Canadian Imperial Bank of Commerce (CM) 2004 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to CIBC's fourth quarter and year-end 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.

Good afternoon and welcome everybody. As you know, some of our comments today may include forward-looking statements that are subject to risks and uncertainties. Actual results may differ due to a variety of factors as detailed in our quarterly and annual reports.

Our fourth quarter conference call today is being audio broadcast live on cibc.com, and will be archived later today. Here to speak to you are John Hunkin, Chief Executive Officer, Tom Woods, Chief Financial Officer, and Wayne Fox, Vice Chairman Treasury, Balance Sheet and Risk Management. Although not all in the room at the moment, we will have on hand to respond to questions Gerry McCaughey, President and Chief Operating Officer, and Sonia Baxendale, Senior Executive Vice President of Wealth Management. Finally, could I ask you to keep your Blackberries away from the speaker? It tends to interfere with the sound system. Thanks very much for your attention, and I will turn it over to John Hunkin.

Good afternoon everyone. Today's CIBC reported net income for the year is 2.2 billion. Earnings per share were $5.53, up from 5.18 a year ago, and return on equity was 18.7 percent. Net income for the fourth quarter of 439 million was down from the third quarter. And these results were affected by several items, most notably a 300 million provision in respect of Enron related litigation matters. Tom will review our financial detail in a moment.

Two years ago we set out on a mission to change the risk return profile of CIBC, and we have done that. We have reduced risk, shifted our business mix, made some headway on expenses, and have grown our core businesses. In fact, we more than delivered on three key risk reduction commitments, and did so a year ahead of time.

First we targeted a one-third reduction in economic capital allocated to large corporate credit. The reduction by the end of this year was 69 percent. As part of this initiative we effectively completed the sale of the original 2.1 billion of corporate loans we identified for sale in 2002. Second, we set out to reduce the carrying value of our merchant banking portfolio by one-third. It is now down 39 percent to 1.7 billion. We have now set a new target of 1.5 billion. And third, we intended to shift our business mix to 70-30 by the end of 2005. That is 70 percent retail, 30 percent wholesale. Today it is at 72-28.

In addition to these accomplishments our capital position is excellent. Tier 1 capital is 10.5 percent. During the year we repurchased a total of 18.4 million shares. And we recently announced a new normal course issuer bid for the purchase of up to 17 million shares. We also announced another dividend increase today, our third in the last five quarters, for a total increase of 59 percent from the fourth quarter of last year. We have also been successful growing our core businesses. Retail Markets had a solid year with earnings up 21 percent, or 7 percent on an adjusted basis, despite intense competition across most products.

We maintained our number one market share in cards, and had almost 10 percent growth in our residential mortgage portfolio. Loans grew ever 10 percent, and consumer deposits 9 percent. Just as important, we invested aggressively in our brand and new technology to strengthen our retail delivery networks. We now have 14 flagship branches opened across Canada.

In Wealth Management earnings were up 10 percent. We now have over 2,600 fully licensed accredited advisers. We made strong progress in both Wood Gundy and Imperial Service in the growth of our fee-based assets.

Full-service brokerage fee-based assets grew by 34 percent over last year and Imperial Service Managed Solutions assets grew by 20 percent. Our World Markets franchise benefited from improved credit markets and improved market conditions and liquidity in merchant banking. Earnings were up 83 percent from 2003. We were the number one underwriter for the fourth consecutive year and also placed first among Canadian dealers in M&A advice.

Overall, a pretty good year, and the market has rewarded us. Our total shareholder return was the best of the major banks in 2004, as well as over the last five years.

We had our disappointments, including regulatory issues in the recent customer privacy incident. But we had some significant wins in terms of governance, early implementation of Sarbanes-Oxley 404, and process improvements.

So we have done a lot, but there is more we can do. This year I talked with investors increasingly about what creates long-term value in a company. And I'm more convinced than ever that the characteristics that drive long-term value are the non-financial variables. In addition to the financial targets we have set out for 2005 and forward we'll be raising the bar for improved performance in client and employee commitments.

I have mentioned in the past how proud I am that CIBC has been included in the Dow Jones Sustainability Index for three years running. And going forward we're continuing to look for ways to improve performance in both the financial and non-financial measures.

Another building block in creating a sustainable enterprise is the development of strong, capable leaders. And in that regard I was very pleased earlier today to be able to announce that Gerry McCaughey will become President and Chief Operating Officer of CIBC effective immediately. Gerry will have responsibility for all of CIBC's operating businesses and will report to me. This appointment recognizes Gerry's client focus and his strong leadership and strategic capabilities.

We also announced today that Brian Shaw will become Chairman and Chief Executive Officer of CIBC World Markets, and that Steve McGirr will be President of CIBC World Markets. Both are highly capable and skilled and will provide our wholesale business with strong leadership well into the future.

In conclusion, I'm very positive regarding CIBC's future. The broader economic outlook for 2005 is for some growth, moderated by energy prices and the stronger Canadian dollar. Not a bad scenario for banks, and nothing on the horizons that would process to alter our course of prudent risk management, continued investment in our client relationships and focused growth.

Although we plan to continue buying back shares and paying out dividends, we know we have to grow the business organically, and only if the right situation presents itself through acquisition. At the moment we don't see anything appealing, so we're focusing our energy on the strength of our current business, and we are optimistic about the future. I will now turn it over to Tom.

Thank you, John. Good afternoon everyone. Slide 4 summarizes the quarter which had EPS, as John said, of $1.06. We have listed some of the main items on this slide and others at the top of the press release. As John also said, we took a litigation charge of 300 million in the quarter. This is in respect to the Enron litigation which has not yet been resolved. Therefore we have 300 million plus the insurance protection we have referred to in previous quarters as a reserve against the ultimate exposure. We also had tax recoveries which worked out to 24 cents a share. And we have reversed 25 million of general loan loss allowance, and 37 million of our student loan loss allowance.

In summary, for Q4 we had good retail loan and deposit growth and solid retail brokerage performance. In World Markets we had higher than run rate Merchant banking gains, which helped offset higher loan losses and lower investment banking in Capital Markets revenue.

The points on the left-hand side of the slide John commented on, including the last one which I just want to reiterate. And that is that today CIBC became, as far as we know, just the second company in North America to certify that our financial controls meet the standards of Sarbanes-Oxley 404, a full year in advance of the requirement for Canadian companies. No other Canadian company, or no other North American financial institution that we know of, has done this yet.

I also like to point out that our full 2004 annual report will be up on our website in two weeks. There you'll see the our 2005 medium-term performance objectives, including EPS growth of 10 percent per annum, the further merchant banking portfolio reduction that John noted, down to 1.5 billion, and our new credit quality objectives that Wayne Fox will discuss in a few moments. Our other performance objectives remain the same as those we had in 2004.

Turning now to slide 12, Retail Markets Revenue, 1.337 billion, up from 11.331 billion in Q3. Slide 14. In personal banking revenue was a record 545 million as deposit balances were up 4 percent and loan balances up 2 percent on the quarter. Loan margins were up despite a tighter prime BH (ph) spread as we were more selective in our promotional pricing.

On the deposit side, although the business remains very competitive, pricing in the over $60,000 savings product appears to be letting up a little from what we have seen over the last 18 months. In 2004 industry deposit balances grew about 12 percent, and loan balances about 15 percent. We think the industry will be hard pressed to hit those levels in 2005. In Q1 personal banking revenue for us should be about the same as it was in Q4.

Slide 16, Cards. Revenue was also a record, but most of the increase was due to securitization gains. The balances were up 2.3 percent versus Q3, but spreads were down due to portfolio mix and increased promotional pricing. Purchase volumes were flat on the quarter. Although industry mailings have slowed somewhat, the business is still very competitive with new balance transfer offers and new card retailer partnerships being launched on a regular basis. We see 2005 industry growth of about 7 percent in balances and 10 percent in purchase volumes, both of which we expect will be slightly in excess of our own growth rates. We expect spreads to narrow somewhat in 2005, particularly if interest rates rise. Our Q1 cards revenue should be about the same as Q4.

Slide 17, in mortgages revenue was about the same as in Q3. Discounting and fixed-rate mortgages has held pretty firm through the year, but seems to have eased off a little for variable rate mortgages. Industry balances grew about 9 percent in 2004. We see this falling off somewhat in 2005, but are optimistic we can do better than the industry growth rates. Revenue outlook for us in Q1 should be slightly better then Q4.

Slide 18, other revenue, which consists of President's Choice Financial, our insurance business, our West Indies holdings and treasury revenue was down in Q4 mainly because of the timing of reinsurance revenue recognition, and also due to lower revenue in the West Indies due to the hurricane. We expect this line to the back up near the Q3 level going forward.

Slide 19, Retail Markets NIAT was 303 million in Q4. This was helped by a $49 million pre-tax gain on the sale of rights to Air Canada shares we received in the settlement of claim we made last year when our Airalgo (ph) contract was canceled and renegotiated. This 49 million pre-tax gain is treated as a contra expense. We also reversed 37 million of the student loan loss provisions we established four years ago, and 20 million in credit card loan losses because of the securitization we just did. Expenses were up 36 million versus Q3, primarily due to higher advertising and technology project spending.

The net of these four numbers, i.e., the Air Canada gain, the two loan loss reversals, offset in part by higher expenses, a 73 million pre-tax or 50 million after-tax, which accounts for the increase in NIAT you see on the slide versus Q3.

Slide 25. Turning now to our second business, Wealth Management, revenue was 617 million versus 611 in Q3. Slide 27, Imperial Service, the group that services our top 15 percent of branch banking customers, had revenue of 195 million, the same as in Q3 as higher loan and deposit revenue offset the seasonal decline in mortgage sales.

Funds under management made up investment credit and deposit balances were up 600 million or 1 percent versus Q3, and 4.3 million or 6 percent on the year. We expect Imperial Service revenue in Q1 to be up from the Q4 number on higher deposit balances and investment balances -- higher deposit spreads rather, and higher investment balances. Slide 28, retail brokerage revenue of 251 million was up 18 million from Q3 due to the strong new issue activity and secondary market trade volumes up 5 percent versus Q3.

This continues to be a relationship business, and with the Merrill Lynch retail acquisition now fully integrated, and with full-service brokerage assets now in excess of 100 billion, we're well-positioned for continued growth here. November volumes on the TSX were strong. December has always down, so Q1 will be driven by how good a month January is.

Slide 29, wealth products, revenue was a 113 billion, down from 125 in Q3 due mainly to a seasonal decline in CFB revenue. In addition, mutual fund revenue was down marginally versus Q3.

Equity fund balances grew in the quarter, but this is more than offset by money market fund redemptions. After eight consecutive down quarters, GIC spreads finely increased, although the remarket remains highly competitive. Q1 wealth products revenue should be higher then Q4.

Slide 30, wealth management NIAT, 105 million, down 1 million from Q3. Revenue was up 6 million as I have just reviewed, and expenses were up 8 million, mainly higher revenue related compensation and slightly higher advertising costs.

The third business group, slide 40, World Markets, revenue 799 million in Q4 versus 840 in Q3. Slide 42, in Capital Markets revenue was 309 million, down from 321 in Q3. The equities component of Capital Markets revenue, which represents just under 60 percent of the 309 million number, was down from Q3 while the debt component was up marginally.

Within equities our Canadian agency, retail structured products and commodities businesses were all better, but arbitrage and U.S. agency revenue were lower than in Q3. Arbitrage opportunities within tolerable risk levels are becoming harder to find, as the number of industry participants has increased in the past few years. The U.S. agency environment is tougher as well as more trades are being done by lower commission direct access technology. Our competitive position in the Canadian equity business is more secure given the depth of our origination and distribution capability.

On the debt side, revenue from structured derivatives was up and some foreign exchange was down from that in Q3. So the message here is on the debt side we were flat on the quarter, on the equity side we were down. Although we are only a month in the first quarter of 2005, the outlook is for slightly higher revenue and debt and about the same for equity versus what we saw in Q4.

Slide 43, investment banking and credit product revenue was 247 million, down from 326 in Q3. The U.S. represents about 40 percent of this number with Canada over one-third and Europe the balance. U.S. revenue was lower in the quarter, primarily due to a slower new issue business in each of the equity, real estate, finance and high yield. M&A had another good quarter with revenue the same as in Q3.

In Canada Q4 revenue was up marginally as all business lines performed close to Q3 levels. In 2004 we were a lead or joint book writer on 121 deals for over 11 billion, over 40 percent more than the second-place firm. Q1 should be a better quarter, particularly in U.S. real estate finance and U.S. equity underwriting. The M&A pipeline is strong, but the timing of several deals isn't clear at the moment.

Slide 44, merchant banking had revenue of 146 million, as gains in other income of 195 million exceeded write-downs of 49 million. The largest gain was in respect of our shares in Side Vent (ph) at 93 million pre-tax as previously announced. We also successfully divested some of our fund commitments and investment, and have more than achieved our 2004 goal to reduce private equity outstandings below a level of 2 billion. And as I said earlier, our goal now is reduce that further to 1.5 billion.

The merchant banking business appears to have more than turned the corner, although the gains we have had for this year are not indicative of what is likely for 2005. Finally, slide 45 shows World Markets net loss 26 million on the quarter. Without the 194 million after-tax provision in respect of Enron litigation matters, NIAT would have been 168, or about 90 million below Q3 net income of 257. This 90 million shortfall was due to lower revenue, higher loan losses, partially offset by lower incentive comp and lower taxes, which benefited from a reserve release in the World Markets business of 31 million. I will now hand it over to Wayne Fox.

Thanks very much, Tom, and good afternoon everyone. As Tom has highlighted, the fourth quarter of 2004 saw continued overall improvement in our portfolios. Total gross impaired loans and specific provisions both improved year-over-year. And held for sale portfolio sales were effectively completed. Our fiscal 2005 guidance is for specific credit provisions to be in the lower half of our 50 to 65 basis point medium-term target range. This will reflect an increase over 2004, as large corporate losses return to more normal levels, and as the impacts of the student loans release and card securitization are not expected to repeat themselves. Our current view is that approximately 70 to 80 percent of our fiscal '05 credit provisions will be in the consumer sector, with the balance applicable to business and government loans.

During the quarter we reduced our general allowance for credit losses by a further 25 million, bringing the total reduction in '04 to 75 million. This was principally the result of the continued progress made in proactively managing the corporate credit portfolio.

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 Oxey (ph) and our external auditors, currently our general allowance is 88 basis points of risk weighted assets.

Specific provisions for the fourth quarter were 200 million, up 59 million from last quarter and down 89 million year-over-year, inclusive of the 93 million held for sale provision. Year-over-year specific provisions are down 590 million, or 362 million and excluding the held for sale provisions in '03.

Our business and government credit provisions totaled 83 million, an increase of 100 million over last quarter and 51 million from the same period a year ago, excluding the held for sale provision. Year-over-year business and government provisions decreased 655 million, including the 228 million held for sale provision in '03, or 427 million excluding the held for sale provision.

The Q4 consumer specific provisions reduction from Q3 of 52 million was largely comprised of a reduction in allowances for the student loans portfolio and a reduction in allowances for credit cards, offset partially by increased provision related to portfolio growth and the impacts of increasing bankruptcies and delinquencies in the personal loans portfolio. We continue to expect recent actions taken to further manage the risk level of the consumer portfolio will lead to lower and more stable loss rates over time, but expect 2005 to continue to reflect above-average loss rates.

A detailed recap of our annual specific provisions as a percentage of net loans and acceptances for the years 1999 to 2003 and on a quarterly basis for the last four quarters is reflected on this slide. Fourth quarter provisions were 50 basis points in net loans and acceptances, at the lower end of our long-term range. The consumer portfolio loss rate continued to trend down in the quarter to 44 basis points, primarily related to the release of student loans allowance in Q4 and the impact of the card loans securitization.

The business and government portfolio increased to 61 basis points from a negative 20 basis points in Q3, primarily reflecting a reduction in the number of reversals of prior period provisions.

Total net loans and acceptances after the general allowance totaled 142 billion at quarter end, down approximately 293 million from July 31, '04. Residential mortgages are up 1.4 billion quarter over quarter, and up 2.6 billion year-over-year. Adding back the securitized mortgages on a managed basis year-over-year growth was 9.5 percent. Personal loans increased by 640 million over the quarter, and 3.4 billion year over year for a 17 percent increase.

Credit card outstandings reduced quarter over quarter by 1.2 billion and were down 8.2 percent year-over-year due to the 1.4 billion securitization of the portfolio. On a managed basis, card outstandings grew 3.2 percent. Business and government loans decreased by 1.1 billion in the quarter, while year-over-year loans have been reduced by 4.2 percent.

Our business and government portfolio continues to be reasonably diversified from an industry perspective, as evidenced by this slide. We continue to view corporate credit diversification as an important objective plans 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 next slide recaps the amount of net credit protection that we have purchased on our business and government loans as at year-end. Credit protection increased from 4.2 percent a year ago to 5.7 percent of our outstanding total business and government loan book as of quarter end, or more specifically, to over 20 present of our large corporate loan book. In the quarter end, we had a net decrease in our credit protection of 186 million, related to the appreciation of the Canadian dollar against the U.S. dollar.

Moving now to new formations of impaired loans at 301 million, business and government new formations increased 217 million quarter over quarter, and 126 million over Q4 of '03. From an industry perspective, the largest levels of new corporate credit classifications were from the service and retail sector at 65 percent, followed by the utilities sector at 12 percent, and the agricultural sector at 10 percent. On a geographic basis credit classifications in Canada represented 55 percent of the new formations with 33 percent outside North America and the balance in the United States.

And now the impaired loan portfolio. Our gross impaired loans shown on this slide increased by 41 million during the fourth quarter, but had a year-over-year reduction of over 267 million or 19 percent. The three largest new gross impaired credits included a consumer electronics provider in Europe at 112 million, an e-commerce systems and call centers operator at 41 million in the United States, and a capital equipment manufacturer at 22 million in Canada.

As of October 31st net impaired loans were $308 million, excluding general allowance, up 69 million from July 31, but down 213 million year-over-year. As a percentage of total loans and acceptances, net impaired loans were 22 basis points at the end of Q4, as compared to 17 basis points as at Q3 '04, and down from 37 basis points year-over-year.

Business and government net impaired loans was relatively -- at 309 million was relatively flat quarter over quarter and reduced 232 million year-over-year. Business and government net impaired loans before general allowances represented 86 basis points of total business in government loans, up 5 basis points over Q3, and a 56 basis point improvement year-over-year.

Our consumer credit net impaired loans at negative 1 million were increased from the negative 63 million in the third quarter and a negative 26 million a year ago, a result of the release of loans -- some student loans and the card securitization.

Market risk. This slide displays Q4 daily trading revenue against the value at risk in our trading portfolios. On no occasions did losses exceed the value at risk, and 88 percent of trading days provided us with positive revenue. This represents continuing resilience in the face of more challenging market conditions in our trading operations.

This next slide shows the value at risk in our trading books over the last five years. Risk levels were stable during Q4 and averaged $8 million, around the same levels as in Q3, but significantly below historical levels, and consistent with our goal of constraining revenue volatility. Stability in revenues from our trading activities support measured growth in these areas. And further controlled increases in market risk levels may occur in response to market 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 4.5 million common shares for an aggregate consideration of 308 million, bringing the full year total to 18.4 million shares, or $1.2 billion. This is in addition to the $780 million of common dividends paid in the year.

Subsequent to the quarter end and subject to stock exchange approval, we announced our intention to commence a new normal course issuer bid (ph) to permit repurchases of up to 17 million common shares, representing just under 5 percent of our now outstanding shares as of October 31, '04. And today as was earlier noted we have also announced another dividend increase.

And the final slide displays that risk weighted assets have declined by 29.6 billion since the end of 1998. Over this same period, our Tier 1 ratio of clients from 7.7 percent to 10.5 percent at the end of Q4. Since 1998, wholesale risk weighted assets have declined by $53 billion, of which 38 million or 71 percent is related to the reduction in the wholesale credit portfolios. 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 Q4 risk related assets were down 1.4 billion from Q3 levels, as a result of wholesale risk weighted asset reductions. In the quarter retail growth was offset by the impact of the card securitization.

And now will turn the proceedings back to Kathy -- I mean John.

So we're ready for questions. We will start in the room here.

Yes, Michael.

I'm looking at -- let me just get to the right slide in the presentation. Okay. It is slide 58 in the supplementary information. This is the other, other, other revenue. Well, this thing over here.

My slide, yes. Fifty-eight?

Now I understand that the third quarter $207 million had included the benefit from economic edges of in the order of about $60 million. And now in the fourth quarter there's a negative impact of about 90 million, I think is the right number -- well, first thing I wanted to do was confirm what the numbers are.

Second, it really amazes me that these numbers get buried in a place where it is so hard to understand what is going on. And you would want -- I would think you would want us to understand that a swing has taken place. And is this really the best way to disclose this information?

Let me go through with it with you. Those of you that are with me on slide 58, Q3 you see the 207. That included the sale of global payments. So that is 109 of that 207.

Is the sale of global payments in the 109?

No.

Up on top, in the other gains?

No, no, we have -- the best practice now is to treat sale of equity accounted investments in the other category. Okay? Whereas -- let's just see this -- on equity accounting investments. Bear with me one second. You're quite right, Michael, actually now it has been moved up because last quarter it was in other. Now it is up above.

Let me just -- just to help you -- and next quarter we'll give you this disclosure, because you have asked several quarters. Let me give you the 207 breakdown. The first comment you made wasn't quite right, because it is not just economic hedges, we have a line called gains and losses on all non-trading derivatives in cash accrual accounts.

This quarter the AcG 13, which I know you have asked before, was a negative roughly 20 million versus last quarter that number was 80 million, but it had a number of other items in it apart from AcG 13. So if you just want to build up to get that 207 and the 96, just 80 in Q3 and negative 16 as it happens in Q4. The next line is our stock appreciation rights. When our stock goes up, as it they did in Q4, that is an income on the hedge. When it goes down, it is a drag, and it gets offset at another place in compensation. So in Q3 that number was negative 2. In Q4 it was positive 19.

But that is not in the 207 and the 96, that is a separate line item.

Yes, you're quite right. I'm giving you the 360.

No, I'm really just asking about the 207 and the 96.

Yes, the 207 and the 96. Let's carry on. I've got it broken down in a different way. So let's -- later in the call I'll give you that drill down. (multiple speakers) broken out that way.

My first question relates to the loan losses in the retail books. If I look at the 148 million of provisions in the quarter, I think I should add in the 37 million, the reversal of the student loan provision. I am just trying to think about sort of a run rate. And then the other adjustment would be the securitization which took a fair amount of the credit card loan losses and moved them off the balance sheet.

It looks as if this quarter, if I did all those adjustments, it is the highest loan loss (technical difficulty) in the quarter that we have seen. I know there's some growth, but it I was asked this question. What can you tell us to make us confident that there isn't anything going on in the book, in the retail loan book particularly, and also the growth that you had is driving (technical difficulty).

I will start with the response, and then I'll get Ron to get more granular, if that's what you'd like. You're right, the run rate on our consumer provisions is high. It is in the order of $200 million. There is several things going on in the bowels of that number which you described. But basically there's the growth in the portfolio, as you can see, the assets are growing, and they are growing at a double-digit rate. It really just depends across which product group that -- which segment you want to look at.

Number two is that we are investing in improving our technology and methodology to identify the risk. And I think as we do so, we find we have a better understanding of the characteristics of these portfolios and the consumer behavior behind them. And these are basically -- we had underestimated in prior periods the risk because we just didn't have the knowledge and understanding we do today.

And then the point that you're concerned about is that we actually had some product segments that are underperforming. We're not happy with. They're performing at below market -- below-market standards. And I will let Ron talk about those specifically, if you would be so inclined. But those are the sort of three elements of that number.

But the more important question is what is it going to look like going forward. And as I noted in my comments in a broad sense you should look for that trend quarter over quarter for the next -- for '05 to be more or less stable. But you have got to factor in the fact that if it is flat 200, 200, 200 we're going to continue to grow these books. So we anticipate that the productivity or performance of our credit assets will be better year-over-year with this investment in these technologies and these systems. Having said that, that is the high-level macro response. If you want to get more specific, Ron, did you want to make any additional comments (multiple speakers) is that sufficient?

Yes, I guess which of the books? I mean is it unsecured, is it cards particularly? Is it (technical difficulty)?

(Inaudible question - microphone inaccessible).

Let me go back to Michael's question here. So on that slide 58 -- there's two lines Michael. One is the gains and losses on non-trading derivatives and cash accrual accounts. And that number as I said those are the first two numbers I gave you. 80 million positive in Q3. And that had some reclassifications, as you may recall when I went through this a quarter ago. And it also had some positive AcG 13 numbers in there.

Q4, that number was negative 16. Virtually all about -- all of that and a more was AcG 13 negative marks. So that is the first number. The second number is a number that is pretty stable quarter to quarter and is called other commissions and fees. And that was 120 in Q3 and 110 in Q4. And that consists of things like revenue we get from entry item third-party business, revenue we get from managing securitizations in the mortgage business, mutual fund fees, rents received from third parties on properties that we own.

So it is really the ACG 13 number that will vary quarter to quarter. And we will disclose that every quarter. I know some banks do, some banks don't. But if you're interested we will do that quarter to quarter.

So are those two in that line of the 207 and the 96?

Yes, that's right. Those two numbers add up that I just gave you to 200 in Q3 and about 94 in Q4. So that is the vast majority of those two numbers.

We will take questions from the telephones.

(OPERATOR INSTRUCTIONS). Steve Cawley with TD Newcrest.

In our press release you gave us the level of reversals, and in your statistical supplement we can see the recoveries. Is there a way to get the reversals for the full four quarters of 2004?

Tom is just checking his special black book. Do you have another question, Steve?

Yes, sure. And while you're at that reversal, while you're looking for the commentary I would like on it is directionally. And how do you foresee reversals coming up, because it seems as if we have seen some banks take reversals later in the cycle, and other banks taking them earlier on in the cycle? I would just like to know what basically is your policy on reversals? That's number one.

Number two is for Gerry, I think. Gerry, this was your first quarter as head of CIBC World Markets, and the net number was certainly significantly below what I was looking for. And I'm just wondering, is there a bit of a cleanup going on in the quarter here? Was there several items that I can't necessarily see in stat pack? Were there things that you were doing that won't necessarily rematerialize in future periods?

Which numbers are you referring to, Steve?

Just I'm talking in general, like the expenses look a little higher relative to your revenues, specifically that.

Can I just clarify one point? Gerry actually has -- this is Gerry's third quarter.

Sorry, what I meant was the (multiple speakers)

(multiple speakers) ones too.

Yes, sorry, what I meant was the year-end quarter. I just figure out year-end maybe there is a bit of a cleanup?

On the revenue side, this quarter there were a number of quarter over quarter comparisons that I think I should point out. We had in our real estate finance group that can be a little bit lumpy. And it was -- and that depends to a certain degree on when they close deals because their deals tend to be very large. And we had a particularly low quarter in that area. And that should -- we expect that to snap back to its trend line. In addition to that in our trading activities we were particularly weak in the area of U.S. equities and our U.S. equity arbitrage. And in both cases, although I am not telling you what is happening in terms of a forward-looking statement, those are natural market activities and to the extent that the cycle comes back in those areas, you should expect us to go back to our trend line in revenues. Does that answer your question?

So basically you're telling me there is nothing extraordinary in the expenses?

Well, the direct operating expenses are flat to down on a normalized basis.

But your revenues were down considerably?

Our revenues were down on the -- our revenues are down from 321 in Capital Markets last letter to 309 this quarter. And in the Investment Banking and Credit Products side we're down from 326 to 247. In the decline in the Investment Banking and Credit Products area, that would have been affected by, as I mentioned, the real estate finance, as well as there was made item -- an adjustment item which Troy Maxwell may highlight.

There's due to accounting changes on the recognition of revenues in the trading room when we either trade or hold our own debt or equities. And additionally on the initiation revenue on certain equity-linked products where we would use the retail spreads and defer them over the life of the instruments.

To somewhat more directly answer the conclusion to your question, all of the activities here are driven by an the ebb and flow of the marketplace and our opportunities there, or accounting items such as Troy mentioned, they are related to year-end activity which is what your question was.

In your 146 for merchant banking, a much bigger number than we have seen in quite some time. And I think it was alluded to by Tom in the introduction that it wasn't necessarily a sustainable number. And that you sold a lot of the funds. Can you give us a little bit more granularity on that 146? And if you can, with a portfolio that is shrinking in size considerably, I guess how realistic is it to even expect a number half that level?

On the merchant banking gains this quarter we did announce two items. And the largest of those was the sale of our holdings in Seisint. That item had a revenue impact of 112 million. We also had some of the impact of the gains on the sale of our private equity funds, and that would have been 25 million. Those are extremely lumpy items, and you're quite correct, they don't come along that often.

In addition, we also had a gain on our Shoppers position of 56 million. So this was quite a lumpy quarter for merchant banking. In terms of looking forward on the Merchant Bank, it is extremely difficult to forecast what the gains will be on the merchant banking, but I think that you can get a feel for it if you can consider the size of the merchant bank, our targets there, and the nature of the holdings in the merchant banking today. The Merchant Bank right now we have reduced it to about a little bit less than $1.7 billion. That is book holdings at this time. We have set a new target to bring that down to $1.5 billion. While in that there are some single name holdings, because we do engage in single name investment, there's also considerable holdings in a wide variety of private equity funds.

So the returns on that portfolio will reflect the overall returns I would think on the universe of private equity funds out in the marketplace, plus maybe a bit or a few with a slight venture nature to it for the single name holdings. I cannot forecast for you what private equity funds and private equity investments will do in the years to come, but there is a lot of history around that. And if you just apply it to the $1.5 billion you can come up with a forecast that to a certain degree is your view of the markets going forward for those holdings.

Thanks for the details, Gerry. Any luck, Tom?

Yes, here we go. I'm going to have to get you a bit more granularity which we will post on our Investor Relations website. But just to get you started, this quarter the two numbers I did disclose, just to repeat, are in the cards business about 20 million of the allowance that we've had booked previously, we reversed upon securitizing 1 billion 4. So that in effect came out -- and the student loans of 37 million. And that is a sum of those two is why the retail loan loss provision this quarter is as low as it is.

We did not to my knowledge in any of the first three quarters have similar reversals to those. However, if what you're referring to is on that corporate side the loans we sold in the year at mark, sort at prices higher than what we had marked them down and taken loan loss provisions last year, I can give you as numbers. Was that what you were looking for?

That's what I am looking for.

Okay. And I will give you the gains we booked, and I think in many cases disclosed these before. But I will have to go back and see what the loan loss provision that actually aligns with this number was. Because just to refresh your memory, last year when we in Q3 and Q4 put loans in held for sale, we attributed -- anytime we had a mark under 95 the whole mark was a loan loss provision. If it was under 95, it was a loss. So I can get that and post it.

And indeed when we sold some of these loans we sold them at above those numbers in any event, in some cases above par. So in Q1 the loan sales were 17 million, Q2, 72 million, Q3, 30 million, and Q4, 28 million, adding up to 147 million of gains. Now accounting does not let you go back and reverse your loan loss provisions. So all of that is in the investment banking and credit revenue line. So it is not the same as in the cards of the student loans. And only part of that 147 was in effect a reversal of previously taken loan losses. But as I say from an accounting point of view, it is not treated that way.

I will follow up with you later, Tom.

Jamie Keating from RBC Capital Markets.

Perhaps for Tom or Wayne. Thank you for the detail on the nature of the new classifications. Could you also just follow up as to roughly when these loans were put on in each of the three jurisdictions? And I guess I'm looking more broadly looking at seasoning your corporate loan book. I am curious about how the credit protection fits in here? You have got an awful lot of it. Could you just describe how much you're paying roughly for your credit protection on a run rate basis? And perhaps more importantly, if some of these are slipping through the cracks or not. Could you just give us a little flavor as to where you might want to bulk up the credit protection going forward?

I'll start off and then maybe Ken Kilgour could chip in. The whole objective here in the portfolio management sense is to try and eliminate the concentration risk. As you know, that is what plagues us over a business cycle, is the lumpy nature of a corporate loan book. And as a consequence that is where all of our hedging activities are directed. We have been very successful I think in that regard, and we do not have a lot of what we call internally excesses in a concentration sense.

The cost of protection varies, but as you know we are more or less at cycle lows if not all-time lows in terms and credit spreads. So just depending on whether you're where you are in the investment-grade or not investment-grade aspect of the question. But a lot of the hedging activities has been done at very attractive rates. I don't believe we disclose that information, but it is -- it all show up in the numbers eventually. As it relates to impaired loans, I mean they, they come and they go, but they get booked when we find them basically.

I just mean when the loans are from outs (ph), how old are these loans?

Oh, you mean when where they originated?

Correct. That is what I am asking.

I see. Okay. Well, then maybe, Ken, you can help me with that.

I can get the precise dates, Jamie, but they would have been in the '90s, late '90s.

I guess just following up on the credit protection, Wayne, I think I understand your emphasis on concentration. I guess we are also curious to understand how it is going to affect classification of ultimately losses. From that prospective am I trying to be too specific here? When you have these impaired loan developments and they are back in '99, is there a number apart from the portfolio that is quite aged that can't really be protected well, or is that oversimplifying?

I don't think age is really the market determination of what you can hedge. It is largely credit quality. As you move down the credit spectrum, the depth of the market deteriorates, and in fact there may not even be one. Right now you can get protection. In fact, in some cases depending on where you're looking in the United States in particular, all the way down to single D, I guess oddly enough. So maybe you can just make a few brief remarks about the depth of the market and where it is.

I think traditionally, Jamie, the market was not in Canada. It has come to Canada in a large way this fiscal year for us. It is quite deep and quite broad now. Most of the hedging that you see us doing in fact would be in that market at this time. The loans in question that you are talking about would have been, as I have said, put on in the late '90s, early 2000 at the (indiscernible), and would not have been loans that even in this environment would be hedgeable.

Okay. That's essentially what I was curious about. Thank you.

(OPERATOR INSTRUCTIONS).

We are going to take some questions here in the room again. Okay, Quentin first.

Just a follow-up to the credit protection and the expectations for PCL length (ph). If PCL starts to climb I guess the delta really is going to be back into the wholesale side where you have stated you have got the protection. So should we expect I guess an offset coming through the hedge lines on a mark to market a ACG basis, where otherwise -- where we going to see the PCL's rising but we should be saying revenue offsets coming from your hedge gains? Or am I not understanding the level of protection where it is that in terms of the portfolio and where you're going to see the losses?

I will let Tom deal with the economic issues. We are going to try and manage the book on an economic basis. So we will ignore the accounting issues because they will be largely adverse because they don't allow for the long side accrual on the short, and hedge side is mark to market so that is unfortunate.

Our intention is -- if you just look back to our business model, and we go back two years, the whole exercise here was to reduce the capital and reduce the exposure and reduce the earnings volatility. As you can well see, we have overshot the runway significantly. We wanted to it get down by one-third, we actually got it down by two-thirds.

The reason for that is the market allowed us to do it. We had a fair wind at our back, if you like. And we were able to get -- largely deal with most of the distressed assets in the portfolio, and deal with most of the concentration risk and reposition ourselves for this business cycle.

However, part of the organizational dynamics was to change the way we were doing the business also. So we continue to aggressively structure and underwrite credit, but we no longer have this appetite to hold large undiversified concentrated risk. So either through the syndication process or in the after market we will distribute into the market as best we can down to a hold level, because that gives us comfort on a portfolio level. In this environment there is a fairly insatiable appetite for credit, so we have no problem doing that through our syndication activities and our secondary market activities. So it may not necessarily show up in hedging.

But as you know, the book is not growing materially. It should grow from here because we did overshoot the runway a little bit. Business conditions are buoyant. We are there to serve the clients, and we are. We're not missing opportunities to underwrite. But the market is absorbing the excess risk from our prospective as we currently sit here. There will come a time when that changes, and that is when you'll see the balance sheet respond. But we're going to continue to be focused and disciplined around the hedging and distribution of risk.

But if I could just -- if I look at the 50 to 65 expected total bank range, and perhaps it looks a little higher than that, if we take it back a little father. Actually it probably works into that range. Have you not in terms of comfort level, given all the changes that the banks undertaken with hold levels, with strapping on protection, with just being better at executing on risk management -- I don't believe that you've made any dents here, or is it retail because of the card program and the size of that portfolio is causing you to stay in this longer-term range? I guess I hadn't moved the range, but I anticipated given all the risk management you had undertaken you could bring that range down over historical levels.

Notwithstanding our securitization activities, because that probably distracts you from getting to the core of the question, with a $10 billion card book at 400 basis points of LLEs there is 400 million. So that in and of itself distorts if you will -- I don't know if distorts is the right word because that is a good business, 400 basis points of LLEs is not bad. We want to grow that as best we can in the context of that risk envelope, and we have been doing that. But it creates large LLEs.

So that -- if you normalize for that, because we are maybe not quite double the next market participant, but possibly as much as double the next market participant, we would fall back into the same range as the rest of the field, which is in that 35 to 50 range. So I don't think that it is materially different than the field. There's no question though that we're underperforming in a couple of our retail segments, and Ron highlighted these two areas.

But the rest are not giving us problems whatsoever. And we will continue to grow the business as best we can. So we don't think that it is outside of the zone, if you like, if you adjusted for the out size nature of our card business.

Jim.

Two quick questions. One with respect to the business mix. Now we are at roughly about 75 percent in terms of retail earnings, you would think that the volatility in terms of the earnings stream would abate as well though. 2004 was an event driven year. You had a number of items, but do you see going forward the opportunity to have a much more stable earnings stream? The other banks seem to enjoy a little bit premium multiple as a result of that.

And the second question is with respect to expenses. The banks did a very good job in terms of reducing expense based over the past few years, but when you look ahead to 2005 in a low single digit revenue environment or a mid-single-digit, are there a couple of items that we could back out of what is occurring right now, such as professional fees and other items, that may maybe will show some incremental gains?

I will deal with the mix issue, and will Tom to comment further on the cost side. On the mix issue, we achieved sort of where we wanted to get to generally, to the 73 level. Going forward we will be prepared to accept that ratio moving in terms of retail between 75 and 65. And our point there is that we think there are opportunities in the wholesale businesses as well that will be acceptable to us in terms of risk profile and returns. So we don't want to -- we don't have sort of a hate on for the wholesale business. We like the wholesale business. So we are going to have a range that we think the bank will operate in there.

And to your point about greater stability, yes, we would like to see -- that is one of the key elements that we have been driving for is to have greater stability over time. And I don't -- I have to say that I don't quite get as fussed as some people do about quarter to quarter. This is -- I tend to look at a year. That seems to be a pretty good period to look at.

And so -- but to your point, we think we pushed hard enough in terms of the 70-30 target we're at. And we think that we can move around that number depending on where the best business is going forward. Tom, do you want to comment on --?

Yes, Jim, on expenses, the areas where we're working hardest on are in the tech and ops area, where I think I mentioned before we kind of have our projects that started probably 2, 2.5 years ago that are starting to really show some benefits. And the trick on the cost side of course is to just ensure your cost growth is less and is much less than revenue growth as you can.

You're right, next year, although we don't give specific EPS guidance or even quantitative guidance on revenue, if you track through the guidance I've given in my comments, I think you get to the point that on the retail wealth side you're looking at mid-single-digits. And the question is, is above 5 or less than 5. And you can make your own call on that. And on the real market side for us, as we have said in our written disclosure, given the absence of these loan sales, and given the fact that merchant banking run ratio in '04 will inevitably be higher than it is in '05, that is going to be less than the retail and wealth side, and is really a call on the capital markets.

So the question is how much can you offset the inherent salary and benefits increase which is low single digits with other efficiencies. Our governance spend is still going to be fairly high. We and the other banks have the Basel initiative, so that spending will be up in '05 versus what was in '04. Our other governance spending, which it may be the other Canadian banks don't have to really gear up, whereas we took a big bite out of that in '04, that part will be down.

Remember we said we were spending 60 million on governance initiatives, ex Basel because there is not much Basel spend in '04. That number would be 30 to 35 million as a comparable. But the Basel spend will be in more than offset that 30 save, so net net governance won't change.

Benefits, we have realigned some of our benefits programs without taking things away from employees, but doing it for less cost. Pension will be down just because markets are better. And we -- we're not quite fully funded, but we have made a big dent in what was sort of a middle of the pack deficit. We're now towards the top end, if you will, of the Canadian banks. Procurement, we've made a lot of headway renegotiating contracts. So those are sort of four or five examples.

Ian de Verteuil (Inaudible question - microphone inaccessible) A question for you, John, linked to the dividend and how you think about that. If I took the $1.06 of earnings and other things (indiscernible) all those things, the cash EPS of $1.27 in the quarter, and so 65 cent dividend is over 50 percent of that number. Even if I followed your comments and didn't think quarter to quarter what I thought for the year, I think even if I were to look at the current dividend relative to what you just earned, the pay out is like 47 percent. How -- is there -- I know (indiscernible), but is there almost a sense in the bank that you can even grow higher than that on pay out?

No, I would wouldn't -- we wouldn't be proposing going higher than 50 percent on pay out as an ongoing policy. No.

So the decision to go up sort of to the 65, do you think in terms of forward-looking earnings, maybe you could talk me through how you came to the 65 off from 60?

Well, I mean clearly number one we said that we were going to be operating at the beginning initially at the low end of the 40 to 50 range, which I think is where we have ended up for this, or will end up in effect for this year. If we -- we ended up I guess under?

Yes, just slightly under.

Just slightly under. Clearly I think that the increase in the dividend suggests to us that we will be operating in the 40 to 50 range. It is not our anticipation to be operating outside of that.

I guess two things, and first I guess for Gerry. In terms of world markets USA there are a number of comments that seem to indicate that it had a soft quarter. We aren't getting disclosure as we get in other banks for U.S. production efforts. So could you just give us a sense of what is going on in the U.S.? Whether the changes that have been implemented over the course of the last year and a half have created a platform that can actually create earnings? Or is earnings being created and in terms of growth, given the good performance of Canada, whether that is where the growth has to come from as capital markets respond? I am trying to get a sense of where the opportunity is if Canada had a great run, and what your comfort is that the U.S. is well positioned?

We went through a fair amount of restructuring in 2002 and 2003 and consolidated our industry groups, as well as in 2004 we combined a number of areas, the financial sponsor area, and the industry group area under one management. We get greater productivity, and hopefully had some revenue synergy. All that having been said, the U.S. today does not produce returns at the level of Canada. Canada in terms of the capital that is employed and the returns that we get it is far, far higher. And so we view that as an opportunity for profit growth.

So in terms of getting disclosure then what is the reluctance given some of your competitors provide U.S. versus Canada disclosure in this business line?

We just continue to think about it. Right now we haven't gone that far, and we probably provide more disclosure in other areas. Geographic splits is just something we haven't done. And you have raised it before and we will continue to think about it.

And then just comment on the NIX ratio. I think you mentioned that in terms of guidance it will remain consistent with I think last year's guidance, mid 60.

That's correct.

Let me talk for I promise no more than two minutes. We would like to get our NIX ratio down in the low 60s. And that is premised on the fact that we see the other Canadian banks doing that. We have got a number of tech announced products in place where we think we can make real headway. And that is where the real headway can be made.

Probably the biggest issue we discuss, as John could say at the Board and at the senior executive team, is how to balance short-term spending on governance and customer facing programs. With the high ROE levels and the high capital levels we have been reluctant to cut those. Now clearly we can improve our NIX if we did that. We have chosen not to, and that has hurt our NIX. Our business mix hurts us 2 to 3 percent, so that has an effect as well.

If you were to -- ex the litigation provision we're around to 66 for the year. We're not happy with that but we're solving for return on equity. And the business mix we have helps drive that return on equity. Some of the U.S. investment banking points Gerry made to the extent we can capitalize on some opportunities there, that is going to help the revenue line. And that obviously is a big input to NIX. The trick when you look out three years, just at that level mark is if you can grow your revenues faster than your expenses for two or three years in a row, you can get down into the low 60s without having to change your business mix, which helps -- which drives the ROE and without hurting your customer and governance spending.

We haven't got a hard 60 or a hard 63 target. I can see 63 with a set of assumptions, and you can do your models at mid single-digit revenue and low single digit expense growth and see how you can get to 63. And that is sort of the way we are viewing it philosophically. And I can see us getting to 60 if we have better revenue performance than the current market environment which would tend to imply. So 60 to 64 is sort of the band, but it is driven by a quarter by quarter judgment on how to spend on marketing, governance and other customer projects.

André-Philippe Hardy: This is for Gerry. The U.S. agency business, how significant is it to your earnings (technical difficulty)?

I will have to -- I will answer that if it is in our disclosure. I'm not sure if we disclose at that level.

André-Philippe Hardy: Well, the reason for that question --.

I have it here. We actually haven't given granularity specifically on the U.S. It would be -- I mean it is hugely material. Let me give you a context versus Canadian.

André-Philippe Hardy: Not material to earnings or to revenue and expenses?

Not even material to revenue in a whole World Markets context. And certainly not material to earnings at the moment given the tight margins we're seeing there today.

André-Philippe Hardy: Are you confident it can't get worse?

I will have Gerry comment on that.

Why don't I -- well, that business will be influenced -- our U.S. cash equities business will be influenced by the markets. And last quarter was a difficult quarter for us. There's nothing that I'm aware of in our cash equities business last quarter that is -- could be seen as a trend other than what we were experiencing in the markets. So if things improve, that will come back to the trend line.

I think that when you look at our overall business and you look at the capital markets change and then look at -- and the way we break it out is in the investment banking and credits products changes. People keep coming back to the same theme, which is the decline in revenues this quarter, and with does that mean? Is it something -- what you should you do with that looking forward?

And in answering that, I think that because I can't predict markets I would like to give you a little bit of context in terms of looking back over the last eight quarters and whether or not anything has actually changed in the businesses, because there have been some changes that have taken place in the businesses that you do need to factor in going forward. And Tom has touched on them, but people aren't -- don't seem to be connecting that to our revenue trend. So I'll just try to outline that.

In the capital markets area our average over the last three quarters of revenues would be $370 million. That is over the last eight quarters. This quarter it was $309 million. If you were to look at that there is one change that has taken place, and Troy Maxwell will outline it for you, and it is an accounting change that will affect our revenues going forward. And other than that the businesses should return to trend line depending upon market conditions and conditions like overall volatility and the impact it has in our U.S. arbitrage book. If you believe that the ability to earn trend line returns in our U.S. arbitrage business has permanently declined then that is something you should factor into your forecasts. But there's no structural change in our business that would indicate we should not return to trend line. There it is an accounting change, and Troy will outline that.

This is just the change that I referenced earlier around where we issue equity-linked notes and deposits. We are required under accounting rules that came to affect at the end of the first quarter of this year to defer the initiation revenues from over the life of the product, so it is really a shift of income into future periods.

Additionally, also in Q1 which impacts, if you will, the eight quarter trend that Gerry -- the eight quarter average that Gerry was referring to -- where we hold our own debts and equity, we eliminate any gains or losses from selling those within the trading room. And this would include when we hold them within baskets. And so for both debt and equity there is an impact of an elimination which is a permanent elimination of both profits, even though we for facilitation purposes and trading purposes continue to trade those debts and equities.

And if you would just give them an idea of the size of that.

Yes. So on a quarterly basis this is about in the range of say about 20 million a quarter.

That's the only change out of the $370 million trend line other than market conditions. And as I say, I can't tell you when -- I can't give you a forecast as to what market conditions are going to do, but I have no reason to believe that the last eight quarters would not be indicative.

Where there are changes that I think you should take into consideration going forward is in the investment banking and credit products area, the area that is broken out as $247 million of revenue. Contained within the last eight quarters, and again both of them I'm rounding off by about $1 million, is an average once again of $370 million of revenue. A pure coincidence that is the same average. But contained within that $370 million are the gains that Tom reference from running off our held for sale loan books and other noncore holdings.

And when you factor that in and look at other businesses that we're no longer in and where there have been structural changes, it is unlikely that you would get back to that level. And if you looked at that trend line you'd be looking at something more like what you saw last quarter, which was $320 million. And that is not intended to be, as I say, a prediction of the future, but that is the trend line that we have had over the last eight quarters that there is no reason we should return to if market conditions are prevailing similar to what we have seen over the last few years. Tom, did you want to add anything to that?

Any more questions on the phone?

Yes, we have -- we have a question from Steve Cawley from TD Newcrest.

Could you just clarify for me with all the charges and whatnot, maybe you said this and I missed it. But I heard a 10 percent EPS growth target for next year. Can you tell me what the basis for 2004?

Its Tom speaking. The 10 percent earnings per share target is a medium-term target, the same as all of our other objectives, so we're not providing guidance or even an objective on a one year basis. But generally speaking we look at a more normalized earnings. For disclosure purposes we can only -- using the new non-GAAP disclosure rules talk about reported. But we would tend to look at a more normalized number. The 10 percent through the cycle or through the next three years feels as an appropriate target.

Gerry, back to you gave your eight quarter trend lines, the real estate business -- which of the two businesses again does it go into? Does it go into to (indiscernible) credit or does it go into the other one?

It is in the Investment Banking and Credit Products.

And so let's say the 320 that you were alluding to, how much would real estate typically make up of that 320?

Tom is just nodding that we don't disclose at that level.

Just to give -- because I know people are intrigued about materiality. Both those businesses, give or take 5 to 10 percent, the business (indiscernible) referred to the agency business, real estate business of the total World Markets business. In a more normal quarter it might be down towards the 5, and in an out quarter it might be up towards -- probably not 10 but 7, 8. That probably gives you just exactly what you need to get a sense.

And what that tells you is we've got 12 to 15 businesses that are pretty -- not the same size, but there's no huge business that in any one quarter can cause a swing. So we're pretty diversified across those businesses. But in a quarter like we just had, when there was lower real estate finance activity, tougher business on the U.S. agency side, 4 or 5 of those businesses came together and didn't perform at trend line, and that's why the quarter revenue in that sector is down a bit.

One for Wayne. When you went into a discussion in your presentation about how you had spent more time to develop new technology, or implemented a new platform, in order to better evaluate the credit losses on the retail side, is that now over? Do you have your arms fully around this thing now when you're talking 200 million?

I am going to get Ron Cathcart to respond to that for you.

Yes, I would say that the last two years have been a process of significant build in our risk management capabilities required to deliver on loss expectations. At this stage we're very well placed to grow the portfolio and had very strong risk management underpinnings.

Would you holding on growing one of your business lines through this process?

Yes, there are certain controls where certain portfolios where we did hold back growth where approval rates were reduced and (indiscernible) the proper controls. That period is now bidding into a different phase, because those controls are now in place.

Maybe this is -- one last one. Maybe this has become such a marginal business that is not even worth asking here, but I feel compelled to after we just went through BNS and Mexico about their Caribbean operations, it just feels as if your Caribbean businesses have been struggling significantly since the joint venture with Barclays. Can you give us -- you don't have to go into great detail here, but can you give me just a general sense of how that business is operating right now and its overall trends?

It is Ron Lalonde. I sit on the Board at First Caribbean. I guess what I would tell you is that the main reason for the results being the way they are have been that we have been going through integration process between the (indiscernible) CIBC and the ex Barclays, and that has involved considerable cost of bringing those two platforms together. I think that that process is pretty much complete now, and we would expect to leave that integration work behind us.

Can you give a sense of roughly where the earnings are relative to where they were at the time of the deal?

I don't have those numbers in my head, but the earnings have been impacted certainly by the integration costs that I referenced. They have also been impacted by lower spreads as the interest rate environment has been lower in the last couple of years than it had been previously. And there is significant deposit business in the Caribbean. So those would be the two most significant factors. We can certainly control for the integration costs, and those will be reduced going forward, pretty much eliminated. For the interest rate and spread environment that will -- time will tell.

Jamie Keating from RBC Capital Markets.

Again in the category of I feel compelled. I guess for John. You know with the compliance spending and so on in the last year, you probably addressed a lot of critical issues on the institutional side. I just wondered if you could review for us how much of that, if any, is directed at the retail side? And more specifically, does the events of the last week -- do the events of the last week have any implications for spending against retail controls and so on going forward? And maybe just update us on what the internal work war cry on this would feel like or sounds like for just our benefit outside the bank?

In terms of the events of the last week, we have been able to in effect stop the problem that we had. We have put in place now what I would describe as a short-term solution that works well, but is not ideal over the longer term. And when I say longer term, we expect within weeks we will have a better solution. And none of this should have a material impact on cost in terms of CIBC.

I am not sure I understood the first part of the question with regard to the governance work over the last year.

I think you answered that part, John. I guess I was implying or asking if there was any need for more spending now as a result of this, but it sounds like you are saying --?

I don't think so. I think that we have pretty well scoped out what issues were in and what happened. And I think that as I indicated in my comments in the press, unfortunately these issues should have been escalated faster. And clearly we need to put in place, and we have put in place the policies and processes that would insure -- if that happened in the future.

Well, ladies and gentlemen, I want to thank you all for joining in the call. And I look forward to talking to, if not sooner, at the next quarter. Thank you very much.