Canadian Imperial Bank of Commerce (CM) 2004 Q3 法說會逐字稿

Welcome to CIBC's third-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. Good afternoon, and welcome everybody. I'd just like to remind folks to take note of our forward-looking statement in our slide presentation, which I'll 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 reports.

Turning to the presentations, here to speak to you today are John Hunkin, Chief Executive Officer; Tom Woods, CFO; and Wayne Fox, Vice Chairman, Treasury Balance Sheet and Risk Management. Also on hand to respond to questions are Gerry McCaughey, head of World Markets, Sonia Baxendale, head of Wealth Management; and Jill Denham, head of Retail Markets. When we get to questions, I would ask those of you on the phones to please identify yourselves. Thank you for your attention. And with that, I'll turn it over to John Hunkin.

Thanks, Kathy. Good afternoon, everyone. I am pleased to report another solid quarter of results at CIBC and equally importantly we have achieved several of our medium-term strategic goals over a year in advance. Today CIBC reported net income of $620 million for the quarter ended July 31, equal to $1.60 per share. This is up from $531 million or $1.33 per share last quarter. Our return on equity for the quarter was 21.3 percent, up from 18.4 last quarter.

Adjusting for a reversal in our general provision in the current quarter and a large tax recovery of $475 million in the third quarter of 2003, net income was up $275 million from the prior period. Our strong results reflect continued progress against our four key strategies. Most notably, we were successful in achieving our objective of a 70/30 retail to wholesale business mix and expect we will have achieved our goal to reduce our merchant banking portfolio by one-third by year end in advance of our end of 2005 target date.

Our balance sheet remains in great shape. Our Tier 1 capital ratio remains high at 10.9 percent despite continued execution on our share repurchase program. During the quarter we repurchased approximately 5.4 million shares. And today we have announced our intention to amend the terms of our normal course issuer bid to increase the number of shares to be repurchased from 18 million of which we have repurchased almost 14 million so far to 32 million.

I will cover the remaining highlights of the quarter under the headings of our four key business strategies. First, risk reduction. We continue to actively reduce our large corporate credit risk. Gross impaired loans fell for the sixth consecutive quarter, and we continue to reduce our held-for-sale portfolio at quarter-end. Only 7 percent remain to be sold of the original 2.1 billion of corporate loans. We took advantage of opportunities to reduce our merchant banking exposure during the quarter and have reached agreements to sell further holdings to get us to our medium-term target. Wayne Fox will have more to say on risk later on.

Second, productivity improvements. We continue to execute on initiatives to reduce our costs without compromising CIBC's brand strengths or our important governance and technology and investments. This quarter our NIX ratio was down almost a full percentage point, while we continued to invest in our key strategic initiatives. We opened three new flagship branches during the quarter and successfully launched two new checking accounts.

Third is increasing capital investment in our retail businesses. We achieved our medium-term objective of increasing the percentage of economic capital dedicated to our retail businesses to 70 percent. Two years ago when we set this goal we were at 50 percent. We are now at 71 percent, mainly because we have scaled back our corporate loan and merchant banking portfolios, but also because we have grown our various retail loan businesses.

Finally, our core businesses continue to turn out solid earnings and are well-positioned for future growth. In particular, our retail markets business rebounded strongly in the quarter despite continued pressures on earnings. We had strong volume growth in both loans and deposits and higher fee income in our Cards business. We saw record sales for mortgages in June, only to be topped once again in July as the housing market remained strong.

Finally, we made two announcements over the course of the past week on which I should comment. We sold our 98 percent investment in Juniper Financial, the niche U.S. credit card company at a gain a $46 million after-tax. We also disclosed details around our investment in the restructured Air Canada organization. We are pleased with how our negotiations turned out and look forward to continuing our ongoing business relationship with Air Canada and Aeroplan. We expect to book a gain on this of $34 million dollars after-tax in the fourth quarter.

In conclusion, the economic outlook for the balance of the year is generally positive. We expect moderate interest rate increases, which could provide some margin relief in retail banking. While capital market's activity continues to be slower than in the first half of the year, our franchise is as strong as ever. And let me reinforce one thing. CIBC's risk profile has been significantly reduced from what it was even two years ago. This was one of our major goals, and we have delivered on it ahead of schedule. I'll now let Tom discuss the quarter's financial results in more detail.

Thanks, John. Good afternoon, everybody. Slide 4 summarizes on the left-hand side many of the financial highlights John just reviewed. On the right-hand side are the main drivers to help you get behind the numbers this quarter. First, in addition to the 50 million general loan loss provision release indicated at the top, world markets had net recoveries again this quarter. Second, merchant banking had strong revenue, due mainly to the global payments gain. And third, we had good growth in retail. These were offset in part by lower volumes in the capital markets businesses. Slide 12, retail markets revenue was 1.331 billion, up from 1.246 billion in Q2.

Slight 14, in personal banking revenue was a record 527 million as deposit balances were up 6 percent and loans 3 percent versus Q2. The strong growth in balances was partly offset by continuing tighter spreads on both loans and deposits. Competition for deposits continues to be intense. It remains to be seen whether competitive pressures will ease if rates increase. There were no Bank of Canada rate changes in the quarter, but when the Fed raised rates a quarter point on June 30th, there were no upward adjustments to banks' U.S. dollar deposit account rates in Canada. The outlook for personal banking in Q4 is about the same as it was in Q3.

Slide 15, small business banking. Revenue was also a record 145 million as deposit balances showed strong growth. The outlook in Q4 is also about the same as in Q3. Slide 16, cards. Revenue was 347 million, up from 333 in Q2 on higher purchase volumes, fee revenue and balances. This was partially offset by the effect a lower revolve rate had on spreads. The U.S. monolines continue to offer aggressive introductory pricing on balance transfers, but our position remains strong and is helped by the enhanced individualized pricing technology we have developed.

Aerogold continues to be the dominate card in the premium sector as net new cards, purchase volumes and outstandings were all up for Aerogold versus Q2. The outlook for cards next quarter is somewhat better than in Q3, even before the approximate 34 million after-tax gain on the settlement of Air Canada claim announcement on Monday that we expect to book in Q4.

Slide 17, mortgages. Revenue of 148 million was down marginally from Q2 because of narrower spreads and higher sales commissions we transferred to our sales force. As new business written in the quarter was up considerably from Q2 and also from Q3 a year ago. After several quarters of escalating competition there were some signs that discounting may begin to stabilize. The Q4 mortgage outlook is about the same as in Q3.

Finally, slide 18, retail markets. NIAT you can see was 253 million, up 48 million from Q2. Revenue was up 85 million, as I've just reviewed. Loan losses were up 3 million, and costs were up 10 million. Second business group, slide 24, wealth management. Revenue, 611 million versus 653 in Q2. Slide 26, Imperial Service is the group serving the top 15 percent of our branch banking customers. Revenue was 195 million, up from 187 in Q2. About 60 percent of revenue here comes from the deposit and loan business, where the positive impact of growth and balances more than offset lower spreads.

The remaining revenue comes from commissions from the product groups, which were higher this quarter. Funds managed per financial advisor. Our most important strategic metric in Imperial Service was up almost 10 percent in the last 12 months. The outlook for Imperial Service in Q4 is up somewhat from Q3. Slide 27, retail brokerage revenue of 233 million was well down from the very strong Q2, due almost entirely to lower trading volumes, down 24 percent on the quarter and much lower new issue activity.

We continue to grow our fee-based business here in retail brokerage, which has helped dampen the volatility of what was once a business very much transaction-driven. One month into Q4 equity volumes continue to be slow, but September and October are normally more active months. Finally, slide 28, wealth management NIAT, 106 million, up 7 million from Q2 despite the fact that revenue was 42 million lower. Expenses were down 54 million versus Q2 due to lower revenue-related compensation and lower litigation reserves.

The third business group, slide 38, world markets revenue trend you can see here was 877 million in Q3 versus 1.053 billion in Q2. Slide 40, capital markets. Revenue was 321 million versus 421 in Q2. The equities component of capital markets revenue, which represents about 60 percent of the 321 number, was down about a third from Q2. Equities down about a third. Debt component was down marginally. Within equities, new issue and secondary market activity was down considerably in Canada in Q3, and revenue in the U.S. was about the same as it was in Q2.

In equity structured products, which for us continues to be primarily client rather than proprietary driven, both client and proprietary were down versus a very strong Q2. Lower price and volatility levels in Q3 meant proprietary opportunities were harder to come by. And the equity-linked note business, which is a big part of our client business in Canada, was much lower because of both seasonality and markets.

Our debt business was down modestly from Q2 because of a small drop-off in structuring activity for corporate clients. The outlook for Q4 is more positive for equities and about the same for debt, as we saw in Q3. Slide 41, investment banking and credit products, revenue was 326 million versus 441 in Q2. The U.S. represents about one-half of this number. U.S. revenue was a little lower on the quarter, primarily due to slower high-yield and credit origination, as well as real estate finance, which had a very strong Q2. This was partially offset by stronger new issue equity and M&A business.

In Canada, Q3 revenue was down from Q2 as the pace of new issue equity slowed significantly. In M&A, however, we had a good quarter, well up from Q2. Europe investment banking and credit revenue was down considerably from Q2, which had high gains on loan sales and strong M&A activity. The U.S. outlook is positive for M&A, but on the new issue side will be driven by how receptive the market will be for our IDS product. In Canada M&A pipeline looks good, but the new issue equity business will probably continue at Q3 levels. Europe will likely be lower because loan sale gains will be reduced.

Slide 42, merchant banking. Revenue of 108 million as gains and other income of 144 million exceeded write-downs of 36 million. The previously announced sale of part of our holding in Global Payments accounted for 88 million of the revenue this quarter. As we've said for the previous two quarters, we continue to feel good about the merchant banking outlook. And in Q3 write-downs were the lowest they have been since the year 2000. In Q4 we expect to book the previously announced 52 million after-tax gain on the sale of our shares in Seisint, as well as a small gain on sale of some of our fund investments.

Finally, slide 43, world markets NIAT, 257 million, about the same as Q2. Revenue was down 176 million. Costs were down 70 million due primarily to lower incentive compensation, and loan loss recoveries were better by 65 million. My last slide, 57, summarizes Q3 expenses, which were down 106 million from Q2. Revenue related compensation accounted for essentially all of this decline with other expense category changes offsetting one another.

As a result, our efficiency ratio, as John said, was almost a point lower in the quarter versus Q2 and versus Q3 a year ago. At 67.2 or on a TEB basis, 66.3. The ratio in Q4, as it is every quarter, will be as much revenue-driven as expense-driven. Our various cost containment initiatives continue, and although Q4 project spending in sublease loss costs will be somewhat higher than in Q3, we remain committed to having our efficiency ratio trend down over the next several quarters. I'll now hand it over to Wayne Fox.

Thank you, Tom. Good afternoon, everyone. As Tom has highlighted, the third quarter of 2004 saw continued overall improvement in our portfolios. Total gross impaired loans and specific provisions both continued to improve year-over-year. Held-for-sale portfolio sales are substantially complete, and as a result our fiscal '04 guidance for specific credit provisions is being reduced to a full-year credit-loss projection of between 750 and 800 million.

We continue to anticipate that approximately 75 to 85 percent of our fiscal '04 credit provision will be in the consumer sector with the balance applicable to business and government loans, which is consistent with our strategy. During the quarter we reduced our general allowance for credit losses by 50 million, principally the result of the continued progress made in proactively managing the corporate credit portfolio.

Our guidance in this regard is also being updated. We expect our level of general allowance will range between 85 to 90 basis points of risk-weighted assets, and as always, subject to any reduction being reviewed with OSV (ph) and our external auditors. Currently our general allowance is 89.5 basis points of risk-weighted assets. Specific provisions for the third quarter were 141 million, down 66 million from last quarter and 149 million improvement year-over-year, excluding that quarter's held-for-sale provision.

In Q3 our consumer credit provisions totaled 169 million, down 5 million over Q2 and up 43 million over the same quarter last year. The year-over-year increase is the result of portfolio growth combined with increasing personal bankruptcies and delinquencies in the personal loans portfolio. Our business and government credit provisions totaled negative 28 million, a decrease of 61 million over last quarter and a reduction of 192 million year-over-year.

This next slide provides you with 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 seven quarters. Third quarter provisions were 35 basis points of net loans and acceptances, somewhat below our long-term target range of 50 to 65 basis points.

The consumer portfolio loss rate trended down in the quarter to 63 basis points, primarily related to the personal loans portfolio. The business and government loan portfolio continued to perform significantly better than historically at negative 20 basis points, the result of managed reductions in our corporate book, coupled with continued positive economic performance and financial market performance. The Q3 consumer specific provisions reduced from Q2 by 5 million, with credit card provisions increasing 4 million and personnel loans decreasing 9 million, reflecting personal loans trending to more normal levels than in recent past quarters. Going forward, we expect recent actions taken to further manage the risk level of the consumer portfolio, leading to more stable loss rates.

This next slide indicates total net loans and acceptances after the general allowance totaled 143 billion at the quarter end, up approximately 2.4 billion from April 30th. The majority of the increase can be accounted for by an increase in consumer loans in the third quarter. Residential mortgages are up 1.3 billion quarter over quarter, and up 1.1 billion year over year. Adding back the securitized mortgages on a managed basis, quarter-over-quarter growth was 2.2 percent, while year-over-year growth was 9.5 percent.

Personal loans increased by 0.7 billion over the quarter and 3.2 billion year-over-year, for a 16 percent increase. Credit card outstandings remained substantially flat quarter-over-quarter at 9.5 billion, and were up 10.1 percent year-over-year, due to a combination of growth and maturing securitizations. Business and government loans increased marginally by 452 million in the quarter, while year-over-year loans have been reduced by 9.3 percent.

Year-over-year, we have shifted the percentage split of our loans and acceptances by 3 full percentage points from 71/29 to 74/26, consumer versus business, consistent with our strategy to position our economic capital much more towards our retail businesses. This was noted by John in his earlier remarks. We have reached our medium-term target. Our business and government portfolio continues to be reasonably diversified from an industry perspective, as evidenced by the breakdown shown on this 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 and improve returns.

Sector diversification of the portfolio continues to be supplemented by our credit protection activities. This slide recaps the amount of net credit protection that we have purchased on our outstanding business and government loans as at July 31st. During the quarter, our credit protection increased from 4.1 percent a year ago to 6.6 percent of our outstanding total business and government loan book as of quarter end. Or, more specifically, to over 24 percent of our large corporate loan book.

Of the 2.5 billion in on-balance sheet credit protection, the largest hedged industrial concentrations were oil and gas at 827 million and business services at 378 million. In the quarter, we had a net increase in our credit protection of 445 million. This continues to part of a program to proactively manage our portfolio to reduce single-name concentration risk.

Moving to new formations of impaired loans at 84 million, business and government new formations decreased 77 million quarter-over-quarter. From an industry perspective, the largest levels of new corporate classifications were from the agricultural sector at 47 percent, and while proportionately significant, actually represented a decrease of 24 million quarter-over-quarter. The bulk of the agricultural impairment is related to BSE. The agricultural sector was followed by the service and retail sector at 29 percent and the manufacturing sector at 11 percent. On a geographic basis, credit classifications in Canada represented substantially all of the new formations.

Impaired loans. Our gross impaired loans shown on the next slide continued to decrease, reducing by 163 million during the third quarter and a year-over-year reduction of over 823 million or 44 percent. The third largest new gross impaired credits recorded in the third quarter range from 5 million to 16 million. As of July 31, net impaired loans were 239 million excluding general allowance, down 101 million from April 30th and down 424 million year-over-year. As a percentage of total loans and acceptances, net impaired loans improved to 17 basis points at the end of Q3 as compared to 24 basis points at the end of Q2 '04, and materially better than the 47 basis points a year ago.

Business and government net impaired loans at 302 million improved for the seventh consecutive quarter, reducing by a further 64 million in Q3 and reducing by 440 million year-over-year. Business and government net impaired loans before general allowances as at Q3 represent 81 basis points of total business and government loans, a further 18 basis point improvement over Q2 and a 99 basis point improvement year-over-year. Our consumer credit net impaired loans decreased by 37 million to -63 million in the third quarter, a result of reduced residential mortgage and personal loan impairments, and specific provisions taken in the quarter for credit cards.

Market risk. This slide displays Q3 daily trading revenues against the value at risk in our trading portfolios. On no occasions did losses exceed the value at risk, and 85 percent of our trading days provided us with positive revenue. This represents continuing resilience in the face of very challenging and volatile markets.

My next slide shows the value at risk in our trading books over the last 5 years. Risk levels were stable during Q3 and averaged approximately 8 million, somewhat higher than in Q2, but significantly below historical levels and consistent with our goal of constraining revenue volatility. Stability in revenues from our trading activity support measured growth in these areas, and further controlled increases in market risk levels may occur in response to business opportunities.

As we continue to make progress against our key business strategies for sustainable long-term growth, including risk reduction, our solid results and capital position provide us with flexibility to return capital to our shareholders. During the quarter, we repurchased approximately 5.4 million common shares for aggregate consideration to 359 million. On a year-to-date basis, we have repurchased 13.8 million shares and have, therefore, completed 77 percent of our repurchase program.

As John mentioned in his opening remarks, subsequent to the quarter-end, the CIBC board and the Toronto Stock Exchange approved our request to amend the terms of our normal course issuer bid to increase the maximum number of shares repurchased from 18 million shares to 32 million shares.

Finally, my last slide displays that risk-weighted assets have declined by 22.8 billion since the end of 1998. Over this same period, our tier-1 ratio has climbed from 7.7 percent to 10.9 percent at the end of Q3. Since 1998, wholesale risk-weighted assets have declined by 51 billion, of which 36 billion or 70 percent is related to the reduction in the wholesale credit portfolio. During the same period, retail risk-weighted assets have increased by approximately 23 billion, primarily due to strong growth in mortgages, credit cards, and personal loans. In Q3, risk-weighted assets were up 200 million from Q2 levels. While wholesale risk-weighted assets did decline in the quarter, this was more than offset by retail growth.

With those comments, I'll turn it back to you, John.

We are now open for questions. We'll start first here in the room and then go to the telephones. Okay, we'll go to the telephones.

(OPERATOR INSTRUCTIONS) Rob Wessel, National Bank Financial.

I have a two part question on the same topic. The amendment of the share buyback, if you add -- or double it I guess or close to double it to 32 million shares, that would be a significant amount of common equity and you have a very, very strong balance sheet so I think that's great. Should we infer from this or draw conclusions from this that you will not be making some large investments outside of Canada or you have not targeted sort of strategically the (indiscernible) to buy mid cap U.S. bank or some other large wealth management asset in the U.S.? Should we take from this that you have looked at all your alternatives and you've decided that returning money to shareholders is the best use of this capital?

Rob, I think we should take from it that we think that we can maintain very strong capital ratios, do the share buyback and obviously continue to look at our dividends on a quarterly basis to see whether it's time to increase. So I think that our capital ratios are strong enough now that we can continue on this pace. If something came along that was particularly attractive clearly we can stop the buyback and gain conserved capital to accommodate such an expenditure. I think that's about all I can say about it so far.

(multiple speakers) the question very well.

Rob, I've also made the point previously that to date we have found it very difficult to find anything in the U.S. marketplace that would meet our criteria which would include that it would have to be a company that was very highly regarded in its particular area, that the management would not only agree to stay but in our judgment would be very eager to stay to build something that was considered to be very exciting and, thirdly, that came at a price that would be accretive within 2 years or in that range. And to date we haven't seen anything that would meet that criteria.

I don't think I worded the question very well. Let me try again. I definitely -- I didn't mean to imply that you don't have the financial strength for the buyback. I guess the question really comes down to – to the extent you are committed to completing the buyback that's essentially making a choice which is we've decided we're going to return the money to shareholders as opposed to invest it and we had rumors with TD today or a press release today that's making a choice that I guess the extent is sort of well, maybe I'll complete it, maybe I won't. Then that is leaving your options open. So I guess the question I have is sort of how focused are you or how likely do you think it is that you will complete the buyback at this level because it's a pretty big level?

The only think I'd say on that, Rob, is that every time we've announced a buyback we have bought back the shares. Clearly we're entering into this buyback with the same perspective. Now could the world change such that something came along that we would stop the buyback to take advantage of an opportunity we would. But the way, touch wood, our earnings continue to come along, if we don't have the buyback our capital ratios are going to continue to grow and we think that at this point in time -- we think that it is appropriate that, if you will, we give back to the shareholders.

Okay, great. Thank you.

Jamie Keating, RBC Capital Markets.

I have two quick questions, one perhaps for Wayne and the other I think probably for Tom. But for Wayne first of all. I'm getting confused or even (indiscernible) by your credit guidance here -- 750 million to 800 million of loan loss provisions I think is still the guidance. If I'm doing the math right that implies more than $300 million of provisions in the fourth quarter and close to 90 basis point provision which would kind of revisit the dark days if I'm not mistaken. And I'm also looking at in terms of your coverage ratio which I think has propped up to about 176 percent or so. Can you tell us why you think your credit is going to get so bad or what's happening here or what am I missing on that one, Wayne?

I don't think you're missing anything, Jamie. I think we have consistently been conservative in providing guidance; it's our objective to under promise and over deliver on these metrics. But you should not anticipate that we are going to show up at every quarter with recoveries. We've had a very beneficial experience, if you like, in terms of the last several quarters including this quarter where we actually have net recoveries in the large corporate and commercial. As you well know, with the disposition of our held for sale portfolios we basically have gotten rid of most of our distressed assets so we're now getting to a point of equilibrium here and I think back to a steady-state and what we are trying to do is forecast largely expected losses going forward.

So -- like to be wrong on this one, Jamie, but I don't think there's anything but business as usual in terms of the forecast. The area that will attract most of the provisions of course will be consumer based on the way we've deployed the capital and based on the way that business is presently performing. That's not performing at the level we would like to see presently and I think Ron Cathcart noted last quarter that we've made some significant changes in terms of some of our scorecards and some of our methodology around adjudication. Unfortunately, as you know, it takes some months if not some quarters for that to kick into gear where you see noticeable and material change. So it may well be an abundance of caution, but nonetheless it's directionally going in the right direction.

Thanks, Wayne. Just for Tom briefly. In Page 4 of the sub pack, "other revenue", I think it popped up to $253 million. I wonder if we can get a little detail on what's in there. I apologize, I haven't been able to dig out the detail from the writing if it's there.

I think, Jamie, you're on page 3.

I apologize, page 3.

That's okay, just for the other people. Yes, the other revenue has gone from -- this is the very bottom line, just one short of the total from 172 to 253. The biggest jump there were some reclassifications from trading revenue. So those of you that have questions on why the trading revenue is down so much on this measure, there was about a $35 million reclass from trading revenue into other income as we did a complete review of all of our hedging and found that some of them were ineffective hedging according to ACG13.

There were -- in Q2, you'll recall, we had a write-off of some fixed assets of about 20 million. This quarter we had a small gain on sale of some branch assets. So that caused a swing of about 25 million. So you're up to about a 55 gap right there and the other is largely offset.

That's helpful, Tom. Just quickly for John. I think at one point what Rob was alluding to earlier was some of your previous comments about been there, done that and I think that related to the U.S. I just wanted to dig a bit deeper if we could, John. Does it still kind of stand as been there, done that or are there things that might be attracting your attention now?

As I say, there's nothing that has come to our attention that would meet the criteria that we have established. The last thing I want to do is get pushed or lose patience. We are trying to structure CIBC so that the next downturn -- and history tells that there will be another downturn -- that we are going to be in a strong position in the next downturn. And maybe at that time if others are weak and that could be here or elsewhere there will be opportunities for us to take advantage of our strength. But we are not going to rush into doing anything that we don't think will be accretive to our shareholders in a relatively short period of time.

Terrific. Thanks very much, John.

Steve Cawley, TD Newcrest.

Trying to forecast our your retail earnings. It's pretty complicated; it seems it's been quite volatile so I wanted to focus my questions there. The first thing, the noninterest income was 472 million, that's a 15 percent jump or so from the previous quarter. Can you tell me -- is all of a sudden have you significantly increased certain fees? I saw that insurance revenues were up. Can you talk about what went into the 472?

Perhaps Jill may want to add to this. The bulk of that -- and I've got to say, we don't focus that much on the split between NII and other noninterest revenue business by business, but I suspect the bulk of that --looking over at Chris -- is the insurance, is it? -- yes.

You'll recall last quarter we had a fair bit of Q&A on the other line in the retail side and I told you that we were in the midst of renegotiating some of our reinsurance contracts. As a result we had to take a pretty conservative stance on the accrual rates. We did get those down, we were able to book an uptick in that business and I think it was about a $20 or $25 million number. So that would be the biggest number. I guess other credit card fees -- we found we were maybe a bit behind on some of the fees so we've changed our structure. That would account for part of it as well, Steve.

So some of it is just catch up that's nonrecurring?

Yes, that's right. On that line item that's right.

Okay. Secondly --.

Actually, Steve, let me just correct myself. On insurance, for example, although that was a catch up, we're pretty bullish on the revenue outlook for that business going forward. On the cards, same thing. A catch up perhaps relative to Q2, but not an indication that those are one off numbers going forward.

Okay. The loss rate in retail continued to be high at 72 bips (ph), and you mentioned credit cards. I thought previously you had alluded as well to other nonsecured lending products causing some credit problems. Is this strictly just a credit card issue?

No, it's not. I think as you know given our relatively scale in credit cards at 9.5 billion and the relatively high LLE rate which is closing in on 400 basis points, that obviously dominates the numbers, Steve. But we have had problems in some of our other consumer business lines and, as I commented earlier, we've identified those problems. We've put in place changes in our scorecard methodology and some of our adjudication methodology. We've given these tools to the business; the businesses are now in a better position to reprice the risk if you like. Unfortunately the light effect associated with those changes does take some time. We would anticipate some hopefully improving trends in this area going into the subsequent quarters. But presently it is what it is and we are unhappy with that performance as well.

And I know this is where we start getting into touchy areas in terms of timing, but could this be somewhat resolved by the end of this year or is this a 2005 sort of go back towards closer to where your peers are?

We'd anticipate by the first half of '05 that we would have some material change in this area, Steve.

And so Wayne, when I take a look at slide number 61 on page 31 of your presentations, there's a shaded area and I just want to make sure I understand this right. You've got an expected total bank PCL range of 50 to 65 bips, is that right?

That's correct.

And you don't want to break that down between the two groups, do you?

No, we haven't done that. But if you normalize it for the outsized nature of our credit card business, i.e. adjust for the fact that we're not quite double the size of the next largest market participant but we're materially larger than the next market participant, you will see that that would drop into the range of the other -- of our peer group which should be in the 35 to 50 range. So the reason for that range is materially impacted by the fact that we've got $9.5 billion of credit card assets that perform at that level.

Okay. And maybe you'd just humor me with one more answer. Margins looked pretty good this quarter relative to the last. Tom, I think you mentioned in your commentary that you were starting to see some of the mortgage rate pricing compression relief a little bit. Can you talk about just margins in general on that in retail and maybe even give us a little bit of a sense of where you think they'll go if you can?

Do you want to do it, Jill? I'll start and then Jill can correct me if I make a mistake here. Well, first of all, on the mortgages as Jill can comment. I wouldn't overplay my comment on mortgages. We'll try to give you some help on the tone of the market and whereas the previous 2 to 4 quarters there was no question the dynamic at the customer Interface was pretty aggressive in terms of discounting off posted rates and what banks would do to get particularly desirable business. The sense we get now is it may be stabilizing, but don't take that as us calling the bottom of that market. But for the first time in 4 or 5 quarters it feels like there may be a little ease off.

What happened in NIM's (ph) quarter for us was that -- and we have a slide 55 which I won't grind through, but that is the way we look at it. We take out all of the noninterest earning; we take out all of the securities. We had some one offs that hurt us last quarter from a math point of view on NIM which I commented on. So even though our NIMs went up on a published basis, they were down about 2 bips when you strip everything away and look at the strictly retail part of it.

Why were they only down 2 bips? Three reasons. One, both the BA and the prime less BA on average was down for the quarter even though at the end they were up. Averages were down and that's bad obviously for the loan side of the book. The one offs hurt us last quarter, helped us this quarter so that clawed back some of the hit we took on just prime BA. And also the mix of cards and higher personal loans -- although the spreads in both of those were down relative to last quarter they are relatively high spread products and the increasing weighting of those two in our mix helped us overall. So bottom-line our spreads didn't change that much. Spreads in the market changed but we clawed some of it back. Jill? No, okay.

I appreciate the answers, thanks.

Rafael Bello, Citigroup.

A couple of questions. The first one just on your expense side you show a governance spending of 174 million, I wonder if you can elaborate a bit on what that is exactly? And the second one more on the strategic outlook (indiscernible) that you expect a relatively moderate increase in rates, should that not be the case -- in other words if the interest rate increase accelerates, what risk do you see in your operation? Or alternatively, and/or opportunities that you may see on a different scenario for interest rate?

I'll maybe tackle the first one and then perhaps Wayne can start in on the second one. Rafael, you mentioned -- I think I heard you right -- 174 million of governance expense?

Of governance spending. There is a line -- I don't recall exactly what page, but in any case you have a 174 million number that I recall.

Okay. Well, I don't know where that came from. What we have budgeted this year is 60 million, 6-0. Yes, 60 million for governance. We spent about 20 in Q2, about 26 in Q3 which is a little lighter than we thought and we'll probably spend another 15 in Q4. Next year -- someone asked last quarter what does it look like for last year? I said 20 maybe 22 million. That might be a little light. It might be 25 to 30 next year. And these are on a range of initiatives -- compliance -- other governance initiatives, Sarbanes-Oxley, legal reputational risk, nonfinancial control projects. Our job here is to absorb that into our broader product budget, but 60 this year, 25, 30 next year is the number we're looking at.

And that will be it, and that's all you expect to spend on that line?

It depends where you draw the line, Rafael. These are dollars that are isolated to specific projects that we sort of view as outside the normal course of business. In this environment each of the departments such as finance, risk management, legal compliance probably have an -- well, they certainly do have incremental staff onboard, but -- and that might account for another $5 million, $10 million through the year that perhaps we might not have to have in place had we not been in the kind of governance regulatory environment that we're in.

Right. And I found out on slide 57 which actually it refers to other and the total for other is 174, so you may want to briefly mention what the other 114 million relates to.

Tell me again what page you're on, Rafael.

Slide 57 and that is on page 29 of your presentation.

Just hang on a second. I'm going to catch up here. This was on my presentation? Okay, I see what you're saying. So this is on slide 57. That other 174 is the total amount of expenses in our business unit called corporate and other. The explanation to the right is just why it's gone up $8 million versus Q2. The 174 is predominantly costs devoted to some of our subsidiary businesses like CIBC, Melon, Juniper, other businesses and that, as you can see, the costs overall have not changed that much.

Okay, thank you. And then maybe we can touch on the other strategic question.

In terms of interest rate sensitivity there's two areas where the bank is exposed; one is in the trading room which is our debt capital markets and equity businesses. We manage that risk through the value at risk calculation. We do not take a lot of directional bias in terms of debt capital markets or equities. I think presently we have value at risk in an interest rate sense of just slightly under 5 million. And so you can see that we're not materially exposed and we're not in a directional bias in any event.

As it relates to the larger risk which is the asset and liability mismatch that is inherent in a bank's balance sheet, we are positioned for a rising rate scenario. So if you look at earnings risk as the conventional way of looking at that which is the 100 basis point parallel shift in the yield curve one year out, we would be in a profitable position and I think at the end of Q3 that number was $93 million positive.

Okay. Perfect, that's very helpful. Thank you.

We might take some questions here from the room now.

Absolutely.

First question is related to the trading business. As you mentioned, trading revenue seemed a little bit lower and I know some of it is reclassification. It looks as if you had a number of unprofitable trading days as well (technical difficulty) 5 percent profitable seemed a little bit (technical difficulty). In most businesses it seems as if (technical difficulty) what would you sort of attribute that to, Wayne?

Well, I think you've all noticed the volatility particularly in the interest rate marketplace, and that's usually -- the reason for that is it's characterized by lack of liquidity. But our value at risk hasn't changed materially as I think you've noticed from the other graphs that we provided, Ian. So it's really a lack of turnover in volume and opportunity. But it's not unusual to have an 85 percent hit rate is pretty good. I think if you look at previous quarters you will see that there's a very consistent pattern there.

There's always a debate bank to bank as to what really qualifies as trading revenues, I think you would acknowledge. We've taken a very conservative approach as it relates to trading -- to if you will disclose the volatility, but we're very satisfied with the performance and productivity of the risk in the trading room. In fact, as you saw in my previous comments, we would be happy to try and raise the value at risk in the trading room given opportunity.

The second area is in the wealth management business. The expenses -- well, the expenses, performance obviously very good particularly in the wealth management business. I look back sort of between 600 and 625 million of revenues, it seemed as if you normally had higher cost than you're running with. I was just wondering at page 7 of the packet it looked a little bit low. Was there anything in there on (indiscernible) 446 million of expenses, previous year you were more like $500 million.

Tom Woods I'll start. I think as you know, the main drop was revenue related comp and litigation expenses were pretty high last quarter, 25 million, they were much lower this quarter. As I recall there were a very few dollars of reversals but not more than about 5 million. I think it really just speaks to the operating leverage that we've got in this business which we talked about 2 or 3 quarters ago together with some of the cost initiatives that the wealth group has put in place. There was certainly nothing abnormal apart from the GAAP on -- the favorable GAAP on litigation expense. Anything else?

No.

Just going back to Ian's question on trading, did the reclassification affect all reported sectors of trading or one more in particular? Page 10 of your supplementary package.

Andre, it was on the treasury side. You see, trading revenue as it's defined in this supplementary includes both business trading as well as our treasury trading as it relates to mark to market books and that reclass was in the trading. There was one major one and there were a couple of smaller ones. The delta there was probably in aggregate about 45 million and that was in treasury. The delta for the various business lines you can actually see in the second slice of that table on page 10 and pretty well each business was down in the environment. The most significant drop was in the equity structured products business which I commented on which was particularly high in Q2 and in Q3 it was certainly below the normal run rate.

Andre-Philippe Hardy Thanks.

(indiscernible) reduce gross and net NPLs in the fourth quarter?

The disposition of the loans that was a recovery from the cards (indiscernible).

But will it represent a reduction in nonperforming loans?

Ken Kilgour No, it won't. A very small amount of it will.

Okay. And secondly, your total allowance now exceeds gross nonperforming loans by a little over $800 million and that's even up $50 million from the previous quarter. How should we interpret the maintenance of this very high surplus allowance?

I don't know if maintenance is a good choice of words. I think it reflects a lot of hard work and effort over the last several years to get to this position. As you well know, part of this is an accounting challenge because you can't release these reserves as quickly as you might like to otherwise, but it shows you that we have a very conservatively positioned balance sheet and a lot of flexibility, if you will, in terms of these provisions going forward.

Meaning that if you had more flexibility you would release some of (multiple speakers)?

Wayne Fox As you well know, we -- on those specifics in general -- we have a lively discussion with our internal auditors, external auditors and in the case of generals OSV every quarter it's done from a bottoms up perspective, and it reflects our judgment on the valuation of these assets. And as you can see, we will release the reserves as and when we are able to. We have reduced our gardens on both specifics and generals on the basis of your observation and hopefully if business conditions prevail there will be more good news in the future.

Okay. And my last question actually relates to this trading reclassification. I'm just wondering, as you said, there is a difference from bank to bank in how these things are treated. The net result of what you're doing creates a lot of volatility just in trying to analyze the numbers. Why don't you just keep all of the trading type revenue in with your report as trading revenue?

Well, every bank has to come up with a definition and you have to stick with the definition. So what we do not include is any accrual book, and by accrual book I mean any book of investments that is deemed to be not actively traded. So one can argue are accrual gains really trading -- in many senses they are, most are not, but you have to set a definition and stick with it. And that's why each bank has a slightly different definition.

Hard to know whether our definition is particularly punitive to trading and favorable to nontrading. It would appear so relative to the other banks when you compare that with the business line aggregate revenue, but it's hard to know.

It's just that the number gets buried in that other “other revenue” number and there's no way for us to really evaluate unless you tell us what the amount of it is. We just see the volatility in the other “other” number.

We're happy to work with you. To the extent one focuses more on this definitional approach to evaluating our business on trading versus nontrading, that's going to be a continuing challenge. To the extent one looks at what we call the management reporting and looks at how much money capital markets makes versus investment banking it's not an issue at all because all of the revenue finds its way into the capital markets number -- where we do drill down product by product and you can look at without having to get bogged down on what's trading and what isn't trading.

All the banks, as you know, are required to actually break down aggregate revenue as between trading and nontrading. I think definitions get in the way and it just makes it very hard if that's your main approach to analysis. My advise and certainly the way we look at it is just aggregate it altogether, look at how the business is doing and make your judgments on that basis.

Quentin BroadI guess for Jill, just in terms of the efficiency ratio and the consistency and your attempts I guess to help the bank drive down the NIX ratio, obviously a very good quarter. What's sustainable in here given -- I mean it's gone up and down pretty regularly over the last several quarters? Is there anything here that now says 56 is the right number versus 59-60 sustainable, or should we expect continuation in that kind of range that we can't bottom out at 56?

For this year I'd look at somewhere around the 57-ish range for the full year. And I'm going to very consistent with what I've been in the past. Going forward I'd expect something around a 1 percent reduction in NIX each year.

And Jill, just to ask the same question, where does that expectation come from? Is there any particular drivers over the course of the last quarter that you would identify as key to that effort?

Really it's the combination of our planning in terms of what we think we're capable of achieving on the revenue line next year while continuing to achieve efficiencies on the cost line. It's a combination of a whole bunch of different activities across the entire business.

On the credit side I guess in retail -- if I remember correctly, Wayne, there was a couple of credits on the agriculture, I can't remember the size. Were those same issues apparent in this quarter? I can't remember your commentary. And if not, obviously the PCL stayed at the same level, so something else backfilled it in. So if you can just give me some further clarification on that?

Yes, I think at a macro level our forecast on this portfolio two quarters ago has actually proven out to be largely accurate, and albeit the numbers are quite high relative to what we would have forecast at the beginning of the year. Susan Walker is with us here this afternoon, works with Ron Cathcart who is on vacation. Susan, do you want to expand on the agricultural portfolio comment for a few minutes, please?

(inaudible) significantly less off of roughly 20. Looking at the portfolio regularly, we're very pleased with what we see, it's very well (inaudible) in terms of dollar amounts of exposure, (inaudible).

Quentin Broad So then if I look on a sequential quarter basis, if agriculture was 20 million less this quarter against last quarter this -- then this sequential quarter increase of 25 million on a 3 million is being backfilled by credit losses and personal lending, credit cards, (inaudible)?

We had a slight uptick in our portfolio due to seasonal bankruptcies that was forecast. That's come down nicely. We also experienced -- quarter to quarter there was an unusual recovery in Q2 in our small-business portfolio, so we had the lack of that recovery in the quarter. We also did a reclassification of some delinquent accounts from a (indiscernible) write-off category to a faster, more aggressive write-off categories. Timing related to the loss recognition on some small (technical difficulty).

Last question, John, for you. Just strategically, you've lived a while now with this significantly reduced risk profile, executing against it. As you look at the business now, is there any opportunities that you would have seen 2 years ago under the old risk profile that you say the bank doesn't go there any longer and that's a revenue give up but you've come to grips with that? i.e., where isn't the bank going to go or what aren't you able to attack right now that might have been there for you previously under your old risk profile?

Probably the most significant thing that we've done over the last couple of years, and I don't consider it, by the way, as a big give up at all, is single name concentration. I think we've made enormous progress in single in concentration. That has always been the killer in the cycle, in the down cycle. It is that account that Mr. Fox refers to as the fallen angels where they are investment grade and all of a sudden events occur and they become otherwise. Where historically we might have had several hundreds of millions of dollars or even more in the way of single name concentrations. We have got that down to a relatively manageable number and we will continue to work on that to make sure that the probability of us getting caught out as we have historically is very remote.

And I think that may be the major distinguishing factor between CIBC and many of our competitors not only in Canada but otherwise. I think we've adapted extremely well in our wholesale business to the so-called securities model of underwriting loans, distributing them or otherwise hedging the risk. I think that is why we have been managed to maintain our position in Canada in the wholesale market to the degree we have and I think we continue to be the number one wholesale investment and corporate bank in Canada. And yet, we are not holding nearly the amount of risk on our balance sheet that we have historically.

And by the way, I think more and more clients are coming to the conclusion that we came to some time ago that our clients are better off when we do that because if an opportunity comes along for them that requires us to underwrite a large amount of money, we're in a position to do it. Whereas if we're carrying very large positions on our balance sheet we may not be able to or not be able to do it as aggressively as we can when we aren't.

Well, ladies and gentlemen, thank you very much were joining us again today and we look forward to seeing you at the end of the year if not sooner. Thank you.