Canadian Imperial Bank of Commerce (CM) 2004 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to CIBC's first quarter analyst 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.

Thank you very much, and good afternoon everybody. Our conference call today is being broadcast from Winnipeg where we have just had our annual meeting. If you're interested, that will be archived on our site later today. The call is being audio broadcast live on CIBC.com. We know you all have a lot on to do today and we have some travel arrangements, so we're going to try and keep the call to one hour. At this point I'll just remind to you please take note of the forward-looking statement in our slide presentation which I will summerize 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. Also on hand to answer questions are Gerry McCaughey and Jill Denham. Thank you for your attention, I'll turn it over to John Hunkin.

Good afternoon. I plan to comment on three things this afternoon before turning over to Tom and Wayne. First, the initiatives underway at CIBC to further reduce risk. Second, the strength of our first quarter results, and third, the strategic direction of CIBC World Markets. The center piece of our strategic commitments over the past number of years has been to reduce risk in all forms. We have successfully reduced credit risk in a very material way. We are operating market risk at historic lows in are systematically reducing operational risk. Over the past several months work has been underway to reduce reputation and legal risk as well. In my remarks at the annual meeting this morning I said 2003 should go down in CIBC's 137 year history as one of our best ever. As our results for fiscal 2003 and the first quarter of 2004 make clear we are executing on our strategy and our strategy is working. But 2003 won't go down as our best year because we stumbled in the critical areas of trust and reputation. Although CIBC has been recognized for several third parties for its work on governance and sustainability, it is clear in the new world that we have to take our processes to an even higher level. CIBC has a broad range of initiatives already underway to further strengthen controls and governance and on Monday we announced that we are investing 50 million to implement our strategies more aggressively. We have already implemented what we regard as the most comprehensive legal and reputation risk management program in North America. And we have launched a comprehensive initiative to catalog and test all material, financial and nonfinancial controls across CIBC. Our board of directors continues to pursue the best practice governance standards focusing this year on improving the efficiency and effectiveness of information reporting and also on continuing the process of board renewal. Under the overall leadership of Ron LaLonde we will have put in place a consistent and standardized process to track the progress of all governance and control initiatives. These initiatives receive regular attention from our senior executive team and from the board of directors. Second, regarding the first quarter results. CIBC delivered another quarter of strong results. We reported fully diluted earnings per share of $1.54, which is better than expected and demonstrates the progress we are making on our key strategies. Our reported return on equity was 21%. Dividends per common share were 50 cents, up 22% from last quarter, and we repurchased 2 million shares. This is a quick recap of our progress on our four strategic initiatives. On risk reduction, our exposure to large corporate credit and merchant banking continue to fall. Our tier 1 capital ratio finished the quarter at 11.1%. Productivity improvements, a number of expense initiatives are underway throughout CIBC. Our intention is to shift the cost culture at CIBC without affecting our brand strength or our governance initiatives. Our cost initiatives are broad-based and include reviewing compensation and benefits, reviewing organizational design, implementing a revised global expense policy covering 60 categories of spending. It all adds up, and the result this quarter is lower overall expenses and a lower cost ratio. In terms of business mix, we continue the steady march towards shifting our business mix. We have increased again this quarter the economic capital supporting our retail businesses to 65%. Our target is 70. On core growth, all of our core businesses reported strong results this quarter. Our combined retail businesses generated over 400 million in earnings, up 30% from the fourth quarter. And World Markets earnings of 194 million are up 54% from last quarter. This is the good segue to my final point. The world market strategy. With the management change announced earlier this month we have been asked often what the implications are for world market, and my answer is, the world market strategy is working. In 2002 CIBC undertook to more effectively manage economic capital within World Markets, to carefully adjust the U.S. footprint and to focus carefully on building upon the strength of our Canadian franchise. First quarter earnings reflect performance strength across all of these initiatives. Under the leadership of Gerry McCaughey CIBC World Markets will continue to actively manage capital, focus on profitable growth in the U.S. and build upon the strength in Canada. I've had the opportunity to meet with several of our corporate clients recently and received very favorable feedback about the quality of the thinking and service provided by the many relationship managers within World Markets. I feel very confident about where we are today. In the first quarter, investment banking results were strong. We completed two more real estate securitization deals in the U.S. Merchant banking revenues were more favorable. The U.S. business was profitable and capital markets revenues were stronger while keeping risk in check. In conclusion, I'm very proud of the progress we have made executing on our strategy. We were very specific in 2002 about what we wanted to achieve and we are making good solid progress. We have moved forward on all fronts thanks to the talent and energy of the people who work at CIBC. Our plan in 2004 is to stay focused on these four strategic business objectives. Underpinning this work will be a strong commitment to building our brand and intensified focus on governance and a continued commitment to our people. Our stock performed very well over the past four years. I have every confidence that if we just stick to our business, we will continue to keep our shareholders happy. Now I'll turn it over to Tom.

Thank you, John. The market environment in the first quarter was better than it was in Q4 in almost all areas. Interest rates remained low, the TSX was up 8% and mutual fund net sales continue to grow. In wholesale new issue equity volumes grew from the strong Q4 levels in both Canada and the U.S. Corporate credit spreads narrowed, high-yield mutual fund inflows increased and refinancing and divestiture activity in the private equity market began to improve. The main negatives were lower M&A activity and heightened price competition in retail banking. Slide 4 of the DAX summarizes the quarter. Within the $1.54 EPS was 14 cents of increases to our Canadian tax asset, so adjusted for that EPS would have been $1.40. Earnings were driven mainly by three things. Good expense performance, although we expect project spending to ramp up through the year. Better than expected run rate loan loss performance, and better market sensitive revenues. Two items in particular hurt EPS, the most significant of which was a $50 million reserve for possible costs associated with the mutual fund market timing regulatory investigations in the U.S. The other item was 16 million of lower revenue due to deferrals mandated by new accounting rules. The lefthand side of the slide shows our main performance metrics for the quarter which were all better relative to Q4 last year. Slide 12 shows you retail markets revenue at 1.33 billion, up from 1.30 billion in Q4. Slide 14. In personal banking revenue was 497 million, down marginally from the record level in Q4. Deposit and loan balances were up 2 and 3% respectively versus Q4. However, lower spreads in both these products more than offset the growth in balances. Personal loan balances were up 14% from a year ago. Market share and deposits increased to 17.3% from 17.2% in Q4. In lines of credit share was 12.9% down from 13.1 in Q4, and in term loans it was 19%, up from 18.4 in Q4. Q2 revenue in personal banking will probably be a little lower as loan growth and RSP revenue will likely not offset seasonal declines in deposit balances and two fewer days in the quarter. Competition for retail deposits continues to escalate. For the first time in recent memory all the banks maintain their deposit pricing when the Bank of Canada cut rates on January 20th. Slide 15. Small business banking had record revenue of 143 million, driven mainly by deposit balances that were up 4% versus Q4. Loan balances were up 1% on the quarter and 10% from a year ago. Spreads were generally flat versus Q4. In Q2 we expect small business revenue to be down somewhat from Q1 with deposit balances likely declining as business owners pay their taxes. On the cost side the consolidation of our small business and personal banking management teams at the end of last year is beginning to deliver good efficiencies. Slide 16. In cards, revenues was also a record at 347 million. Balances were up 2% versus Q4 but spreads were down as expected due to the lower revolve rates we always see in Q1. Transaction revenue is up as purchase volumes were 3% higher and fee revenue was up reflecting product fee changes put in late last year. Market share of outstandings was 19.8%, down from 20% in Q4, and purchase volumes remained unchanged at 31.8%, maintaining our number 1 position in each of these categories. Extensive advertising and promotion continues throughout the premium segment including programs for our own Aventura card and the additional features on Aerogold. Aerogold continues to do well and remains by far the leading premium card in the country. Outside the premium segment direct mail from the U.S. mono lines offering 0% balance transfers appears to be escalating. The outlook is for the same or slightly higher cards revenue in Q2 which should benefit from growth in outstandings and the seasonal increase in the revolve rate more than offsetting the shorter quarter and lower purchase volumes. Slide 17. In mortgages, revenue of 122 million was down as expected, 70 million from Q4. As indicate last quarter this decrease was largely the result of a change in our transfer pricing methodology and declines in securitization and hedging revenue. The drag on this line from additional transfer pricing charges now appears in the line below, called other. Excluding the impact of the items noted above mortgage revenue was down 5 million versus Q4. Balances were down 1% and spreads were a little lower as price competition continued to increase particularly in fixed rate products. Mortgage market share was 14.7% versus 14.8 in Q4. We expect core mortgage revenue in Q2 to be flat or slightly lower as higher balances may not offset the impact of fewer days in the quarter. On slide 18, retail markets net income was 282 million, up 78 million from Q4. Revenue was 27 million higher than on Q4 as I've just reviewed and loan losses were down 22 million, mainly due to lower small business and agricultural loan losses. Expense were also down from Q4 which included higher severance cost and higher advertising and technology spending. Slide 22. Turning now to Wealth Management, revenue was 625 million up from 604 million in Q4. Slide 24, Imperial Service is the group serving the top 15% of our active banking customers. Revenue here was 188 million, about the same as in Q4. Deposit and loan balances were relatively unchanged. New mortgage business was a little slower, and the sales of investment products higher. Spreads generally were a little tighter. Funds under management were up 1.4 billion in Q1, or 2% versus Q4. We expect revenue in Q2 to be about the same as inQ1 with revenue from higher funds under management offsetting the drag of fewer days in the quarter. Slide 25. Retail brokerage revenue of 258 million was up 12 million from Q4 which included a 6 million increase to the gain on the sale earlier in the year of Oppenheimer, our U.S. brokerage business. In both full-service and discount brokerage revenue was up across almost all major categories including income from equity trades, new issues, mutual funds, and fee-based products. January was our best month ever in full service and one month into the second quarter the pace is the same as the Q1 run rate. Full-service trade volume was up 14% in the quarter and discount trade volume up 23% versus Q4. CIBC Wood Gundy continues to be the largest full-service brokerage firm in Canada with over 1400 investment advisors giving us good continuing leverage to up improving markets. Slide 26. Wealth products revenue was 119 million versus 123 million in Q4. Higher mutual fund revenue supported by increased assets under management was more than offset by lower GIC revenues. The GIC business continues to be very price competitive. Narrower spreads reduced revenues while balances remained consistent. GIC market share was 15%, down 10 basis points from Q4. The mutual fund business continued to perform well, balances were up 2.2 billion, or 6% in the quarter, driven both by the market improvement and positive net sales on the quarter. Our mutual fund market share among all providers was 8.7% up from 8.5% in Q4. Though part of the increase was due to the merging of some of the Tel private funds into our mutual fund business. Slide 27. Wealth Management net income was 92 million, up 3 million from Q4. Revenue was up 21 million from Q4 primarily due to retail brokerage. Expenses were down 4 million from Q4 which included higher marketing costs even though Q1 included a $25 million share of the reserve I mentioned at the outset. Excluding this reserve, NIAT would have been 117 million. Third and final business group is World Markets, slide 36. Revenue in World Markets was 904 million in Q1 versus 876 in Q4. Slide 38. Capital markets, revenue was 394 million, up from 337 in Q4. The equities component of capital markets revenue, which represents about 60% of the 394 number, was up 19% from Q4 while the debt component was up 14%. Within equities, our retail structured product business continues to do well as funds flow in a protected equity product remain high. This is an important and growing business for us and to date we've been able to exploit the first mover advantage we believe we have. New issue in secondary market revenue was essential flat in Canada and the U.S. while arbitrage revenue showed a modest improvement. On the debt side the structured derivative business was better in Q1because of continued low interest rates and reasonably high interest rate and currency volatility. Foreign exchange revenue was up modestly from Q4. Market share to date in equity trading increased in the U.S. from 1% to 1.2% and fell in Canada from 12.7 to 12.2. Although we're only a month into Q2 the outlook is for slightly lower revenues in equity and similar revenues in debt. Slide 39. Investment banking and credit product revenue was 366, down slightly from 372 in Q4. The U.S. represents just over two-thirds of this number with Canada about 20% and Europe 10%. U.S. revenue was higher in the quarter, primarily due to high yield and real estate finance. This is partially offset by lower revenue in structured finance which we have begun to wind down pursuant to the Enron relate settlement announced in December. In Canada Q1 revenue was down marginally from Q4, but we maintained the pace we set last year in new issue equity. Being lead or joint book-runner on 29 deals for $4 billion, more than double the second place firm. Q2 revenue in Canada will likely go down from Q1 but our Canadian M&A pipeline for Q3 and Q4 is high. The outlook for business in the U.S. is reasonably good, particularly in new issue equity and M&A. We closed the first income trust deal in the U.S. in Q1 and we have several more in the works. In M&A confidence appears to be coming back to the market. And in real estate finance our niche position, originating in selling commercial loans in a securitization vehicles, continues to strengthen and our pipeline is strong. Slide 40. Merchant banking had revenue of 14 million, as gains in other income of 101 million exceeded write-downs of 87 million. I said last quarter that merchant banking business had stabilized. We continue to feel optimistic about this portfolio despite the 87 million in write-downs in Q1. After six quarters of negative or flat markets on our fund investments leading up to Q4 last year we received net positive contributions in Q1 for the second quarter in a row. Although we may divest some of our fund commitments and investments in the coming quarters at small discounts as part of our portfolio reduction program we believe that level of markdowns on direct investments could be lower in aggregate for the rest of the year than the 87 million recorded in Q1. On the prospect for gains on sale appears brighter as well. Slide 41 shows World Markets net income of 194 million. This was well up from Q4, mainly because we had net loan loss reversals in Q1 and lower expenses, as Q4 had higher severance sublease losses due to space consolidation and the Enron related reserve. So to summarize a strong quarter driven by good performance in all three of the major earnings drivers, revenue expenses and loan losses. Thank you and over to Wayne Fox.

Thank you very much, Tom, and good afternoon. As Tom has highlighted the first quarter of 2004 saw continued overall improvement in our portfolios. Business and government loans continued to decline. Specific provisions continued to improve, capital continued to strengthen, and as I'll speak to in a moment our specific provision guidance is for lower losses in 2004. Specific provisions for the first quarter were 155 million down 33 million from last quarter excluding the 2003 held for sale transfer and $184 million improvement over the first quarter of fiscal '03. In Q1 our consumer credit provisions totaled 157 million while our business and government credit provisions totaled negative 2 million. The significant decline in business and government credit losses is consistent with our continued effort to take risk out of the corporate loan book, and is also a reflection of the strong U.S. credit capital market environment which was helpful in achieving stress bank debt repayments. My next slide provides with you a detailed recap of our annual specific provisions as a percentage of net loans and acceptances for the years 1999 to 2002 and on a quarterly basis for the last five quarters. First quarter provisions were 39 basis points of net loans and acceptances, the lowest in the last five years, with consumer loans at 62 basis points and business and government loans at a negative 1 basis point. While our consumer specific provision level falls well within our target specific provision level of 50 to 65 basis points for the total bank this result, when combined with our business and government portfolio, yields an overall ratio better than the lower end of our expected range. Q1 consumer specific provisions were consistent with Q4. Credit card provisions declined 3% quarter over quarter, including the impact of securitizations maturing. Our fiscal 2004 guidance for specific credit provisions is that we are reducing our full-year credit losses projection to between 800 and 850 million, an appreciable improvement over our fiscal '03 experience. Key factors supporting the year-over-year reduction are the contraction of our corporate credit book, the two held for sale stress credit transfers in '03 and the stronger tone of credit capital markets in general. We also anticipate some volume impact in our year-over-year credit provisions as we continue to grow our retail businesses. Currently we anticipate that approximately 70 to 80% of our fiscal '04 credit provisions will be in the consumer sector with the balance applicable to business and government loans. It is also possible that we will see further improvement in our general allowance for credit losses in fiscal '04 depending principally on the continued progress made in proactively managing the corporate credit portfolio. Our guidance in this regard remains unchanged and we expect that our level of general allowance will range between 90 and 95 basis points of risk weighted assets over the course of 2004 subject to any changes being satisfactorily reviewed with our external auditors and regulators. Currently our general allowance is 95 basis points of risk-weighted assets. The next slide indicates total net loans and acceptances after the general allowance totaled 137.7 billion at the end of the quarter, down approximately 1.3 billion from October 31st, '03. The majority of the reduction can be accounted for by a decrease in business and government loans in the first quarter which I'll speak to in a moment. Consumer loan balances are flat quarter over quarter, the result of mortgages securitized in the first quarter, offsetting natural growth in the portfolio. Residential mortgages are down 1 billion quarter over quarter and up 1.3 billion year-over-year. Adding back the securitized mortgages quarter over quarter growth was 1.4% while year-over-year growth was 9.5%. Personal loans increased by 657 million over the quarter and 1.5 billion year-over-year. Credit card outstandings increased by 300 million in the quarter to 9.4 billion as of January 31 and were up 19.3% year-over-year due to a combination of growth and maturing securitizations. This slide displays that our consumer credit assets represented 74% of total net loans and acceptances as of January 31 as compared to 73% at the end of the last quarter. Year-over-year we have shifted the percentage split of our loans and acceptances by five full points from 6931 to 7426 consumer versus business, continuing to position our credit capital much more towards our retail businesses going forward. This ongoing shift in our portfolio is 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. Turning to our business and government loans. This next slide shows the continued reduction in the portfolio to 36.6 billion, down 1.2 billion since October 31st, '03, and down 19.9% year-over-year. At the same time our credit protection increased from 4.2% to 5% of our outstanding total business and government loan book as of the end of the quarter. The next slide updates you on our progress in reducing the held for sale portfolio and indicates that over one-third of that portfolio has been divested and closed by the first quarter. In addition, since January 31st we have either closed or have on hand sales contracts for over 20% of the $1.8 billion portfolio. And we also confirm that we have to date achieved aggregate prices which are better than the initial transfer values and which absorbed any revaluation on realized losses. Sector diversification of the portfolio continues to be supplemented by our credit protection activities. This next slide recaps the amount of net credit protection that we have purchased on our outstanding business and government loans as of January 31st. Of the 1.8 billion in on balance sheet credit protection, the largest hedged industrial concentrations were business services at 330 million, oil and gas at 296 million, and manufacturing capital at 278 million. Credit portfolio management continues to concurrently manage down the non-core corporate loan book and this quarter's activities included accrual book loan sales and purchases of credit protection providing 63 million of risk-weighted asset relief at a cost of less than 1 cent per share. Our business and government portfolio continues to be reasonably diversified from an industry perspective as evidenced by the breakdown shown on the current slide. We continue to view corporate credit diversification as an important objective and are continuing to place emphasis on active loan portfolio management to groom the portfolio to improve our returns. Moving to new formations at 171 million, business and government net new formations decreased 4 million quarter over quarter. From an industry perspective, the largest levels of new corporate credit classifications were from the utility sector at 38% followed by the manufacturing sector at 31%. While on a geographic basis credit classifications outside of North America represented the largest levels at 39%. Now let's look at the impaired loan books. Our gross impaired loans shown on this slide continued to reduce during the first quarter reducing by 108 million to below 1.3 billion and a year-over-year reduction of over 1 billion. The three largest new growth impaired credits recorded in the first quarter were to a European utilities counter party at 55 million, a U.S. capital goods manufacturing counter party at 39 million, and a U.S. transportation counter party at 14 million. As of January 31st, net impaired loans were 417 million, excluding general allowance, down 104 million from October 31st and down 748 million year-over-year. As a percentage of total loans and acceptances net impaired loans improved to 30 basis points at the end of Q1 as compared to 37 basis points as of Q4 '03 and materially better than the 82 basis points as of January 31, '03. Turning to the next slide businesses and government net impaired loans improved for the fifth consecutive quarter reducing by 108 million in Q1 and reducing by 774 million year-over-year. Business and government net impaired loans before general allowances at January 31, represented 117 basis points of total business and government loans, a 25 basis point improvement over Q4 of last year and 146 basis point improvement year-over-year. Our consumer credit net impaired loans shown on this next slide increased by 5 million to negative 12 million in the first quarter with credit cards decreasing 10 million and with other consumer credit portfolios combining for a $15 million increase. Turning to market risk, this graph displays Q1 daily trading revenue against the value at risk in our trading portfolios. On no occasions did losses exceed the value at risk and 97% of trading days provided us with positive revenue. This represent continued strong performance as customer activity generate consistently positive revenues without our having to assume incremental risk. This next slide which shows the very substantial reduction in our risk and trading books over the last five years. Value at risk in our trading books remained at low levels during Q1 averaging under $7 million, significantly below historically levels and consistent with our goal of containing revenue volatility. This next slide shows the continuing stability in the bank's structural interest rate risk consistent with our strategy of retaining limited directional positions in the asset liability mismatch. In combination the past few charts indicate the very controlled and modest market risk profile we have maintained during the recent past and demonstrate the extent of the risk reduction we have undertaken in the past few years. As we continue to make progress against our key business strategies for sustainable long-term growth, including risk reduction, our capital position strengthens. We posted strong levels of internally generated capital throughout 2003 and continue to do so in 2004, even after factoring in shares repurchased in the quarter. My final slide displays that the risk-weighted assets have declined by 29.2 billion since the end of 1998. Over this same period our tier 1 ratio was climbed from 7.7% to 11.1% at the end of Q1. Since 1998 wholesale risk-weighted assets have declined by $49 billion, of which 34 billion, or 69%, is related to the reduction in the wholesale credit portfolio. During the same time period retail risk weighted assets have increased by approximately 19 billion primarily due to the strong growth in mortgages, credit cards, and personal loans. In Q1 risk-weighted asset were flat to 2003 year end levels while wholesale risk weighted assets did decline in the quarter this was offset by retail growth. And I'll end it there and turn it back to you, Kathy.

Or to John.

We're open for questions.

Thank you, Mr. Hunkin. We will now take questions from the telephone lines. If you have a question please press star 1 on your telephone keypad. If you are using a speakerphone please lift your handset and then press star 1. If at any time you wish to cancel your question please press the pound sign. Please press star 1 at this time if you have a question. There will be a brief pause while participants register for questions. Thank you for your patience. The first question is from Jim from Credit Suisse First Boston. Please go ahead.

Good afternoon. I got three questions, please. First on the merchant banking portfolio at 2.1 billion, have we seen a majority of the restructurings in terms of bringing this portfolio size down complete in the context of, Tom, you had mentioned that the losses that were incurred this quarter are exceptional, will decline going forward, but I'm assuming the gains that were incurred perhaps could be assumed as a normal run rate. Second question, one of the banks earlier this morning highlighted an accounting change in the context of mortgage loan prepayment fees no longer being amortized and were brought back into income. Did that occur here in the quarter for CIBC and to what extent was the revenue impact? The third question relates to the settlement via the Enron and particularly regarding the restrictions on the business activities in the U.S. Tom, you touched upon the structured finance activities. Are there any other businesses that are being effectively shut down or significantly restricted upon and what's the impact, perhaps, from a revenue perspective from 2003 going to 2004? Thanks very much.

Got a full slate of questions. Let me do my best to tackle them in order. On merchant banking, I'm not quite sure what you're trying to get at, but let me tackle a couple of the things you raised. The size has come down from 3 billion to about 2.1 billion. We've said all along a good chunk of that is due to write-downs in F X. We've made some progress, divesting direct investments. Most of the focus in the next two to three-quarters, as I said in my comments, will be to divest funded and unfunded commitments to funds. Okay? And we think we can do that at reasonable prices but we're not going to stretch and accept distressed prices, so that is where the bulk of the remaining reductions to that portfolio should come. As far as gains go, I mean, I was, in an effort to be helpful to people as optimistic as we have been, I would say in two-and-a-half years in saying, and I appreciate we're perhaps going out on a limb a bit here and saying that the 87 million in write-downs this quarter, we think we've got a fair shot at doing less than that in some for the last three-quarters of the year, and I appreciate in saying that, that's a challenge we're going to have to hopefully live up to, but that's to give you some guidance on how we feel about how that market has bottomed out. In terms of gains, I'm not going to give you specific guidance in terms of how we might divest. We've got unrealized gains I think of over 700 million which has crept up over the last couple of quarters. So we're certainly well positioned in that area. Second question you asked was accounting changes in mortgage prepayments. We have not moved to book all of the prepayment charges. We had been up until the last, well for the last couple of years booking the percentage of charges that align with the percentage of dollars of mortgages that were leaving CIBC as they prepaid, and that was about 50%. So up until last year we had been amortizing 50% and booking 50%. We've raised that to book 65% as opposed to the 50 we were booking or that 100 that it appears at least some of the other banks are doing. Not material dollars, but not 100%. Enron settlement, there are no more businesses apart from the three that we announced on December 22nd that we are exiting. The most important business, to refresh your memory there, was the U.S., European, and Australian conduit business where we are in discussions with the various regulators on the plan to exit. No material difference in revenue and NIAT drag. I said on December 22nd NIAT drag of about 10 cents a share. It might be a little higher than that not 15 cents, but 11, 12, and there's a bunch of assumptions in there. So that essentially stands as I reported on December 22nd.

Tom, that was very helpful.

Thanks very much.

Thank you. We will now take another question from Mr. Quentin Broad from CIBC World Markets. Please go ahead.

Good afternoon. Two questions if I could. First on the credit side. Wayne, just to your comment about being able to sell these loans at levels above what they were transferred in at, and that's been offsetting any diminution in value for the loans remaining. That would sound like you're being able to sell loans that are, perhaps, a little better than would you're retaining, which would, I guess, intuitively make sense, but just are we now getting into the loans that are going to be a little bit more challenging to get rid of given either their size, their structure? Could you give us any sense of what's in there? Then I'll come back to my second question.

Thanks, Quentin, and be happy to. As you may recall, when we originally selected these assets for the held for sale portfolios they were put in there on the basis of their identifiable prices and perspective liquidity and marked to market accordingly. So we had some confidence at the onset that we would be able to dispose of these assets inside of the requisite 12 months as the accounting treatment calls for. As you know we're largely complete the exercise in the held for sale one account and we were taking a more measured pace, if you will, on held for sale two, largely because of the rapidly improving credit environment. I think you would acknowledge quarter over quarter there's been a material improvement in credit conditions. In recent weeks, and I think I tried to refer that in my remarks, that we have now picked up the pace. We do not see any particular problematic assets and we are, quote, in the money in an accounting sense, i.e. if you were to mark to market this portfolio today we would have a recovery at the end of the disposition period.

Excellent, thanks. Just to John, I guess. John, you talked about execution and sticking to your business. And you've also, on numerous occasions, talked about having a high, I think you called it a high-class problem with excess capital with your tier 1 where it is, your mark to market gains available of 860 million and negative net impaireds of 680 million, your lower loans and acceptances and your lower market risks what does one do given you're going to stick to your business? And I assume that means there's no major acquisition trail you're going to go on, means that capital and how aggressive you might be on your buyback and the dividend action that you've taken with the 40 to 50 that you said you'd stay at the 40% level. Or close to the bottom.

Right. First of all, on the share buyback, we have authority to do a 5% share buyback this year and we probably did in the first quarter around 2.1 million and so we have some way to go on the share buyback during the course of the year. On the dividend, the dividend payout for this quarter was about 30%, so it was below the targeted range. We would look at it on the grounds that this is the first quarter of the year and so we will obviously be reviewing the dividend payout as we move through the year. And beyond that at this point in time we don't have any specific plans. We've said all along that first of all we would like to use the excess capital to grow the business. If we can't find ways either internally or externally to do that, we'll have to consider other ways to get the money back to shareholders. I will say, however, that given the environment we live in that clearly we are going to run our capital levels at this point in time higher than we might otherwise do.

Thanks, John.

Thank you. The following question is from Ian de Verteuil from BMO Nesbitt Burns. Please go ahead.

congratulation, guys, on a great quarter. Must be very heartening to see this after a tough few months here. So congratulation. Three questions. First of all, in the narrative there's a comment on the possible costs in exiting some of your square footage in New York. I guess, Tom, the note says that it could be up to $10 million. Can you explain to us how that would work through P&L and sort of timing? Second question relates to a World Markets outstanding results on mix ratio. Generally, if I took out the charge, it looks as if your expenses were sort of 550 million. Is that sustainable given what probably will be a slight uptick in revenues from here? Why don't we just leave it at those two. Quentin got to my third question.

Okay, Ian, on the first, the 50 to 70 million Canadian is a charge that we can only book when we move in, so that is likely to be a Q1 event next fiscal year, it could be a Q4 event. Odds are probably 75/25 Q1, so a one-time hit Q1 next year in all likelihood. The World Markets mix performance, the absolute cost numbers reflect the reductions in staffing that we've made throughout last year and the relative absence of severance cost in Q1. I think the mix ratio in Q1 there was about 66%. When you look at what it was in '03 it's 70, and certainly '02 was way higher than that. I think 65, 66 is certainly achievable. Obviously we had strong revenue in World Markets in Q1 so you'll have make a judgment on sustainability and growth predictions there, but I think in the mid-60s for World Markets is certainly achievable. We feel very comfortable with the incentive comp we accrued there. In otherwards I know we haven't been stingy on that accrual. It's very formula driven, so there's not a lot of judgment there. The short answer is yes, if you're reasonably optimistic on the market for revenue, that that's a number that we think we can certainly aspire to when we think probably achieve.

Thank you.

Thank you. The following question is from Michael Goldberg from Desjardins Securities. Please go ahead.

Thanks very much. Have a few questions, number of questions. Let me start with how much was the stock appreciation rate expense in the first quarter? Second, was the 50 million reserve that you took in the 216 million other non interest expense line? And if so, why was that line down so much from prior periods and is that amount sustainable? Turning to slide 52 of Tom's presentation, what other big items besides ACG 13 account for the significant decline in the other other category there to 51 million dollars, and finally, the Spitzer investigation indicates that there could be further indictments of either past or current CIBC personnel. What's your sense as to whether these could be people that are more senior than Mr. Flynn was and what impact is this actually having on morale in the company? Thank you.

Wow, that's -- let me do my best here, Michael. SARs expense. Let me remind you we fully hedge our SARs. SARs stands for stock appreciation rights, and up until the year 2000 people had the option of exercising up to 50% of their stock options and receive cash instead of equity. As of, I think it was Q1 last year, we fully hedged that. We book, however, the SAR cost in compensation, so that means this quarter incentive comp to revenue ratios were higher, but we offset it in the other line with the hedge revenue we get. It was about 20 to 23 million. We weren't perfectly hedged but in that vicinity. Second question was the $50 million reserve and where does that sit. Michael, I'm going to have to come back to you on that. I could guess, but let me just in the interest of getting some other people in here move to your third question. Slide 52. You're right, the majority of that dropped from 100 million on the other line to the 51 million was ACG 13. There were a number of other ACG 17, for example, where we now have to mark to market the embedded options on equity link notes. You can never be perfectly dealt a hedged on those and indeed this quarter we weren't. That hurt us by about 10 million. The mark to market on the sellers swap in the mortgage backs went negative this quarter by nine, generally it's positive. There was a reclass in one other line for about 16 million. Finally, the real estate finance book, well this is linked to ACG 13. ACG 13 in total was about 12 of that and the other items add up to the bulk of that difference. I can follow up with you in more detail on that, but that's largely the ACG 13 and 17. I don't know, John, whether you want to comment on the last.

Michael, could you just repeat the last question?

Sure. The Spitzer investigation indicates that there could be further indictments of either past or current CIBC personnel and I guess there's two things about this. What's your sense as to whether these could be people more senior than Mr. Flynn and secondly, what impact is this ongoing stuff having on morale in the bank?

I just couldn't speculate in terms of any further indictments. I have no idea. With regard to morale, obviously these sorts of things are not helpful to morale, but I have visited certainly New York relatively recently, and I would say that particularly in the equity area that I'd say all things considered, morale is very good, and most importantly when one looks at how is performance, I'd say that they continue to do well. So, Michael, these aren't really fun times, but all things considered, I think morale's good.

Okay. Can I just come back, though, on the expenses. Because when I take out your incentive bonuses and the commissions and look at the expenses, excluding those items, it looks like your expenses are really down very significantly sequentially, and the big component there seems to be that other-other category. The real question is how sustainable is the level of your non interest expenses, excluding these items.

Michael, as I said, on the summary slide, we don't think the tech and advertising numbers that we spent in Q1 are representative of the run rate. I said project spend would probably ramp up about 30 million relative to what we did in Q1. If you're trying to normalize the rest of the year add 30 million for project expenditures, probably another 10 million for advertising, but I think the bulk of that decline, in fact is some of these efficiencies that we've kicked in. We're going to have to move on but I did get the answer to your third question a moment ago. The 50 million in the reserve for costs as it relates to mutual fund is, in fact, in that 216. But I'd remind you that Q4 also had the second part of the Enron loss in there. So that's the main reason. The main reason the 262 is, or that line is down in Q4 is some other litigation expenses that we had in Q4 are not there in Q1. That is the biggest single item as it relates to Q1. Some other outside services in the cards business were lower as well. Thank you, Michael.

Thanks a lot.

Thank you. The following question is from Jamie Keating from RBC Capital Markets. Please go ahead.

Thanks again. For Tom, I think. Question relates to NIM in the retail area and I guess we've kind of danced around this a bit before. Curious if you would hazard a guess as to what the comprehensive NIM is doing. We get a NIM estimate, I think, from page roughly 6 in your supplemental, we can kind of calculate something from there but I believe that still excludes the deposits from Wealth Management. Is there any way to get back at that, Tom, or is that not available?

Jamie, I don't know how helpful this is. I think we're the only bank that tries to do this but on slide 51 of my presentation, I didn't speak to that, and tell me if you've thought about this and it's not helpful but we try and exclude all the non interest earnings assets and even take out the wholesale assets and add back securitizations then take out finally some unusuals, and that, to us, is the number we look at. To the extent we look at top of the house NIM's at all. In fact, we look at product by product NIM's, but bottom line is in Q1 NIMs went down 2 points from 316 to 314, if you want to look at it top of the house retail. I'm not sure if people may fully appreciate, because we've had relative strength in our NIM's, as the other banks have over the last few quarters shown weakness. And I think one of the differences is the mix issue of cards and personal loans, both areas of which we've had pretty good growth relative to the other banks. Those are both pretty high NIM businesses. And even though we, like everyone, I imagine, has had weakness on the mortgage side and the personal deposit side, that has been more than offset by a continuing strength in personal loans and cards, which have had higher growth rates, and, hence, the mix helps us there. Having said that, what's the outlook for the rest of the year? Probably going to get weaker just based on the competition we're seeing in mortgages and deposits.

Perfect. Thanks, Tom. That's what I wanted.

Thank you. The next question is from Quentin Broad from CIBC World Markets. Please go ahead.

Just a followup. I think, Tom, you talked about the U.S. or maybe it was John, breaking or being profitable this quarter. Is it possible to get a breakout much like World Bank does, U.S. Canada to just continue to give the street a sense of how the U.S. platform is migrating in terms of profitability? Secondly, you mention a lot of market share numbers. Just wondering whether that can be embedded into your slide presentation rather than trying to record these so we can see the continuity of your shares.

Yeah, okay. Certainly on the second one we'll do that. We've done it verbally, and I guess people have had to pick it up in the transcripts, so we will commit to put those in the material going forward. There's some lags in some quarters. You don't get the latest numbers so there will have to be some footnotes added to that. Yeah, on the first one, let us think about that, Quentin, we think that we provide as good, if not better, disclosure than all the banks here but to the extent geographic segmentation might be helpful, without hurting our competitive position, we'll to have think about that. I don't have a better reaction than that right now.

And the absolute levels this quarter, other than just profitable?

Yeah, we were profitable this quarter in the U.S. We were not EVA positive.

Thank you.

Thank you. This concludes our question-and-answer session. I would now like to turn the meeting back over to Mr. Hunkin.

I just want to say thank you very much for tuning in and good afternoon.

The conference has now ended. Please disconnect your lines at this time. Thank you for your participation, and have a nice day.