. Second quarter was a little positive, third quarter was a little negative. A relatively small proportion of that reduction in revenue might have been attributable to lower VAR.

My last question has to do with the variable interest entities comment in the quarterly report to shareholders, sort of the very last thing. Under the multiseller conduits and and single seller conduits, there is a note that says it would be reasonably possible that CIBC would need to consolidate assets of approximately 30 billion and then 2 billion on the single seller conduits. Can you assign, A, a probability, B, what kind of risk-weighted assets that would be? How you're preparing yourself, what sort of capital impact that would have and (multiple speakers) this?

It is not -- we can't make a definitive statement until everything is complete. But we would assign a low probability to a number anywhere near that magnitude being consolidated. You may have seen Citibank about a month ago announced that of their U.S. 50 billion they were successful in restructuring all but 5 billion U.S., and that was really the first test of I guess the auditing profession's view of this, as well as the market for restructuring participants. Suffice to say we are very comfortable with the status we are at now in discussions with other parties, in discussions with our external auditors about being able to restructure a very large percentage of that. Having said that, it is not done yet; hence, the disclosure, which is probably a little bit more cautious than I would say is where we are at.

What would be the risk-weighted assets percentage of that 31 billion?

Ryan O'Donnell's (ph) just coming to the phone. Do you know, Ryan, what the RWAs might be on that?

I can't give a clear answer on that at this point in time. (indiscernible) a clarification on those rules. There are no clear rules as exactly to what the risk weighting factor they would put against those balances. The indication would be it would be relatively low, however.

You would expect it to be low, and that combined with my comment about unless things go in a different direction, that aggregate number would be pretty low. So suffice to say at the moment we're not that concerned about it. The thing that we and all of the Canadian banks, as you may know, are more concerned about is where we are at with the auditing profession on mutual funds. And there is still lots of discussion, both in the U.S. -- and their decisions will have to come out -- will come out in advance of our as to whether we might have to put those on balance sheets. So the probability of those is much higher, based on where we are at right now in the discussions. That is 52 billion.

But I would say the risk weighting assets are indeed capital allocatable from regulators if, in fact, we ended up having to consolidate, that would be very low, given that it appears to be a more technical issue that we are dealing with with the auditors right now as to why that might need to go on balance sheet.

We should acknowledge, though, that the most significant factor, assuming any of this were to take place, would be the leverage ratio, that would impact the institutions -- not the capital.

(multiple speakers)

Sure, they would be footings, and therefore on the balance sheet, and that would impact the leverage ratios of any bank.

But would it affect it so much that that would be the key constraint, rather than the (indiscernible) ratios?

We believe so. As Tom pointed out, it is a little murky right now what would work. But we are anticipating very modest risk-weighted assets and capital associated with this, but footings are footings. When you start talking the numbers that are being referred to here, you can well imagine how that would impact the leverage ratio.

And that's an easier problem to resolve, isn't it, because you could just issues sub-debt?

Oh yes. There's remedies for all of these things and we're working hard on all of them.

Okay, great. Thank you very much.

Jim Bantis from CSFB.

Just wanted to touch upon John's earlier comments in terms of the number of new cost initiatives underway. And perhaps we could talk about them in a little bit more detail and maybe aggregate the level of cost savings that will come from these initiatives in 2004?

The program we have embarked upon internally is one where we are looking at areas such as our procurement initiatives, all of our technology applications, some aspects of how we are structured from an org design point of view, other potential outsourcing of some services. Those areas, with a view to, by the end of -- for fiscal year 2005, trying to get a mix ratio down towards 60 percent, which with the business mix we have I think would be a good achievement. Right now, our mix ratio is around the 67, 68. We think our costs are still too high.

Where can we get to by next year? I think as I said at a previous meeting, the best way to -- and I've said this internally -- talk about a goal for '04 -- although this is more of an '05 program, is to just take the difference between 67, 68 and 60, so 64 would be a target that we would aspire to. But it really depends on how long it takes to get some of these programs in place.

Okay, great. The second question I wanted to ask, perhaps if David's in the room, in regards to the U.S. platform in terms of world markets. We're starting to see a pickup in terms of equity business. We're starting to see a pickup in M&A transactions. Can you talk about, David, in terms of where your head count's at, are you comfortable with it to leverage the beginning of the turnaround?

Yes, we feel very comfortable that we have got the right size for want our aspiration is. You are right, inasmuch as certainly in the last eight weeks, the market's picked up somewhat -- certainly on the equity side, where it has been a multiple number of deals as compared to the previous 10 months, certainly in our shop and I think in the industry generally. And M&A as well. Having said that it's hardly buoyant; it is just not dead anymore. So we wouldn't exactly see things as robust. We would see them as starting to pick up and we will go from there quarter-by-quarter.

Recognizing we're coming off a very low base -- that's true-- at what point would the midmarket customer start to really flourish in this -- if we have a potential economic recovery? Will it lag the large cap customers? And then I bring it up in the context of your focus on the midmarket in the U.S.?

I mean, typically, historically the larger caps are the ones who access the markets first, from a quality perspective, and then you go to the midmarket. I don't know how this particular cycle is going to unfold in terms of balance sheet reparation as well as M&A opportunities. There is still, I think, a desire certainly in the midmarket for lots of consolidation, whether through M&A or a combination of that and capital market. So as volumes and levels pick up, you could see more activity in that sector doing those types of transactions. My observation of the larger companies, if anything, they are shedding divisions and they are likely to end up more with midcap companies or with financial sponsors.

Okay, great. Thank you.

Andre Hardy (ph) from TD Newcrest.

Steve Cawley. It's actually Steve Cawley. A question for you -- on the investment securities losses of 57, if you were positive six on the merchant bank and I think I heard you say -20 on the high yield side -- was that true? Then I am wondering what is going on with the CDO portfolio?

Let's take them in steps, because just for everyone's benefit, from a management reporting point of view, merchant banking had $46 million of write-downs. Some of those were common shares, some of those are limited partnerships, so you get into a classification challenge when you try and go over to the financial reporting side. So it is probably easier if I just stick to the management reporting first and then talk to you about each of the write-downs we have taken, and then you can sort of look at the sum of limited partnership losses plus investment securities losses, and the two should add up.

In terms of the high yield book, I think it was back early October when we had a call -- I went into some detail on this. We have now a relatively small remnant book of bridge loans, which you will recall in October was much larger. Now it is under 150 million U.S. I believe we took about 20 or 25 million write-down on that -- I don't have the precise number, but in that magnitude. The other area is the CDO area, which also appears as negative revenue in the investment banking and credit line. Just bear with me. Eighteen on CDOs? Yes, 18 Canadian on CDOs, and I'll just tell you the total there. That book is now 244 million Canadian; that's about 25 percent of original cost. That includes return of capital as well as write-downs.

So we are in a much stronger position in terms of CDOs and high yield remnants which are really the only two pools of securities apart from the merchant banking business. So the sum of 18, 25 and 46 would be the sum total of any securities losses we had and as I say, split that between limited partnership and equity securities write-down and you should get more or less the same number.

On to the negative net impaired loan balance now, I suspect (indiscernible) is making some phone calls in terms of the release of general reserves. Your balance sheet certainly looks awful conservative at this point in time. Has there been any progress made in terms of when and how much in terms of general reserves you could be releasing?

Your observation is correct, 101.25 billion, 104 basis points of risk weighted assets, so that is a very conservative position. We reviewed that at quarter end with the auditors and obviously amongst ourselves, and we acknowledge that it is conservative. But it is in keeping with the methodology that we are -- have exhibited, if you will, with the regulator. It's an area that, as you know, on a quarterly basis we look at very carefully all of our provisions and we will do so again in Q4 and I think it would be fair to say that there's opportunity there to have a look at that.

Is certainly seems like the theme is having an extremely conservative balance sheet going into 2004.

And you're also right to say that we do need the approval of our regulator to release those reserves.

Okay. They haven't been putting any pressure on you, Wayne?

No, not to my knowledge.

One last one. You mentioned ACG-13, we're going to start seeing the income statement impact in Q1 '04 of that guideline. I was wondering, are you going to separate that out on the income statement? Will it be very clear to us when you announce your results exactly how much the amount was?

If I go astray our Chief accounting will step in. What I can say is this, that if we have significant volatility in any quarter due to accounting as opposed to business issues, we will in our webcast highlight that. As to the flexibility under GAAP to delineate that in the financials, I'm not sure. But you can be sure that just as we've been transparent on a number of other things, that will be an area where we will highlight it positive or negative.

Thanks a lot.

(OPERATOR INSTRUCTIONS)

Operator, we will take some more questions here, if we have any.

Just a couple of questions, just to follow up on I think it was Rob Wessel's question on trading VAR. Given the size of the capital base has grown and it's obviously taken down, where do you stop? I mean, what's the level that you're feeling comfortable with given the bank is growing, your earnings have not grown over the past couple of years but certainly 1998. So what level do you feel comfortable with that you're kind of stable and perhaps even have perhaps a slight uptick as you continue to grow capital base?

Well, David may want to answer part of that question, but let me just give you some additional information. Just keep in mind that the way VAR is calculated in the parameters that go into the calculation, we use a dataset that has a 250 day moving average. So if you just cast your mind back 250 days and you see that the data that is falling off had extreme volatility associated with it across most of the datasets. So purely by methodology alone, even if one didn't touch one's inventory or aggregate positions, your capital and your risk is reducing just because of that one fact of life. The second part is the short-term metrics around the marketplace, and volatility probably being one of the ones that you watch most closely, have basically collapsed certainly in the equity market over the last several months. So part of this is related to methodology. As it relates to the risk appetite question, maybe I could direct that to David. I think David would prefer to answer that I think.

I mean, we don't foresee taking it a lot lower. We're party comfortable where we are, and really it's up to the business leaders and the people in the business to find the opportunities. But as an organization we're relatively risk averse when it comes to taking proprietary position taking. That's not our bread and butter, but we can certainly be comfortable in the more favorable environment up from where we are.

You're not looking to continue to take it -- continue to take it off the desk, David, which is giving it out -- you're not there either, but you're not pulling it back?

No, and in fact, if anything, the businesses have pulled back because of the adverse environment, so they are operating well under their limits actually right now.

An important point David makes. It hasn't been taken off of the desk. The risk limits are on the desk; they're just not being utilized.

Secondly, just to understand the process in terms of receiving the tax recovery and the decision around loan sales and charges, etc. that happened to coincide and net out, and how one can do that from an accounting perspective versus versus the business line making that decision and that they happen to coincide that you have got the big gain to offset the decision on the loan losses that you have had to take as you move them to held-for-sale? So could you give some color on that process?

As I think we said in the call on the 7th, after we concluded negotiations with (indiscernible) and Kent (ph), it was pretty clear that all of our capital ratios, just from an accounting point of view, were obviously going to be enhanced by about -- Tier 1 was going to go up by about 30 basis points -- on a Tier 1 that was already pretty strong. During those negotiations, looking at what the outcome we were facing, we began to ask ourselves could we take, in effective, some of that Tier 1 capacity or balance sheet capacity and begin to mitigate risk faster.

I mean, we would prefer to mitigate this risk as fast as we can in any event but we are also conscious of the short-term effect on earnings and balance sheet. So the two coincided from that point of view, because from an accounting perspective, we were less constrained than we would otherwise have been. So it was really the excess Tier 1 balance sheet that put us in a position to be less concerned about adverse accounting by moving faster on the (indiscernible) sale side.

So it helped accelerate that decision-making process?

Absolutely, yes. Having said that, keep in mind we have to sell these loans within a year, but we now have the flexibility to move very quickly and not have to suffer P&L volatility in the meantime.

To take that one step further, though, as you look at your merchant bank, if he wanted to mitigate risk in the merchant bank, that wouldn't -- you couldn't take those types of decisions having a gain in your pocket, if you will, from the tax recovery?

No. I think it is important to distinguish between the two. Because on the loan side, the accounting adverse impact was taken up front but we have flexibility to divest those loans over a year okay? We are going to be opportunistic in the market. In fact, we are well ahead of plan already, but having taken the P&L hit up front. Merchant banking from an accounting point of view, you can't take a general provision against merchant banking.

Every situation has to be evaluated -- in fact, we do it almost on a monthly basis now -- every quarter. And with that book, while we would like to mitigate our risk and indeed we've set an objective to reduce that book by a third over three years, the accounting and the liquidations occur concurrently. So the only way to mitigate risk faster would be to move faster on the liquidation front, and we're moving reasonably fast, but we're just not prepared to move and sell positions at what might be called distressed prices. So that will have to be on a more methodical basis as compared with the held-for-sale loans.

On Wayne's point of the increase in the impaired loans, Wayne, I wasn't sure if I got it quite right. The cattle operations was 35 million. Is that one loan or is that several loans? Is that situation improving or getting worse?

I would describe it on the one hand as actually neutral, but it is a difficult situation. It was obviously a very large operation in terms of size, both acreage and head count -- I should say cattle account. Secondly, then being impacted, given the part of country that it is in, with the mad cow situation, caused it to deteriorate to the point of impairment. Until there is really a significant resolution -- I realize things are improving somewhat -- but until there is a significant resolution to the issue will remain neutral.

First I'm wondering if you can respond in a similar manner to retail and how the rest of your retail portfolio looks? Second question is a follow up on the on-off balance sheet discussion. If I have this right, I was under the impression that in the state there is talk of moving trust preferreds off the balance sheet, so therefore they wouldn't qualify for Tier 1, and I'm wondering if that's being discussed up here as well?

I will start with the first question regarding retail. In terms of our overall portfolio on the retail side, we are satisfied with it. We have not in the past -- actually, in the first since it's been a fairly active banker from a credit perspective into the retail marketplace, given the general volatility of that sector. Secondly, approximately 2 1/2 years ago, we also within our Canadian base, which is where we would have by far the largest amount of retail sectoral exposure, we entered into a joint venture with CIT by way of asset-based lending, which has become that much more important to the retail side. And we have seen a number of our clients that had been previously focused primarily in the bank market moving into that asset-based market. So we're able to support them to a degree through that JV and reduce outstanding bank loans.

I did -- I am sorry -- Wayne did in his remarks, when he talked about new formations in the third quarter, he did highlight the fact that our largest new impaired formation was $100 to a European retail operation. That was actually a situation where we are lending at the Senior secured level, but there have been challenges down at the sublevel, on the operating level, and where we thought it appropriate to impair the credit. But coming back to the core retail portfolio, fairly stable, but obviously once again in light of the Canadian economic situation, including the knock on impact of tourism and the like, et cetera, we certainly have it under regular scrutiny.

Can I just clarify that your question related to our in effect large corporate retail sector, or were you talking about the loan book?

No, he answered my question. Thank you.

Okay, good.

On your second question, I'm not familiar of anything as to relates to preferred being off balance sheet, unless Barbara, you are familiar with any?

I think perhaps you're talking to (technical difficulty) -- that is an issue as well. We do not specifically have those types of preferred shares, but it is an issue here.

But it is a broader conversation, just to confirm that the definition of capital has become topical, which would include the question you raised, but it is a discussion and it is ongoing at the accounting level.

Just for David, perhaps. Just looking at your businesses, David, perhaps north and south of the border, if we adjust -- back out the 88 and 44, it actually became positive economic profit in the quarter, which I think is the first time in seven or eight quarters. So that is quite positive. But if we look at Canada, given the numbers you see -- Bloomberg Globe, etc., in terms of where CIBC sits, it's had what appears to be a pretty good quarter. Are you as comfortable with what your seeing out of the U.S., number one? And two, where do you think the greatest leverage points are that you have in your business over the next 12 to 24 months that you haven't seen right now? So if people are looking at CIBC still to have a pop to a market recovery, where do those occur in your business, given the restructuring that has gone on and the reallocation of capital that has gone on?

Number one by far would be the reduction of capital -- in particular, the noncore capital. So further to your earlier question, we want to get through that as quickly as possible and beyond the held-for-sale because, to your point about return on capital, we have got, I think, for the three quarters a 12 percent return on capital. If you take out the non-core capital, we've got a 22 percent return on the core underlying business that we're running today. So we would like to accelerate, hit the fast forward button as fast as we can, to get rid of that capital. So that is a big issue. It is also a negative drag, but the reduction of capital alone gives us a far better ROE.

Number two would be loan losses, which is related to that. Even notwithstanding that the levels are down substantially from last year, they are still above -- well above expected loan losses on the core portfolio, so that is a huge lever. Number three would be merchant banking, where we are still running for the nine months a negative number, where hopefully at some point going forward, we are going to be running a positive numbers. So that is a swing factor. And number four would be the U.S. revenue environment, where you get a more buoyant equity and M&A environment, would bode well for us as well.

On the final point, is that just a rising tide lifting all boats that you'd count on or are there specific areas that you think CIBC continues to be well-positioned to take advantage of if those areas come back?

I think it is an overall environmental issue. I think where we have our markers out, obviously, is in financial sponsor world and health care which hasn't been bad. Consumer growth is an area that we have got a fair team on. We still have some capability in aspects of the tech sector, software, notably. So yes, we are well-positioned in a number of areas -- not in every area. But the overall environment, the equity markets and the M&A market, which is obviously related to that, we need a favorable environment in order to improve revenue.

Try one more at the phone.

Thank you. Kate McKellar (ph) from RBC.

It's Jamie Keating. I had a question that may be directed to Jill or possibly back to David as well. I just wanted to get a little color, if I could, switch gears on the retail side of the business and really taking Quentin's tack, understand a bit about what some of the levers are there. I think volume seemed pretty good. Perhaps the revenue growth is obviously stalled a little bit broadly. Are there some levers, both perhaps on the cost front branch network side and/or specifically on revenue that we should be alert to? As a second question, this might come over to David's side a bit -- is related to PC Financial, if it's turned positive this quarter, it seems to be a quarter ahead of schedule. And I am curious to know what the momentum is there and again, what the levers are related perhaps to interest rates and other (indiscernible) business?

Jill is in Europe, actually; otherwise she would be here, Jamie. On the retail side, I think it is fair to say that the competitive environment is much tougher than it was certainly nine months ago and even six months ago, although we have seen some stability in the deposit market, I would say in the last three months, the bank -- Canada cut rates -- all of the banks cut their deposit rates, which probably wouldn't have happened nine months ago. So on the deposit side, I think it is going to be more a question of fighting for share at the margin and not sure you can make big headway there, although you can make some with the new product introductions.

Mortgages probably have leveled off and that is why our guidance is for -- quite apart from the lower securitization gains -- probably a leveling off from the huge growth we have seen in the last 18 months with rate declines. Cards for us, we continue to see strength, notwithstanding the heightened direct-mail campaigns our of the U.S. Are you going to see double-digit growth the way we have been in the last 2 1/2 years? Probably not. RSDL (ph) retail and small-business lending is the one area for us that we think we have got real growth potential. We have got some new product and some new systems on credit adjudication and some new selling techniques that we are very confident about. I would say that is the area of the four where we are most bullish. And the mortgage side has probably given the strength we've had and the unlikelihood of keeping that up is probably (indiscernible) with cards and deposits in the middle.

Cost is the bigger leverage point here, Jamie. Not so much in the branches because in fact we are rolling out some destination center branches, (indiscernible) St. Clair (ph), for example, will be opened shortly. So there is not a lot of dollars in terms of just closing rural and urban -- smaller branches, and folding them into larger sales-oriented branches. But certainly in terms of technology, procurement, which the retail business takes the lion's share of, that is the big leverage point there.

On PCF, maybe I will start. The prediction we made I guess back in December of 2001 that we would be profitable in Q4 -- we're profitable this quarter -- is really the result of some hard work on a number of fronts -- costs, a bit of a break on spreads, we put some new service fees in which have not had any customer resistance, so it is just a lot of hard work on a number of fronts. Do we still feel as optimistic as we did back in December 2001 for the numbers five and six years down the road? Yes, we do. We feel very good about this so far. I know, David, you have had some involvement -- anything further? So we are optimistic, Jamie, that that P&L will continue to grow through Q4 and into next year.

And this backup in rates in midterm, is that having a direct impact in the current months?

It hasn't had a significant impact so far, Jamie. Our positions on the bond side are pretty small, apropos the discussion we have just add. So no significant effect as yet.

Okay, thank you.

(indiscernible) from Standard Life Investments.

It's Neil Matheson (ph) here. Tom, a couple of details just to clarify things. You mentioned that mortgage securitization and hedging added something like 5 cents. Just so we understand how the parts move together, was that mostly in the net interest margin line?

Just to clarify first, Neil, I said 5 cents -- that's the combination of that item plus some interest on other tax settlements. The mortgage number would probably be about 3 cents or 2 1/2 cents. So I am looking over at Barbara. I'm thinking now, that would be gains on -- no, that would, in all likelihood, and we'll call you back if we are wrong -- that would I am almost certain would be in the non-interest income line, because there are gains on sales of mortgages into the CMHC vehicles, together with some mark to market on seller swaps. So we will let you know if it's -- in fact, I'm certain that would not have been NII, and have no impact on NIMs, if that is where you were going.

Because the NII's up -- roughly about $100 million in the quarter, and even versus Q1 it is up quite a bit. Is there something else unusual there -- it is a very strong increase for just one quarter.

No, Neil, I'm glad you raised that, because I didn't get into the numbers, but I did allude to that earlier. About 17 million of that is interest on various tax settlements, about 30 million of which was in respect of the July 7 preannouncement and about 40, 42 in respect of other settlements which we factored into that NIM analysis on page 5. I should say, if you're trying to get to the 3 cents on the tax interest side, there was some offsetting tax settlements as well. Didn't have an impact on NIM but netted out to about 2.5 cents on the interest side.

So it was about 70 million is related to tax and the net interest (multiple speakers).

Yes.

In terms of retail commissions, you've mentioned that there is still some (indiscernible) in Q2. Can you give us an idea, even if it is just a ballpark figure, of what that is in the Oppenheimer in Q1? The point here is, it sounded, talking to people at CIBC, that things had improved quite a bit. I think we are not quite got an apples-to-apples comparison in the published numbers. Can you give us a little guidance?

Good point. I don't have the Q1 numbers, but perhaps you were referring to Q2. What Neil is referring to is retail brokerage, as I mentioned, revenue in total is 250 this quarter. It was 245 last quarter. The Canadian full-service brokerage business was actually up 30 million. The Oppenheimer clearing transitional agreement we had in place was in place for the full three months of Q2, but was only in place -- it is complex the way the agreements are written, but we only got, in effect, about one month's worth of revenue from that. So that essentially offset the gains we made in full-service brokerage, which are included in that 250 number. So those two were a wash. Discount brokerage made up the other 3 or 4 million, so --

That helps a lot, just to kind of get it on a base --

The thing to keep in mind on that is that the revenue that was received under the transition agreement for the sale of Oppenheimer in the U.S. offset our costs at our end to run services for them such as back office. So the reality of this is is that since that was always a wash against expenses, the 30 million of improvement in revenue in Wood Gundy, all of that shows up in the bottom line. Because the disappearance of the revenue from Oppenheimer means nothing in terms of bottom line, since it was always offset by an equal amount of expenses.

Okay. That makes sense. I just was here looking at the revenue line, saying, where is it. Because we had a meeting with you and you were very optimistic. Okay. That's great, Gerry, thank you. Thank you, Tom.

Can you please explain the arguments that the auditors are using for putting mutual funds on the balance sheet? Are we getting close to having this happen? I thought it might all go away, like it was -- but it sounds a little more concerning now?

It has to do -- and I'm going to get myself in trouble here very quickly, so I'll hand it over to Barbara -- but it has to do with who has the rights to appoint or de-appoint the agents. It's a very, to me, arcane sort of technical issue. But Barbara, do you want to elaborate on that?

That is the basis of the issue, as well. The way the mutual funds are structured in Canada, they're more as trusts; where the U.S., they're more as corporates. And so that structural difference is coming into the discussions. In terms of trying to work through this, we will have to do model calculations on expected losses in terms of determining whether or not there is any potential for them to go on the balance sheet. There is still a lot of discussion happening -- within the accounting profession, within the industries, it is still early for us in terms of resolving this one.

Are you confident it will go away?

Not at this time, no.

Ladies and gentlemen, thank you very much for coming. Give us a call if you have any other questions.