Canadian Imperial Bank of Commerce (CM) 2003 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to CIBC's fourth-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. Our meeting today is being audio broadcast live on CIBC.com. Our press release and investor presentations have been posted on the web site, and our annual financial statements are being posted shortly. I will make note of a couple of legal items. First, in the course of our remarks this afternoon, we may refer to measures that have not been calculated in accordance with Canadian GAAP principals. These would include such things as net interest income on a taxable equivalent basis, economic profit, and operating earnings. In accordance with SEC rules and CSA (ph) guidelines. these measures have been reconciled to the most directly comparable GAAP measures and our fourth quarter press release and subsequent supplemental information, both of which have been posted on a our website. Secondly, 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.

Turning to the presentation, here to speak to you today are John Hunkin, President and Chief Executive Officer, Tom Woods, Chief Financial Officer and Wayne Fox, Vice Chairman Treasury Balance Sheet and Risk Management. Following our presentation, we will open for questions. Our business line heads are all here to speak to you today, Gerry McCaughey, Jill Denham (ph) and David Kassie. In addition, Dan Ferguson, Head of Credit Risk Management is here to answer your questions. I would ask those of you on the phone to please identify yourself before asking questions. Thank you for your attention, and I will turn it over to John Hunkin.

Welcome to all of you. Today, we reported net income for the fourth quarter of $510 million, bringing earnings for the full year to just over 2 billion. Diluted earnings per share were $1.28 for the quarter and $5.18 for the whole year. Reported return on equity was 17.9 percent in the fourth quarter and 19.3 percent for the full year. We have made substantial progress this year on repositioning CIBC as a lower risk organization. This is reflected in our dividend increase of 22 percent to 50 cents per quarter. It's also reflected in our increase in our payout ratio target to 40 to 50 percent, as well as our intention to re-start our share repurchase program, subject to regulatory approval.

We began the year with a commitment to four clear business objectives -- reducing risk, changing our business mix, improving productivity, and growing our core businesses. I will provide some brief commentary. We are reducing risk. Credit quality continues to improve. Gross impaired loans are down almost $900 million. Our provision for credit losses is down and we continue to successfully shift economic capital away from our large corporate loan book. In fact, we hit our three-year objective in six quarters. Market risk is being managed at historically low levels, and our exposure to merchant banking has been reduced. Capital ratios are high, and we closed the year with a T-tier one capital ratio of 10.8 percent.

Second on our business mix, it continues to shift in favor of retail and wealth. These businesses are now supported by 64 percent of the Bank's capital, up from 50 percent at the end of last year.

Third, expenses. We have made improvements to operating efficiency, but not enough. This is a major focus of CIBC in 2004. While our overall mix ratio fell this year and we reduced the compensation to revenue ratio, which has been comparatively high, we are intent on achieving more significant, broad-based sustained reductions in our expense base. We have committed to sustainable growth in revenues, above that of expenses as an ongoing discipline. Essential to ongoing share price performance will be sustainable growth in our core businesses. I think we have accomplished a lot this year. Our retail, wealth and commercial banking businesses generated 1.4 billion in underlying earnings, and wholesale earnings are much improved over last year. In retail, we have committed resources this year to putting customers first. We have invested in technology, sales and service and our brand. Cards, administered mortgages and personal loan balances are all up this year. CIBC remains the number one credit card provider, and our mortgage market share is up 70 basis points this year to 14.8 percent. We successfully we renegotiated our Aeroplan contract with Air Canada, sold our retail brokerage business in the U.S. and completed the integration of Merrill Lynch and Tau (ph). We are pleased that our wealth management platform is now significantly more robust than it was through the last cycle. The number of accredited financial advisers increased 16 percent this year and productivity per F.A. continues to increase.

In CIBC World Markets, some investors have expressed concern that we may have left upside this cycle than last as a result of the ongoing focus on risk mitigation. Well, yes, that's probably true. However, that does not mean that there is no leverage to the upside. Our Canadian franchises had an excellent year, manifest most notably in being the leader in the Canadian new issues market for the second year in a row. Our U.S. business is fit and trim and in a very solid position to participate in a growing market. We're targeting 400 to 600 million in sustainable earnings and feel good about our prospects for achieving that next year.

We committed last year to move CIBC along a new path, and I am very pleased with our progress to date. But be assured, we continue to be resolute in our determination to reposition CIBC, and see clearly one year of improved performance does not get us there. Our primary measure is best total return, not just this year, but through the economic and credit cycles. In 2004, we will continue to build upon the progress of this year in each of our key business strategies. Particular emphasis will be on brands, productivity and people. With that overview, I will turn the meeting over to Tom Woods and then Wayne Fox to provide more detail.

If you go to Slide 4 in your deck, Slide 4 provides a summary of the fourth quarter, which reported earnings per share of $1.28. This included a benefit of 26 cents a share from the release of general loan-loss provisions, and an 18 cent a share drag from the transfer of noncore corporate loans that were held for sale account (ph). We also had a number of other items, some of which are listed on the right hand side of the slide that you may want to factor in as you assess our Q4 results.

Turning now to a review of our business line performance on Slide 12. Slide 12 shows retail market revenue was 1.303 billion, up from 1.257 billion in Q3. On Slide 14, in personal banking, revenue was a record 509 million, up 21 million from Q3. Deposit balances were up 3 percent on the quarter, but lower spreads more than offset this. Loan balances were also up 3 percent and loan spreads increased as well in the quarter. Personal loan balances are up 14 percent from a year ago. Market share in deposits held steady in the quarter at 17.2 percent, and lines of credit was 13.1 versus 13.2 in Q3. And in term loans, was 18.4 versus 18.1 in Q3. Looking ahead, Q1 for personal banking is normally a little weaker, and revenue growth for the full 2004 year will not likely be as high as the growth we saw in 2003. Retail deposit pricing continues to be very competitive. For example, following the Bank of Canada rate cut in September, not all banks followed with similar cuts to their savings deposit rates, which in the past has normally been the case.

Slide 15, small-business banking had record revenue of 143 million, driven mainly by higher loan spreads. Deposit volume growth of 3 percent was more than offset by a decline in deposit spreads. Although small-business loan volumes were relatively flat versus Q3, they were up 9 percent from last year. In Q1, we expect small-business revenues to be about the same as in Q4, and revenue growth overall in the full year 2004 to be a little less than the growth we saw in 2003. During the quarter, we completed the consolidation of management structures at the personal banking and small-business banking groups. This is an important cost initiative for us. And while sometimes initiatives such as this can be a distraction to the frontline sales staff, we were able to carry it out and still deliver record revenue in each of these businesses.

Slide 16, incurred (ph) revenue was also a record for the quarter, at 330 million. Outstandings incurred were up 2 percent versus Q3 and purchase volumes were up 1 percent. Revolve was up marginally, and spreads were down somewhat, largely due to a change in transfer pricing methodology. Market share of outstandings incurreds was 20 percent versus 20.3 in Q3. And market share and purchase volumes was 31.8, up from 31.5, maintaining our number one position in Canada in each of these categories. The competitive environment incurreds (ph) remains about the same as it has been throughout the year, with continuing aggressive advertising in the premium segment, including from our own new Aventura card, as well as more targeted direct mail from U.S. mono-lines, offering balance transfers of zero percent interest for the introductory months. Aerogold continues to do well across its performance metrics, and remains by far, the leading premium card in the country. The outlook for cards is for higher revenue in Q1 as compared with Q4.

Slide 17, in mortgages, revenue of 192 million was down 3 million from Q3. Balances were up 3 percent on the quarter. Margins were higher, as the prime BA spread widened, and prepayment fees were up marginally. These increases were offset by lower securitization hedging revenue. Market share for mortgages, as John said earlier, was 14.8 percent, up from 14.7 in Q3, the 11th consecutive quarter we have gained share. Our residential mortgage balances are up 11 percent from a year ago, and as we continue to benefit from our multichannel distribution strategy. The market environment remains very competitive, particularly in fixed-rate products, and there is no sign that this is abating. We do not foresee mortgage growth continuing at the same pace into 2004. And we expect prepayment fees in particular to start to come down. Q1 revenue will probably be well down from Q4 levels because of this, and a change in our transfer pricing methodology on this line.

Slide 18, retail markets NIAT for the quarter was 204 million compared to 247 in Q3. Revenue was 46 million higher than in Q3, as I have just reviewed. Loan losses were 34 million higher due to balance increases and due to slightly higher loss ratios in cards and other lending products. Expenses for the quarter included 35 million higher employee severance payments, largely in connection with the consolidation of retail banking and small-business banking management groups, as well as somewhat higher market, technology and branch improvement spending.

Turning now to our second of three business groups on Slide 22, wealth management, revenue here on Slide 22 was 604 million versus 615 in Q3. The decline was due primarily to the reduction of, in-clearing (ph) revenue from Oppenheimer, as the transitional services agreement terminated as planned with Fahnestock Veiner (ph), who we sold the Oppenheimer brokerage business to earlier in the year.

Slide 24, Imperial Service is the group serving the top 15 percent of our branch banking customers. Revenue here was 189 million versus 180 million in Q3. The increase was due mainly to loan products, which had both higher balances and spreads, and to higher mutual fund trailer fees. Over 1000 or 88 percent of our Imperial Service advisors are now ADA (ph) qualified, part of the reason we have been able to improve the sales culture in our branches. Funds under management here were up 1.2 billion in Q4 or 2 percent versus Q3. Growth in the future will continue to be driven primarily not by walk-in traffic, but by how successful we are at converting referrals into real customers, in much the same way full-service stockbrokers build their business. We expect revenue in Q1 for Imperial Service to be about the same as Q4, but increasing through the year as we grow funds under management.

Slide 25, retell brokerage revenue was 246 million versus 250 million in Q3. Excluding the difference in Oppenheimer transitional service agreement revenue I noted earlier, revenue was up marginally in the quarter. In full-service brokerage, higher revenue from equity trading more than offset lower new issuance fixed-income revenue. And in discount brokerage, higher trade volumes produced slightly higher revenue as well. One month into the quarter, we appear to be on track for Q1 revenue the same or better thank Q4. You may recall nearly two years ago when we acquired the Merrill Lynch Canadian retail brokerage business, we said we expected to be modestly earnings accretive in 2003. We were in fact only 1 cent a share earnings dilutive, despite weaker than anticipated market conditions and higher pension and benefit costs. Adjusting these differences out, we would have been nearly 10 cents a share accretive. And both of these figures are before the incremental benefit the acquisition has provided to our investment banking business in the form of much enhanced distribution. So we remain very pleased with the Merrill Lynch retail acquisition and its integration into CIBC Wood Gundy.

Slide 26, retail products revenue was 123 million versus 128 in Q3, primarily due to lower GIC revenues. The GIC business continues to be very price competitive and the effective narrower spreads more than offset marginally higher balances. GIC market share was 15.1 percent, the same as in Q3. Our mutual fund business continued to perform well; balances were up 1.5 billion or 4 percent in the quarter, driven both by the market improvement and our positive net sales in the quarter. CIBC led all providers in the mutual fund industry in net sales for the quarter with 468 million. For the third quarter in a row, we saw migration from money market into equity funds. Our mutual funds share among all providers was 8.5 percent on the quarter, the same as in Q3.

Slide 27, wealth management NIAT was 89 million in the quarter, up a little from Q3, as better expense performance and a lower tax rate more than offset slightly lower revenue.

The final business group, World Markets on Slide 35 -- here you can see World Markets revenue trend, which was 876 million in Q4 versus 831 in Q3.

Slide 37, in Capital Markets, revenue was 337 million versus 378 in Q3. The equity component of Capital Markets' revenue, which represents about 60 percent of the 337 number, was down 8 percent from Q3, while the debt component was down 15 percent. Within equities, new issuance secondary market revenue was down marginally in Canada and the U.S. Arbitrage revenue was also a little lower due to lower volatilities and tighter margins. Our retail structured products business continued to do well as funds flow in a protected equity product remained high. On the debt side, foreign exchange revenue was lower, as the volatility and exchange rates we saw in Q3 tapered off in the fourth quarter, reducing client activity. Derivative structured opportunities were fewer in Q4 versus Q3, which had higher levels of client hedging activity. Market share year-to-date and equity trading decreased in Canada from 12.7 to 11.9 and increased in the U.S. from 1.0 to 1.2 percent. Although we are less than a month into Q1, the outlook is for the same or better revenue versus Q4 in both debt and equity.

The next business line, investment banking and credit product on Slide 38 -- revenue was 372 million, up from 310 in Q3. The U.S. represents about two-thirds of this number, with Canada about 25 percent and Europe 10 percent. U.S. revenue was higher in the quarter, primarily due to real estate securitization, structured leasing and higher valuations in our held for sale corporate loan book. In Canada and Europe, Q4 revenue was about the same as in Q3. During 2003, CIBC World Markets was the number one ranked firm in new issue equity in Canada, having led or co-led 103 transactions, nearly double that of the second-place firm. We have maintained this pace so far in Q1, having led or co-led 19 deals versus six for the second-place firm. Canadian M&A activity in 2004 looks like it will be better than last year, and possibly as good as we saw in 2001.

In the U.S., the near-term outlook for our business is reasonably good. In real estate securitization, market conditions remain strong and our pipeline is up. In high yield, good float continued in the more mutual funds, and the new issue market is as receptive as it's been since 1998, particularly in our area of focus, that of midmarket companies. In corporate credit demand from investors for new loan product is very high, as many loans have been refinanced into the high yield market. In structured leasing, deals in the pipeline are up, but potential changes in U.S. tax law may affect these transactions. In M&A, interest rates are low; access to financing is improved; and transaction activity has begun to pick up. And in new issue equity, share prices are up and investors have shown increased willingness to participate, at least selectively, but the market needs a little more sustained confidence in the economy before activity really bounces back. In our own case, we have a higher number of deals in the pipeline; but it remains to be seen how receptive the market will be when they're ready to be launched.

Slide 39, merchant banking -- revenue of 9 million and gains and other income of 75 (ph) million exceeded write-downs of 66 million. Although we expect to continue to have event driven write-downs going forward, the market for divestitures is beginning to improve. We have started to see sales of higher valuations and more accessible financing on better terms. High yield spreads are now 540 basis points over U.S. Treasury versus 1100 a year ago. After six quarters of negative or flat marks on our fund investments, in Q4 we received net positive distributions. And of the six U.S. banks of comparable merchant banking portfolios, only two had negative merchant banking revenue in their Q3 versus five or six with negative revenue in Q2, and all six of six in Q1. Notwithstanding these positive signs, there will no doubt continue to be situations where we will have to take write-downs. But the business appears at least a little better than it has been in recent quarters. And I want to emphasize, we remain committed to reducing the scale of our merchant banking portfolio as opportunities present themselves.

On Slide 40, you see World Markets NIAT of 126 million. You will recall in Q3 that we placed 885 million of noncore corporate loans in a held for sale account, and recognized an $88 million after-tax loss. That is the main reason the third quarter number you see is only 3 million. In the fourth quarter, we designated a further 1.24 billion in loans held for sale, and took a $64 million after-tax loss. The 126 million Q4 NIAT bears the 64 million held for sale loss; but loan losses apart from the held for sale transfer were a reversal of 7 million in the quarter. Expenses in World Markets were 629 million in the quarter, up 45 million from Q3. The main increases were 18 million in sublease losses mainly in London, as we consolidated our space there; 15 million in higher incentive compensation; and 13 million in higher severance expense. Taxes in World Markets were unusually low as we benefited from tax recoveries of 24 million, mainly due to the windup of international subsidiaries.

I will conclude on Slide 53. This slide provides a brief comment on the four main drivers for earnings per share for CIBC in 2004. Retail revenue growth may not be as high as last year; that is the growth not being as high. We do expect increases. But mid single-digit growth appears possible. The tone for Capital Markets-related revenue is better than it has been in several quarters, as is the outlook for loan losses. Expense containment is an area where we focused much on this year, and we expect to see more results in 2004 and 2005. Finally, with the tier one ratio of 10.8 percent currently, there will be a positive impact on EPS as we re-launch our share repurchase program. Thank you. Over to you, Wayne.

Thanks, very much, Tom. Good afternoon, everyone. I will go to Slide 4, please. As Tom pointed out, our specific provisions for the fourth quarter totaled 281 million, including the $93 million for the transfer of further 1.4 billion of net credit commitments in the held for sale portfolio, which I will speak to in more detail later.

Including the Q4 held for sale transfers, specific provisions for the fourth quarter totaled 188 million, down 102 million from our third quarter, similarly adjusted for the Q3 held for sale transfer, and a $92 million improvement over the fourth quarter of fiscal '02. Specific provisions for the full year totaled 1.293 billion, including 228 million for credits transferred to the held for sale portfolios. This is a 14 percent year-over-year improvement. At the year-end, we recognized $150 million reduction to our general allowance, primarily reflecting the material progress achieved in managing both the size and quality of the corporate credit portfolio. And as a result, our total Q4 credit loss provisions totaled 131 million on an unadjusted basis, and our full-year fiscal '03 provisions totaled 1.143 billion.

Slide 3 provides you with a detailed recap of our fiscal '03 quarterly and a full-year credit permission by type of credit asset, in addition to highlighting the two held for sale corporate credit transfers and the general allowance reduction. In Q4, our consumer credit provisions totaled 156 million, while our held for sale adjusted business in government credit provisions totaled 32 million. The higher Q4 quarterly consumer credit provisions were principally reflective of increased credit card provisions. While volume growth continues to be a material contracting factor in increased credit card losses, we have also seen some credit quality deterioration as a byproduct of increasing personal bank bankruptcy rates. The significant decline in business and government credit losses is consistent with our continued effort to take risk out of the corporate loan book. It's also a reflection of the strong U.S. credit capital markets environment which prevailed during the past year, and which was helpful in achieving stress bank debt repayments. The services and retail, manufacturing and agricultural industrial sectors were the principal sources of Q4 business specific credit provisions. Fiscal '03 specific business credit provisions totaled 513 million, excluding the two held for sale transfers, which is 53.2 percent year-over-year reduction.

Turning to Slide 4, as of October 31, our revised general allowance of 1.1 billion was equivalent to 95 basis points of risk-weighted assets, as compared to 104 basis points as of July 31; 99 basis points as of October 31 of '02. The fiscal '03 year-end specific allowance for credit losses of 855 million was equivalent to 62 percent coverage of our gross impaired loans, a slight reduction from 65 percent coverage as at July 31, but a very material improvement from 46 percent coverage as at fiscal year end' 02. By way of additional context, our year-end total allowance for credit losses of 1.96 billion, including general allowances, provided 142 percent coverage of our gross impaired loans, a further improvement compared to 131 percent coverages at July 31, and a very material improvement from the 101 percent coverage at fiscal '02 year-end.

The fiscal '04 guidance for specific credit provisions is shown on Slide 5. We are projecting that full year credit losses will be in the range of 950 to 975 million, representing an appreciable improvement over fiscal '03. These factors supporting the year-over-year reduction are the contraction of our corporate credit book, the completion of the two held for sale stressed credit transfers in '03, and the stronger tone of credit capital markets in general. Partially offsetting these improvements are the knock-on impact of the negative events that occurred in Canada earlier this year, such as SARS and BSE and the much stronger Canadian U.S. dollar FX rate now prevailing, which will prove challenging for certain Canadian business clients. We also anticipate some volume impact in our year-over-year credit provisions, as we continue to grow our retail businesses. We currently anticipate that approximately two-thirds of our fiscal '04 credit provisions will be in the consumer sector with one-third applicable to business and government loans. It's also possible that we will see further movement in our general allowance for credit losses in fiscal '04, depending principally on the continued progress made in proactively managing the corporate credit book. Our guidance is that we expect that our level of general allowance will range between 90 to 95 basis points of risk-weighted assets over the course of 2004, subject to any changes being satisfactorily reviewed with both of our external auditors and regulators.

Slide 6 indicates total net loans and acceptances after the general allowance, totaled 139.1 billion at the year-end, down approximately 2.6 billion from July 31. All of the reduction can be accounted for by a 3.3 billion decrease in business and government loans in the fourth quarter. Approximately 1.2 billion of Q4's reduction is due to the transfer of loans from the held for sale account. The year-over-year reduction in business and government loans exceeded 10 billion, equivalent to a 21.4 percent reduction and consistent with our strategic objectives. Residential mortgages remained relatively flat on a known (ph) basis quarter over quarter, at 70 billion, inclusive of the securitization of 2.3 billion of mortgages, while personal loans increased by 390 million. Credit card outstandings increased by 454 million in the quarter to 9.1 billion as at October 31, and were up 21.7 percent year-over-year due to a combination of growth and maturing securitizations.

Slide 7 displays that our consumer credit assets represented 73 percent of total net loans and acceptances as at October 31 as compared to 71 percent at the end of Q3. Year-over-year, we have shifted the percentage split of our loans and acceptances by six full points from 6733 to 7327 consumer versus business, continuing to position our credit capital much more towards our retail activities going forward. This ongoing shift in our portfolio was reflective of our strategy to shift our business mix, measured by economic capital, in favor of retail, in conjunction with our ongoing focus on balance sheet and capital management.

The next slide illustrates our corporate credit portfolio industry diversification. Please note these numbers exclude the held for sale loan assets, given their balance sheet re-categorization. The back of the deck, you'll find our ongoing detailed disclosure with respect to stressed industries, with Q4 results in each case, evidencing continued tangible progress. The appendix loans and acceptance numbers are reported inclusive of the held for sale transfer credits, so that you can track progress by sector.

Sector (ph) diversification of the portfolio continues to be supplemented by our credit protection activities. Slide 9 recaps the amount of protection that we have purchased on our outstanding business and government loans as at October 31. Of the 1.6 billion in credit protection, the largest hedged industrial concentrations were oil and gas, at 251 million, telecom and cable, at 228 million, and business services at 189 million. As at October 31, we had credit protection against 4.2 percent of our outstanding business and government loan book, as it compared to 4.1 percent at July 31.

Credit portfolio management continues to concurrently manage down the non-core corporate loan portfolio, as is shown on Slide 10. This quarter's activities included accrual book loan sales and purchases of credit protection, providing 143 million of risk-weighted asset relief at a cost (ph) of approximately 1 cent per share. On a forward-looking basis, we should remind you that effective November 2003, that is our first quarter of '04, CIBC's compliance with Canadian GAAP Accounting Guideline 13 will require that we mark to market account our credit derivatives hedge book. This will be a change from our current accrual accounting approach. While this change may cause some volatility in our quarterly income statements, 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.

Slide 11 is a summary of the accounting highlights applicable to our Q4 held for sale transfer, and is effectively a repeat of the same slide which we used to discuss our Q3 held for sale transfer, other than adjusting the numbers to reconcile to the new Q4 transfer.

Slide 12 provides the detail around our Q4 held for sale transfer, which totaled 1.4 billion in net credit commitments, predominately for European telecom and cable borrowers, with the pre-transfer on balance sheet loans totaling 1.2 billion being reduced to approximately 1.1 billion, reflecting $100 million loss on transfer, 93 million of which was accounted for as a specific credit provision in Q4. Our objective, consistent with the approach taken with the Q3 held for sale transfer, is to proactively reduce the held for sale -- Q4 held for sale portfolio -- over the next year. And as of today, we have already executed sales in excess of 10 percent of this portfolio.

The next slide updates you on our progress in reducing the Q3 held for sale portfolio, and indicates that approximately two-thirds of that portfolio have been divested and closed by the year-end, with sales continuing at a similar pace in November. We would like to confirm that we have today achieved aggregate prices which are better than the initial transfer values, and which have absorbed any revaluation unrealized losses.

Our gross impaired loans shown on Slide 14 improved sharply during the fourth quarter, reducing by 515 million to below 1.4 billion. 116 million of the reduction was due to the Q4 held for sale portfolio transfer. The three largest new gross impaired credits recorded in the fourth quarter were all to privately owned companies, comprised of an aerospace parts manufacturer at 24 million; a clothing manufacturer and a tourism operator, at $17 million each. As at October 31, net impaired loans were 521 million, down 142 million from July 31, and down 715 million year-over-year. As a percentage of total loans and acceptances, net impaired loans improved to 37 basis points at the end of Q4, as compared to 47 basis points as at July 31, and materially better than the 86 basis points reported as at the end of fiscal '02.

Turning to the next slide, business and net impaired loans improved for the fourth consecutive quarter, reducing by 204 million in Q4, and reducing by 731 million year-over-year. Business and government net impaired loans before general allowances as at October 31 represented 142 basis points of total business and government loans, a 38 basis point improvement over Q3, and 121 basis point improvement year-over-year.

Moving to new formations on Slide 16, at 175 million, business and government net new formations decreased 189 million quarter over quarter, and accounted for 36 percent of the new classifications. From an industry perspective, the largest levels of new corporate credit classifications were from the manufacturing sector, at 51 percent, followed by the business services sector at 17 percent.

Now we would like to look at the consumer loan books. Slide 17 indicates that our consumer credit net impaired loans increased by 62 million to negative 17 million in the fourth quarter, with credit cards decreasing 13 million and with other consumer credit portfolios combining for a $75 million increase. Our expectation is that any increase in our year-over-year consumer credit provisioning in fiscal '04 will be principally reflective of volume growth rather than credit deterioration, given the combined impact of stable to improving delinquency trends and enhanced retail risk management methodologies.

Turning to market risk, this graph displays Q4 daily trading revenue against the value at risk in our trading books, and evidences that on no occasion did losses exceed the value at risk.

The next slide shows that 77 percent of Q4 trading days provided us with positive revenue, and this represents continued strong performance as customer activity generated consistently positive revenues without our having to assume incremental proprietary risk.

This leads to my next slide, which shows the risk in our trading books over the last three years plus and the associated risk-weighted assets. Value at risk in our trading books remained at low levels during Q4, averaging under $7 million per day, significantly below historical levels, and consistent with our goal of minimizing revenue volatility. Consistent with the reduction in risk, the risk-weighted assets attributable to market and specific risks in our trading books has declined by more than 60 percent over the last three years to the current low of 2.6 billion.

The graph on Slide 21 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 challenging interest rate risk markets in North America.

And my final slide displays that risk-weighted assets have declined by 29.1 billion since the end of 1998. Since 1998, wholesale risk-weighted assets have declined by $47 billion of which 33 billion, or 70 percent, is related to the reduction in the wholesale credit portfolio. During the same time period, retail risk-weighted assets have increased by approximately 18 billion, primarily due to the strong growth in mortgages, credit cards and personal loans. In Q4, risk-weighted assets decreased by over 4 billion, effectively all due to reductions in wholesale credit related activities.

In summary, we believe we have made good progress during fiscal '03 with respect to improving CIBC's risk profile in accordance with our business strategies and our prior guidance. With that, I will turn it back to you, Kathy and John.

Great, okay. We are now open for questions. We will start with questions here in the room and then we will go to the phones. Questions here?

Wayne, can you articulate the approach that's going to be used to establishing the right level of general allowances, and delineate between how you deal with OSFI's and how you deal with the terms on that?

I would be happy to, Ian. Just in brief and just in terms of the way in which we approach this topic, we have to have agreement with our regulators on how we calculate general allowances. And so we have worked with them over the past year or so, and have from them their precise -- don't want to use the word approval, but I guess it's non disapproval; they always have a funny way of looking at these things -- methodology, which allows us to calculate the general reserves. It is really using the same tools we use to evaluate the balance of our credit assets, KMV-based (ph), and that is overlaid with some qualitative and subjective judgments based on management's view of where we are in the credit cycle, and other factors. So armed with that information, as you probably know, we have been an outlier in this regard for some quarters. Last quarter as you may recall, we reached 104 basis points of general to (ph) risk-weighted assets. The capital efficiency frontiers, you may also recall, was 87.5 basis points. And it came to the point, given all our portfolio activities, it was very clear, given our view of current trends, that we were significantly overprovided for, and that was consistent with our auditor's view, and it was consistent with our regulator's view. So we sought OSFI's approval for a reduction. We were given a range in which they would except a release of these reserves, and in conjunction with our external auditors, we landed on 150 million. We would foresee, as I indicated in my comments, that all things being equal based on our current portfolio activities, that we should be able to manage our general reserves in that 90 to 95 basis point range going forward. And as you can see at the end of Q4, it's presently at 95 basis points.

Is it calculated on -- can you tell the detail of calculation? Is it a percent of assets, is it expected loss, what's unexpected, give a little bit more --?

Brian O'Donnell is sitting here across the room. He is responsible for the oversight of the methodology. And Brian, maybe you would like to make a few brief comments.

The methodologies, as based on these same methodologies, (indiscernible) and expected loss, and is largely duly needed (ph) off the expense at loss calculations. So it is certainly volume based in the first instance, but it also looks at the expected loss rates through the cycle.

Any questions? Yes, Michael?

Can you discuss the thinking behind the 22 percent dividend increase, and the move in the target payout ratio to 40 to 50 percent?

First of all, we have not had a dividend increase in some time. Secondly, given our earnings and our capital position and the fact that we have, we believe, significantly reduced our risk profile, we feel that the increase at this time in our dividend is quite manageable. And in fact, we would see ourselves operating at below the low end of that range until we in fact complete what we have set out to do. And I would say in completing it, in terms of the risk profile, we believe we still have the distance to go on reducing the size of our merchant banking portfolio, which as you may recall, when we started that a year and a half ago or so, we said we wanted to reduce our exposure there by about a third by the end of '05. And we are on course to do that. And we believe we will be able to make more progress there this year. It also reflects the fact that in talking to shareholders, clearly, we got a very clear message that shareholders would like to see not only an increase in dividends but a higher dividend range. We think this range is manageable, taking into account what we believe our greater stability in earnings will be -- what we believe -- as we look to the future right now, we think that we can sustain that and gradually move up the range from 40 to 50 percent, as we feel, as I say, that we have the bank positioned just where we want it. Others?

It seems to me even with a 40 percent payout and a share repurchase program, you're still going to be accumulating capital relatively quickly. Can you address what you will do with an 11 percent tier one? Secondly, I didn't -- I noted there were no EPS targets for next year. I was wondering if you could comment on that?

I don't know that we have given EPS targets previously. And we wouldn't intend on doing this year. But it was a good try! I have been asked often about excess capital. We have an expression that says it's a high-class problem. We always talk about excess capital in terms of the status -- looking at the status quo. And therefore, I have never seen the status quo last very long, or other things being equal, be equal. So we are going to run CIBC on a very strong -- with a strong capital position. We're going to make sure that we are financially strong. My experience over the years is that we have missed out on opportunities because when the status quo changed, we weren't as strong as we should have been or could have been to take advantage of opportunities that are available when there is change out there. So clearly, we will be looking for opportunities. But our major focus now is going to be continue to run CIBC as well as we possibly can, to continue to pursue the strategies that we have pursued over the past year. And if our capital position just gets so excessively large, we will deal with that at the time. But for the time being, we don't have any specific thoughts other than those we have put in front of you in terms of increasing the range of dividends, the payout ratio and also, re-introducing share buyback.

Quentin?

A couple of questions. First on the retail credit, if we can get some more color on -- the increase quarter on quarter looks higher than simply the volume balances being up. So I am wondering what else might have gone in there, what it means to have an enhanced retail risk management methodology, Wayne, and what that might mean going forward? And secondly, on cost base, and I noted again, there, probably within the mix ratio that was lower this quarter than last quarter, despite it being a focal point. So just what's going to happen in '04 as you focus on NIX (ph) 60 to draw expenses out of the system?

Ron Cathcart will address that question. Ron is responsible for our retail risk management oversight activities. And he will address that question. Push the button in so they can hear you.

You've referenced the increase in loan loss experience Q3 to Q4. There is a certain amount of quarterly movement between those numbers. But if you look at the year-over-year increase, which I guess is the significant one, you see us going up $150 million, that made up largely -- two-thirds of that is credit card, increases in credit cards. largely attributed to the fact that a very significant portion of our portfolio is credit card. We have more of a credit card bank than some of our competitors with the dominant market share. Looking at that two-thirds, one-third of that increase relates to securitizations, which matured and have come back onto the balance sheet. And the remaining two-thirds are the result of portfolio growth in prior years. Through the latter half of the year, we have seen as Wayne referenced earlier, some increase in bankruptcies, which have caused a small elevation in the numbers, although it's not the main driver of the increase.

The other one-third, the 50 million, relates to a non credit card credit cost, which once again are driven by prior year's portfolio growth. You asked for clarification on the question of enhanced risk management capabilities. And that's really a reference to the fact we're heavily investing in building a robust data infrastructure that allows us to properly and deeply analyze trends in the portfolio so that we can do a more competitive job against our competitors at originating credit, at determining line management once the credit is originated, and then finally, with risk with respect to collection strategy. A significant amount of investment is going to take place in that infrastructure.

Let me add to that, that we have been moving over the past several years and are now there, in terms of consolidating the retail risk management within treasury and balance sheet and risk management, which used to be on a more decentralized basis, as well as collections. So that's all part of trying to enhance the effectiveness of our risk management in this area. Do you want to comment on the other?

On the cost side, in Q4, our costs were 2.03 billion versus 1.95 billion in Q3. I touched on some of the reasons why the costs were higher, and there is a more detailed slide in the deck, but really three main areas why they were higher, 45 million on higher severance, 30 of which was in retail markets, about 15 of which was in World Markets. And we are always going to have some severance. But that was clearly higher than normal run rate, the main reason being the consolidation of part of our management structure and retell markets. Sublease losses were 20 million; bigger advertising budget in Q4, which is always a seasonal thing. And we have been very aggressive on Aventura and GICs (ph), in particular, as well as our new TV campaign. That won't continue at quite the same pace, although we are going to continue to support product with advertising. We also adjusted an accounting policy in Juniper, which is our small U.S. credit card investment, to make that accounting policy on writing off advertising, consistent with CIBC as a whole; that was 12 million. So I am certainly confident we can get a run rate next year quarter in, quarter out, I think even below the Q3 number of 1952. Right now, we are running around a normalized mix ratio of about 69 through the year. And clearly, that's not good enough. You can adjust that down by a couple of points by mix. But that still puts us at 67 versus about 64 or 65 for three of the other four Canadian banks. So our goal next year is to get it down to around 66 if we can and then down into the low 60s beyond that. And that does not presume what we feel are unreasonably aggressive revenue targets.

Can we go to the phones, please?

(OPERATOR INSTRUCTIONS). Jamie Keating from RBC Capital Markets.

Thank you, and great quarter, everyone. I have a simple question, I hope you don't mind taking a minute to go over this. Just on Tim, Slide 4 concerning the adjustments, I wonder if you could just broaden on the specifics? You clearly describe three adjustments there. (Inaudible) there were some others you alluded to, including the Enron reserve. And I believe some FX over hedging. And you also talked about higher severance. Can you just, Tom, perhaps just walk us through from top to bottom what some of these considerations may be, moving from the $1.28? In addition to the three that are on the slide?

Yes, every quarter has items that (indiscernible) don't quite hit the radar screen as being in usual. We try to give some color on some of the things that sort of verge on being unusual without putting them in a table, which the security commissions and the SEC will no longer permit us to do next year, just to give you some sense as to what else is going on to help you normalize. So apart from the three at the top that I commented on, I also commented on the loan loss reversals in World Markets. So apart from the held for sale, we had reversals which occurred in the quarter. So as you look at the World Markets' numbers this quarter and say to yourself, what does that auger for the future? I think you would want to bridge to Wayne Fox's comments on guidance for World Markets into next year, at, Wayne roughly call it 300 million in round numbers versus a negative 7 in this particular quarter. So that was our results in the quarter, obviously, negative 7. It emanated from a significant change in some of the events surrounding some of the loans. But as you try and normalize going forward, I think you would want to say quarter in quarter out, we are not going to, obviously, repeat that kind of performance. Lower tax rate, we shut down a couple of international subsidiaries, and we had another tax gain of about 25 million in total after-tax. And that's reflected when you look at the tax rate in World ,Markets and that's not a normal sustainable tax rate. So those two items probably helped our earnings per share just shy of 20 cents a share. The flip side however, we had a second quarter of Enron reserves, it hurt us 12 cents a share. The higher severance, advertising project spending, and I am hesitant to even think of that as unusual. But clearly those three numbers were bigger than normal. We also had, as I referred elsewhere, some over-hedging in some of our FX businesses, which really emanated from a combination of the rapidly rising Canadian dollar, and the rapidly falling loan loss provision, together with some new systems we put in place, we ended up being somewhat over-hedged, which helped us about 30 million before tax. We are always going to have some hedge gains or hedge losses. But this quarter, that went right in a pretty significant way. So I will leave it to each of you to weigh how those five things factored in. But hopefully, that transparency helps you just get a sense of what might lie ahead.

I wondered if I could follow up on one additional question. You may be reticent. But I always try to compare retail NIM in the domestic operation. And your numbers are not presented that way, unless I am missing it. Can you comment on it in a more realistic (ph) fashion, how you felt your comparable retail NIM went, or if you analyze that?

Yes, in fact, we do have a Slide 50, which I didn't comment on, which we put in the last couple of quarters. Because there continues to be a fair bit of -- confusion is probably too strong a word, but need for a bit more transparency. So what we have done on Slide 50 -- and I won't spend a lot of time on this, I will be happy to follow up later -- is try to carve out fixed assets, add back securitizations, take out trading assets and exclude unusual NIM. For example, with the tax return interest we got in Q3, technically from an accounting point of view, has to flow into NIM, but obviously it's not real NIM. So our NIM is actually, despite the fact I have been pretty bearish over the past few quarters on the trend as our competitors have been, given the competition in mortgages and deposits, earnings have actually gone up. You can see on Slide 50 where they have gone up. And in particular, they have gone up because some of our new loan products carry higher spreads. Mortgages, because we are very active on the variable side, and we were in that business -- I think it's fair to say -- in front of some of our competitors, and that business still remains very robust. That's a higher NIM business. Some of the financing we put on recently is at very attractive rates. So the combination of those three things has allowed our NIM really on a retail basis, because that bottom line on Slide 50 takes out the wholesale, has gone up. Now, can we sustain that? I am not sure but we put three or four quarters together of pretty healthy NIM growth. So it's hard to second-guess that.

(OPERATOR INSTRUCTIONS). Rob Wessel from National Bank Financial.

Actually one quick question. Most of my questions were asked and answered. With respect to the general reserves, I guess we have all -- and maybe I am mistaken -- but I am guessing that we all sort of view that some were going to get reversed and brought back into income for a collection of banks. But certainly, some of the CEOs have been suggesting it would not be for awhile. I guess what I am wondering is, since it happened this quarter, is there anything else we can relate to this? Specifically, do you think the regulator might be open to maybe a small use of general reserves on a consistent basis, I guess now you have not been able to draw them down? Or anybody has really drawn them down, do you think that now, we can take this reclassification we can draw also (indiscernible) from that that the regulator might be open to people actually using these things? Or are they still just dead capital?

The reality has been over the past year -- and I will call on Wayne to maybe comment further -- but it has been an understanding with the general provisions that one could draw down. So that's one factor. If you had agreement on, if you will, the model that you're using for establishing the general reserve. The other thing that one has to remember is that your shareholders' auditors have a view on this also, because they will not allow you to be over-reserved, on the grounds that otherwise, one could be managing earnings. So there is not -- this is not just a matter of us and our regulator. It is also the shareholders' auditors who have a view on whether you are properly -- you are over or under, for that matter. Wayne, do you want to comment further?

That's exactly the correct answer, John. Just as in the case of specific provisions, where we must, on a quarterly basis, on a bottoms-up calculation, justify the provisions and reserves we choose to take in conjunction with our auditors. So it goes with the generals going forward, now that this methodology has been in place. So we will have to sit down and review them and make an assessment, and then in conjunction with our auditors, and then obviously, the regulator, make a decision to release or add to general allowances on a quarterly basis. So yes, it will be dynamic going forward.

Actually just one more question with respect to the guidance that you provided, Wayne, how should we think about that 950 to 975? Should we think of that as something approaching sort of the average provisions the bank would report over a full credit cycle, or would you sort of view that as more of a trough like number? How should we think about that?

We haven't really concluded on that. That is a discussion we are having amongst my group. I think I would characterize it as trying to be, as we have done over the past couple of years, to be a fair reflection of a conservative number. I think if you look back over time, I don't think we have missed our guidance on provisions for the last two years. And I think we would be highly confident that this would be reflective of our best judgment today. So having said that, I know that you are all consistently looking for us to put out a range of provisions to loans, and BAs as a ratio. And we are working on that and may come up with some guidance in Q1. But presently, we have not come to a conclusion on that. So I would just characterize this as, given our view of the improving trends in the market, this is our best guess, and we will refresh this guidance at the end of Q1.

(OPERATOR INSTRUCTIONS). Susan Cohen from Dundee Securities.

Perhaps just turning to wealth management for a minute, your NIAT was 89 million, up from 87 last quarter, and I recognize the growth was low because of the termination of the Oppenheimer agreement. But can you give us any perhaps additional color on the capital market leverage in this segment?

I'll start. If Gerry wants to add something, I am sure he will jump in. We have done quite a bit of work on this because a number of investors have asked this. It's hard to, I think, do justice to it without getting too complex. But let me take a crack at it. We have looked at the three main parts of our capital-market sensitive businesses within wealth management, the mutual funds, the manufacturing business, the discount business and the Wood Gundy retail brokerage business. And you would take them in that order in terms of how much retention to bottom line we think we can get for every incremental dollar of revenue in a better market. I will stress these are rough numbers. But we think we can maintain anywhere from 50 to 60, 65 cents to $1 NIAT in mutual funds. And this is putting three good years together. Discount brokerage, maybe 20 to 35 cents, and on the Wood Gundy side, maybe 15 to 25 cents. But Susan, I think a simpler way to look at it, and I want to stress this is not a forecast, but just to give you a sense of the leverage, we think is possible there, markets permitting, when you look at the NIAT in wealth management this year of 366 (ph), we kept about 15 cents of every dollar of revenue. We had two months of drag in there from the Oppenheimer, where the NIAT to revenue ratio was unfavorable, and we no longer have that. But as you look through let's say three good years out of four going forward, by the third or fourth year, we think we can drive that retention to 18 to 20 cents, for example. I think with those data points, if you want to try and model it, you'll get the sense that we really need to maintain 40 to 55, 60 cents of every incremental dollar. And that is something we think we have got a shot at.

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

Okay, thank you, very much. Any further questions here? Yes, we have Ian and then Heather.

David, looking at the World Markets business, I guess a couple of things. The trading business, the trading revenues, seem to be a little bit low. I am wondering is that specific issues in the quarter, or is it a reduction in risk capital associated with the trading businesses? That's one issue. And then the second question relates to the downsizing of the merchant banking book. With your success in the underwriting business, some of it has been driven off this (indiscernible) of relationships at the venture capital level. Do you think as you scale down the merchant bank, you might possibly let somebody else lead some deals now and then?

First on the trading revenues, Ian, I think that probably is a reflection of both the low risks, market risk, that we were running and have been running for some time, as well as in this quarter, a lack of opportunity relative -- or as much opportunity relative to the previous quarter. I don't think there's anything in there more than that.

Was there anything particular in the quarter? Or to the extent you can think of normal-end (ph) trading?

I don't want to characterize it as normal. I would say just from quarter to quarter, it would be about low risk and less opportunity -- in terms of market risk -- and less opportunity. On the merchant banking side, I assume you are referring to the fund portfolios. I don't think that that has been -- it's been obviously helpful in Canada in a couple of notable transactions. But by and large, it's not a big driver in Canada. It has been helpful to us in the U.S., particularly in the leverage finance market. I think having been at it now for not quite ten years but almost, our franchise has matured enough, even with less commitment to that area from the fund investment perspective going forward, we should be able to continue to do well with the financial-sponsored community, recognizing that a lot of the other banks are in exactly the same position. So we are not doing anything unusual, in the context of the U.S. market. In the Canadian market, as I said, I think it is, for the most part, less relevant, other than a couple of high-profile transactions.

Heather, you had a question?

Just a quick question on the Enron-related reserve. It's the second quarter in a row. I am wondering if we can get more color on what the reserves are for?

All I can say about it is based on our assessment and our shareholders' auditors assessment, we have adjusted the reserve to its new level. And again, that is, say, this based on facts we have. That's about all I can say about it. I really can't say anything more.

Are they specifically legal reserves or is there --?

I really can't say anything more than what I said. That's what we think right at this point in time when we look at our activities, relating to Enron and what we believe we could need related to those activities, because we have made those provisions. Michael?

Of all the irregular (ph) items that you had this year, the largest one I guess you had was the tax recoveries in the third quarter. I'm wondering, should we be viewing the impact of these recoveries on your reported bottom line, as almost an insurmountable challenge to getting a number in 2004 to, at least on a reported basis, would exceed the '03 level?

I think that's a pretty good guess, Michael. I don't think in my lifetime we will get another recovery close to that. And I can't imagine that there is any -- not that we are going to run a low-risk business, that we are going to be taking chances that would otherwise recover that income. I think that's the answer. Quentin? Are you?

A similar question that was posed on the wealth management to Gerry or Tom about leverage. David, if you could give some sense, similarly, what restructuring activity you have undertaken on the U.S. side, given Canada has been such a powerful earner through 2003? If markets are up 15 percent from here, how do you get the same type of drop (ph) expectations that Tom outlined for wealth? Can you outline similar leverage in World Markets to improving marketplace, greater M&A volumes, is it all really related to U.S. versus Canada?

I think in Canada, to be fair, we have done pretty well. While, clearly, equity markets, not income trust markets, but equity markets, could (ph) be stronger, and M&A markets could be stronger, our shares look pretty good. So I find it hard to say that we have weak prospects from where we are in the Canadian context. In the U.S. context, clearly we could benefit from a greater equity and M&A market, which we have not had in 2003. The leverage finance market has been pretty good. The fixed income markets generally have been pretty good. So we do have some operating leverage in those markets. I wouldn't care to quantify it. But it's more material than it would be, relatively speaking, in Canada. In terms of the differential.

For those of you on the phone, we are getting some sort of alarm here, which we asked them to shut off right about this time. (multiple speakers) So maybe if there are other questions, you would be good enough to phone them in or whatever. There you go. Thank you, all, for your time and attention.