Canadian Imperial Bank of Commerce (CM) 2005 Q1 法說會逐字稿

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

Thank you very much. Good afternoon, everybody, and welcome. We know you have a busy day today, and we'll try to make our meeting as brief as possible. We are aiming to conclude at 3:15. Our annual general meeting was held earlier today, and will be archived on CIBC.com for your reference. As usual, this conference call is being audio webcast, and will be archived, as well. There are some additional risk management slides which will be posted for your reference later today; if you think they are missing, they are coming.

As you know, 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. Here to speak to you today are John Hunkin, Chief Executive Officer; Gerry McCaughey, President; Tom Woods, CFO; Wayne Fox, Vice Chairman and Treasury, Balance Sheet and Risk Management. We also have other executives on hand to respond to questions, including Sonia Baxendale, Head of Wealth Management; and Jill Denham, Head of Retail Markets.

Thanks for your attention. I'll turn it over to John.

Good afternoon. Today, we reported net income for the first quarter of 2005 of $707 million. Earnings per share were $1.94, up from $1.54 a year ago, and return on equity was 25.7 percent. Our results this quarter included gains on the sale of our Juniper credit card business and the sale of shares of Republic Bank Limited and the sale of shares of ACE Aviation Holdings, Inc. After adjusting for these gains, ROE was still over 19 percent. Most gratifying is that all of our business lines performed very well. Tom will review our financial detail in a moment.

I just want to make a few comments today. Whenever there is a change in senior management, it is natural for all of our stakeholders to wonder what it portends for the future of CIBC. Gerry and I have worked closely together and with the Board, and I think it is important for you to know that the new management structure is designed to ensure consistency and continuity of CIBC's strategic direction. We have made significant progress in the past few years, and achieved many of the key milestones we've set for ourselves. We have made big strides in governance and in the culture of CIBC. It is not our intention to deviate too far from our core themes.

You will hear more from Gerry in a moment about our three key priorities for 2005 -- client focus, disciplined risk management, productivity improvements. Gerry's role as President and Chief Operating Officer, with primary responsibility for the three business lines, will enable us to look more closely at enterprise-wide initiatives that support clients and improve productivity.

My priorities for this year are the following -- first, lead CIBC's vision of being recognized as the leader in client relationships; second, introduce a more robust nonfinancial measurement framework, so that we continue to shine a light on the key issues of client satisfaction, employee engagement, brand strength, corporate responsibility and governance; and third, ensure that we continue to prudently manage our risk profile for the long term.

Now, I'll turn it over to Gerry.

Thank you, John. I'll make some remarks in two categories -- first, what we've achieved so far and how we're going to focus our attention going forward. In Retail Markets, we made tremendous progress on many fronts, from brand revitalization to branch renewal and from front-line training to upgrades in technology. We have done much to improve the client experience. In the process, we have grown topline revenue and made significant gains in the area of productivity. In cards (ph), we remain the leading player (technical difficulty) wealth management, our strategy to be the leader in (technical difficulty). Over the past five years, we have improved our market position, and today rank number one or two amongst the Canadian banks in most significant categories of the marketplace. In World Markets, we have significantly reduced risk and the factors that led to volatility in the past, while maintaining leadership in our Canadian platform and returning our US operations to profitability. Our World Markets franchise is now better-positioned to generate consistent returns moving forward.

While each of our businesses has established growth strategies in their own areas, there are opportunities to generate earnings growth by focusing on three key overarching strategies. These areas are our clients, productivity and credit. Let me start by talking about each, starting with credit.

Strategically, CIBC has targeted credit quality that is consistent with lower volatility in our earnings. CIBC World Markets has significantly reduced concentration and overall exposure in our large corporate loan book during the last two years to be consistent with this priority. In retail banking, we have refined the credit adjudication criteria on underperforming products. And, although there is a lag effect, the full benefits will be realized over time. As these benefits take effect, we will bring our overall retail loan loss performance to lower levels, thereby aligning our retail credit with the overall bank strategy of lower volatility.

Our second focus is on the area of improved productivity. Today, our productivity ratio is fourth amongst the Canadian banks -- not where we need to be. For us to be competitive, we need to strike a balanced position between costs and growth. We will support topline growth through targeted and select investments in our existing businesses, while holding the line on cost through eliminating duplication of effort and streamlining processes throughout the organization.

The third and most important area of focus is our clients. In recent years, we have invested significantly in client service, in technology and training for our people, in our branches and direct access channels like ABMs and telephone and PC banking and we have gained share as a result. But our competitors are not standing still and so we need to continue to move forward. Our opportunity is to provide our clients the highest and best use of the product range, the technology support base and the direct access channels that we currently have. This means increasing our clients' awareness of our broad-based capabilities, so that they can select the best service point based on their needs. Helping our clients find the right points of contact is an opportunity to further improve the client experience, and it will be a major focus moving forward.

These three areas -- credit, productivity and client service -- will contribute to CIBC's performance in the future, a future that will be defined by building businesses that perform consistently over time, striking a balance between risk and return and managing for the long term.

Over to Tom.

Thanks, Gerry. Slide 4 summarizes the quarter, which, as John said, had recorded EPS of $1.94, including gains on asset sales of 49 cents a share. Our results were helped by corporate loan loss recoveries, lower-than-normal project spending, good growth in retail balances and lower operating expenses. The results were hurt by lower-than-run-rate merchant banking revenue, lower treasury revenue and higher consumer loan losses.

Slide 6 summarizes our revenue, up 178 million from Q4. I will provide more detail on revenue in a moment.

Slide 7 summarizes our expenses, down 365 million from Q4, or down 114 million after taking out the Enron provision and the Air Canada recovery in Q4. Most of the drop was due to lower project spend, legal and advertising expenses and lower sublease losses. Project spend is expected to be about $40 million higher in Q2, with other expense changes probably offsetting each other, except for incentive compensation, which, as always, will be driven by revenue.

Slide 9 -- retail markets revenue was 1.46 billion, up from 1.33 billion in Q4.

Slide 11 -- in personal banking, revenue was a record 551 million. Deposit balances were up marginally from Q4. Deposit spreads were slightly higher, but this was offset by product mix. Loan balances were also up marginally, and higher spreads and product mix pushed NII here (ph) up 4 percent versus Q4.

Fee income was up marginally from Q4. The competitive environment for large deposits remains unchanged from Q4; i.e., the market is competitive but a little bit more disciplined that it was a year ago. We see mid-single-digit deposit balance growth for the industry in 2005, well down from 2004 growth of 12 percent.

2005 loan balance growth across the industry should be higher than deposit growth, but not as high as the 15 percent recorded in 2004. We expect to maintain or grow market share in deposits this year and maintain or give up a little share in loans.

In Q2, we expect personal banking revenue to match or fall a little short of Q1, as the effect of three fewer days in the quarter will have to be offset by growth in balances.

Slide 12 -- small-business banking also had record revenue, up 3 percent from Q4. Deposit balances were up, loan balances were down, primarily because we shifted some of our loans to the commercial banking group, and spreads were up across the board. Q2 revenue will be lower because of the shorter quarter and lower seasonal deposit balances because of tax payments.

Slide 13 -- in cards, revenue was 383 million, but this was affected by the securitization we did at the end of Q4 and the gain on the sale of the ACE Aviation shares that we received in the Aerogold contract renegotiation. Adjusted for this, Q1 revenue in cards was 363 million, up 3 percent from Q4 revenue of 351 million.

Balances in the revolve rate were up in the quarter, in line with seasonal expectations. Spreads were up, as well, but our average APR fell. We continue to make selective use of promotional pricing, although not to the extent necessary to maintain market share in all categories. The competitive environment for balance transfers remains heated, but has not escalated noticeably from what we saw in 2004.

In the premium card market, our Aerogold and Aventura cards continue to perform well. Cards revenue in Q2 should be about the same or a little lower than in Q1, adjusted for the gain on the ACE Aviation shares, as the adverse effect of seasonality will likely offset organic growth.

Slide 14 -- in mortgages, revenue was about the same as in Q4, as balances grew 2 percent, or 1 percent net of securitization, and spreads were about the same. This was offset, however, by lower prepayment of securitization revenue. The competitive environment in mortgages was stable through Q1, but it normally escalates somewhat in Q2, as spring volumes increase. We continue to see industry balances growing in the mid to high single digits in 2005, and we expect to maintain or grow our market share. Mortgages revenue should be about the same in Q2.

Slide 15 -- other revenue, which includes President's Choice Financial, insurance, student loans, West Indies and treasury earnings, was up 93 million from Q4, mainly due to the $85 million gain on sale of the Republic Bank shares. Insurance revenue was higher than normal, which offset lower treasury revenue and lower student loan servicing revenue, due to the sale of EDULINX.

Slide 16 -- retail markets, NIAT, 364 million or 257 million adjusted for the asset sale shown in the footnotes. That 257 was up 8 percent on Q4's adjusted NIAT of 237. Revenue was up in most business lines, as I have just gone through. Loan losses were up 37 million from Q4 on a reported basis; but, adjusted for securitization and the student loan loss reversal in Q4, were about the same. Expenses were up 36 million from Q4, but down 13 million ex- the Air Canada recovery in Q4, mainly due to lower project compensation and advertising expenses.

Turning now to our second of three business groups, wealth management, slide 17 -- revenue was 653 million, up from 612 in Q4.

Slide 19, imperial service -- the group serving the top 15 percent of our branch banking customers -- revenue here was a record 200 million, up 3 percent from Q4, due to slightly higher spreads and investment product sales commissions, offset by a seasonal decline in mortgage commissions. Funds under management, made up of investment credit and deposit balances, were up 1.1 billion or 2 percent versus Q4, primarily due to increased investment product volumes. Q2 revenue in imperial service will likely be down a little, due to the shorter quarter.

Slide 20, retail brokerage revenue of 277 million was up 26 million or 10 percent from Q4. January was the second-best revenue month ever. The increase was driven primarily by higher new issues revenue, due to a record supply of structured products in Q1. Secondary market equity trading revenue was also well up, with full-service brokerage volumes up 13 percent and discount brokerage volumes up 26 percent from Q4. Although February TSX volumes are even higher than January, Q2 revenue and retail brokerage will likely not match Q1, due to an expected leveling-off of new issue volume.

Slide 22, wealth products -- revenue was 130 million, up from the unusually low Q4 number. Mutual fund and GIC balances were both up. MERs improved due to product mix, and GIC spreads increased. Q2 revenue will likely be a little less than in Q1.

Slide 24, wealth management NIAT -- 114 million, up 14 million from Q4. Expenses were up 20 million, due to revenue-related compensation.

In our final business group, world markets, slide 25 -- revenue, 749 million in Q1, down from 791 in Q4.

Slide 27 -- in capital markets, revenue was 349 million, up from 309 in Q4. The equity component of capital markets revenue, which represents about 60 percent of the $349 million number, was well up from Q4, while the debt component was down marginally. Within equities, most of our arbitrage strategies performed very well in the quarter, and new equity issue distribution had its second-best quarter ever. Agency revenue was a little higher than in Q4, while structured products and commodities were down marginally.

On the debt side, revenue from foreign exchange was up from Q4, due to higher market volatility, resulting in more client flows. But this was more than offset by lower volume and interest rate derivatives, where volatilities and flows were lower than in Q4.

Although we are not quite a month into Q2, the outlook is for similar revenue to Q1, assuming similar markets. On the debt side, higher volatilities would be good for the business, but continuing flattening of the yield curve would be a negative. In equities, new issue revenue will not likely match Q1, while performance in the agency-structured products and arbitrage businesses will be driven mainly by absolute market levels and, to a lesser extent, by volatilities.

Slide 28, investment banking and credit products -- revenue, 296 million, up from 247 in Q4. The US represents just over half of this revenue, with Canada most of the balance. In the US, real estate finance and credit underwriting fees were well up versus Q4. In Canada, new issue equity was much higher and M&A was up, as well. The near-term outlook for US equity underwriting, M&A and real estate finance is good, but improvements there will not likely be enough to offset a leveling-off in Canadian new issues and US credit, both of which had a very strong Q1.

Slide 29 -- merchant banking revenue this quarter was lower than normal, with gains in other income of 70 million and write-downs of 47 million. Although the divestiture market, both private and public, continues to improve, we had relatively few opportunities to take advantage of it in Q1. We see this improving during the rest of the year. Our write-downs were concentrated in a small number of investments, and here, too, we see an improved run rate over the rest of the year. As has always been the case in merchant banking, the timing of revenue recognition is investment-specific, and will vary from quarter to quarter. However, we continue to feel good about the embedded value built up in this portfolio, and the effect it should have on our run rate over the next four to six quarters. As I said last quarter, we do not see the 2004 run rate -- that's last year's run rate -- being representative going forward, but we do see an improvement over Q1.

Slide 30 shows world markets net income of 173 million. By way of comparison, Q4 NIAT was pulled down by 194 million, due to the Enron legal provision, and Q2 and Q3 last year had high gains on loan sales, as well as loan loss reversals. Expenses in world markets this quarter were 31 million lower than in Q4, excluding the Enron provision, due to reductions across several cost categories.

My final slide is slide 56. Reported NIMs were down 2 basis points -- that's on a reported basis -- but NIMs excluding fixed assets, trading assets, soft or trackable (ph) preferred share dividends and adjustments due to securitization, which really gets at the heart of front-line retail spreads, were up 2 basis points. This occurred mainly because the prime VA spread widened marginally -- about 6 or 7 points -- helping our prime-based loan spreads, and retail price deposit pricing didn't change, offset only in part by a slightly negative impact of product mix.

Thank you, and I'll hand it over to Wayne Fox.

Thanks very much, Tom. Good afternoon, everyone. As Tom has highlighted, the first quarter of 2005 saw a continued overall improvement in our portfolios. Middle (ph) growth in net impaired loans, as well as specific provisions, continued to improve. Capital ratios remained strong, with Tier 1 at 10.5 percent and total capital at 13.1 percent.

Our fiscal 2005 guidance is for specific credit provisions to be 50 to 65 basis points, our medium-term target range, based on a revised ratio that now excludes reverse repos from the denominator, which provides a better measure aligning provisions with the source of credit losses. For your ease of reference, we have also included in the appendix a further slide illustrating the measure, both inclusive and exclusive of reverse repos. And, as Kathy noted, that will be on our website later this afternoon.

Our current view remains that approximately 70 to 80 percent of our fiscal ’05 provisions will be in the consumer sector, with the balance applicable to business and government loans. During the quarter, our general allowance remained unchanged. As advised last quarter, 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 OSFI and our external auditors. Currently, our general allowance is 86 basis points of risk-weighted assets.

A detailed recap of our annual specific revisions, as a percentage of net loans and acceptances for the years 1999 to 2003, are on this slide on a quarterly basis for the last five quarters. First-quarter provisions were down to 49 basis points of net loans and acceptances, excluding reverse repos, below our long-term target range of 50 to 65 basis points.

The consumer portfolio loss rate returned to a more normal level of 62 basis points, an increase of 18 basis points from Q4 '04, primarily related to the effect of the release of student loans allowance and credit cards in Q4 '04 -- the credit card securitization; excuse me. The business and government portfolio loss rate reduced to 10 basis points from 93 basis points in Q4 '04, primarily due to recoveries of amounts previously written off, as well as a reduction in the recognition of new specific provisions.

In dollar terms, specific provisions for the first quarter were 178 million, down 22 million from last quarter and up 23 million over the first quarter of fiscal '04. Our business and government credit provisions totaled 9 million, a decrease of 74 million over last quarter and up 11 million from the same period a year ago.

The Q1 consumer specific revisions of 169 million was 52 million higher than Q4, which had been reduced by the effects of the release of student loan allowance and credit card securitizations, as previously noted. We continue to expect that the recent actions taken to further manage the risk level of the consumer portfolio will lead to lower loss rates over time, but expect the remainder of '05 to continue to reflect Q1 loss rates.

Our gross impaired loans, shown on the next slide, decreased by 50 million during the first quarter, and had a year-over-year reduction of 209 million or 16 percent. As of January 31st, net impaired loans were 288 million excluding general allowance, down 20 million from Q4 '04 and down 129 million year over year. As a percentage of total loans and acceptances, net impaired loans were 20 basis points at the end of Q1, as compared to 22 basis points as at Q4 '04, and down from 30 basis points year over year.

From an industry perspective, the largest levels of new corporate credit classifications were from the agriculture sector at 38 percent, followed by the service and retail sector at 28 percent and the telecommunications, media and technology sector at 19 percent. On a geographic basis, credit classifications were substantially all in Canada.

And now, let's look at the total portfolio. Total net loans and acceptances after the general allowance totaled over 143 billion at the quarter end, up over 1.3 billion from October 31st, '04. Residential mortgages are up 872 million quarter over quarter and up 4.4 billion year over year. Adding back the securitized mortgages on a managed basis, year-over-year growth was 11.8 percent.

Personal loans increased by 527 million over the quarter and 3.3 billion year over year, for a 16 percent increase. Net incurred (ph) outstandings reduced quarter over quarter by 116 million, and were down 12.3 percent year over year, in part due to the 1.4 billion securitization of the portfolio in Q4 of '04. On a managed basis, and excluding Juniper, outstandings are up 4 percent.

Business and government loans increased by 141 million in the quarter, while year over year, loans have been reduced by approximately 1 percent. Our business and government portfolio continues to be reasonably diversified from an industry perspective, and is supplemented by our credit protection activities. We continue to view corporate credit diversification as an important objective, and are continuing to place emphasis on an active loan portfolio management to groom the portfolio and improve our returns. Further details on our diversification and credit hedging activity can be found in the appendix.

Turning to market risk, this slide displays the Q1 daily trading revenue against the value at risk in our trading portfolios. On no occasions did losses exceed the value at risk, and 89 percent of trading days provided us with positive revenue.

This next slide shows the risks in our trading books over the last six years. Risk levels were stable during Q1 and averaged $7.7 million of value at risk, around the same levels as in Q4, 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 business opportunities.

As we continue to make progress against our key business strategies for sustainable long-term growth, including managing risk, our solid results and capital position provide us with flexibility to return capital to our shareholders. During the quarter, we repurchased approximately 7.2 million common shares, for an aggregate consideration of 506 million. This is in addition to 226 million of common dividends paid in the quarter.

And our final slide displays that risk-weighted assets have declined by 26.9 billion since the end of 1998, while, over the same period, our Tier 1 ratio has climbed from 7.7 percent to 10.5 percent at the end of Q1. Since 1998, wholesale risk-weighted assets have declined by 51 billion, of which more than 70 percent is related to the reduction in the wholesale credit portfolio. During this same period, retail risk-weighted assets have increased by approximately 24 billion, primarily due to strong growth in mortgages, credit cards and personal loans. In Q1, risk-weighted assets were up 2.7 billion from Q4 levels.

And with that, John, I'll turn it back to you and Kathy.

Okay. So we are ready for questions.

(OPERATOR INSTRUCTIONS). Jamie Keating, RBC Capital.

My question is about the corporate loan loss recoveries. And I think in the first slide, Tom, you cited as one of the factors in your sort of discussion of how the earnings were helped -- I can't quite figure out -- I'm looking at slide 20, and maybe I'm not quite on the right slide here. But can you help me, maybe Wayne or Tom, understand the magnitude of the benefit from the corporate loan recoveries? And perhaps, if I can find it in the package -- we're swamped today, so I apologize for not finding it yet.

I'll have a go at this. Ken Kilgour is with me, and also Tom. I think, if I understand your question, you are trying to understand the aggregate corporate and commercial loan provisions for Q1 '05. Is that correct? Jamie, did I lose you? I just want to make sure that I'm responding to the question you're asking, because I didn't hear all of what you said. You are looking for us to expand upon --

On slide 4 -- Tom's slide, I guess, at the beginning of the package here -- results helped by corporate loan loss recoveries -- I just wanted to make sure. Is that something in the reconciliation, or what do you mean by that, Tom or Wayne, and can you help us -- just give the magnitude behind that?

Maybe I'll start and I'll hand it back to Wayne. The only point I made there was to -– was the fact that in world markets, we had a net recovery of 17 million, which was made up of gross recoveries, offset to a small degree by incremental loan loss provisions. I was just highlighting that. Clearly, that is not a sustainable number.

And another way to reflect that observation, Jamie, is our expected losses at this point we don't make public, but obviously expected losses are not negative. So it's unlikely that we will have, on an annualized basis, net recoveries for '05. So it's just, as you well know, the timing of these recoveries and provisions is not always that predictable. So you shouldn't read too much into the large corporate and commercial provisions for this particular period.

(Multiple speakers) it will be in line or slightly below expected losses, and I think that 70 to 80 percent reference point I made about total provisions -- we're trying to incorporate that.

I'm with you now; sorry. I just didn't know where that was pointing to. Another brief question is on the consumer side. Wayne, you pointed to the idea that this level will continue for the balance of '05, but you're hoping the number comes down in '06; or you are working towards that. Can you just describe why that number comes down in '06, what the basis for that thought process is?

I'll once again just highlight the macro issues, and Ron Cathcart is with us, and Jill may perhaps wish to comment, as well. But in brief, there are three or four forces at work, Jamie. Number one is, as you know, the portfolio continues to grow. Our current estimate is it will grow at approximately 8 to 10 percent. So from an absolute topline nominal level, the portfolio continues to grow.

Number two, as you know, over the last 12 to 18 months, we have introduced some new tools and technology into the bank that has made the risk more granular. There has been some catch-up, if you will, in terms of some of our provisions as a result, and they have been reflected in prior periods. And that has not yet run its course in the terms of that vintage of assets, if you like, that we have on the books.

And then thirdly, there are some products and businesses that are underperforming that we haven't quite got right, in terms of their structure or their pricing. And as you know, there's a lag effect between the changes that we make at the adjudication level and the time it takes for them to run through the portfolio. But we do believe that they have leveled off, and we believe that you'll start to see the positive effects of those changes, notwithstanding the growth in the absolute portfolio, by the end of this fiscal year.

So that's a high-level macro way to explain what's happening. If that's that sufficient, fine. Otherwise, I'll let Ron expand on that if you would like.

And that is unsecured credit, the last point you are making?

With respect to unsecured credit, I would say first of all that the credit card portfolio, which is the largest unsecured portfolio in terms of loss content, has performed very, very steadily. And there has been no change at all in the loss rate of that portfolio for some time. We are talking, really, about the personal loan portfolio and specifically the unsecured portion of that. Some of the actions that Wayne is talking about, I think Gerry already alluded to -- tightening origination criteria. We have also installed a number of scores, predictive scores, including bankruptcy predictive scores, and we have enhanced our line management and collection strategy significantly against that portfolio, on top of which we have heavily invested in lending processes and tools, as well.

A lot of that investment and activity took place last year; and so, as you know, with consumer portfolios, there's a significant lag effect. And we will expect to see those starting to take hold and bearing fruit by the end of this year.

Steve Cawley, TD Newcrest.

Just a follow-up on Jamie's question to you -- at the end of last quarter, before Christmas time, you put up on your website that you had $142 million of credit recoveries and reversals as it related to your held-for-sale portfolio. What were the level of those same reversals and recoveries as it relates to your core portfolio this quarter? And could you compare that to the previous quarter?

Unless they were linked to the held-for-sale accounts, they have expired, if you like. There's no more accounting impact to be had from any of those, nor do we expect any further recoveries, I think. From a public P&L perspective, that's the end of those two accounts, so you won't be hearing about those in this quarter or in future quarters, Steve. So I'm not sure if that's precisely what the question you're trying to solve for, but --

I was asking about the core portfolio.

Okay. In the core portfolio, the question is --?

The same thing, reversals and recoveries. They were 142 million in your held-for-sale, so let's forget about held-for-sale. That's gone now. In the core portfolio, what were the reversals and recoveries like?

Ken, do you want to have a go at some of the color on that?

Well, in terms of amount, they were about net $17 million of recoveries in the first quarter.

And how would that have compared to the previous quarter?

I don't have the breakdown, but I can get it to you, of the two.

Second one is for Gerry. A bit of a qualitative question, Gerry. As you are going through some of these businesses -- and the one I want to talk about is retail -- I guess the issue is the press seems to be doing a pretty good job of picking up different issues that have materialized on your systems platform, on the retail front. And there seems to have been a few bugs in the system recently. And then, this quarter, you see the project spend down. So what I am looking for is a comfort level about your systems right now, about the platform. And is there a lot of work that needs to be done?

Well, first of all, in terms of the reported numbers on project spending, you shouldn't read anything into that. We continue to be committed to our overall systems development within CIBC. And this quarter, project spending is a bit low, but you should actually expect that that would be made up through the balance of the year. So that's the first thing. We continue to invest in our systems, partially for the reasons that you were basically pointing out, which is that wherever one has manual processes, they are more prone to error than when you have processes that have been reengineered and a technological solution has been arrived at. So we remain committed to pushing in that direction for precisely the reason that you pointed out.

What is your comfort level with the systems today, Gerry?

Well, first of all, all of the major banks have enormous legacy systems. And when you look at all those legacy systems, one of the biggest issues that you have is change management. Whenever you want to introduce any changes, you are always going into an environment that in some cases has many linkages, and some of the systems -- and this is an industrywide issue -- are very old. They are very, very reliable, but they have been around for many, many years.

So I'm quite confident that we are very competitive, from an industry viewpoint, and that our change management processes have integrity. I think that on occasion, with some of the issues that we've had recently, that the real issue was how rapidly we dealt with the problem once it was escalated. And we've taken significant management measures to ensure that, whenever a problem turns up, that there is very, very rapid escalation that takes place. Right now, we have major spending going on in core systems -- in the teller systems area, in the Visa systems area, as well as we are upgrading the debt systems area, and we are in the back half of a major upgrade in the deposit systems area for GICs. So we are pushing forward, and it's not just an error issue, it's also in order to improve customer service.

And Wayne, quickly, last one. You have cut about 50 branches from the retail side of things over the last year. Is there a way to quantify -- and I know each branch has got a different size to it. But when you eliminate a branch, how much money do you save?

I will turn that over to Jill Denham, because she actually has the numbers.

If you look at the overall activity that has been going on since the beginning of 2003, which is a reduction of -- you know, it's the overall spend where we are closing branches and building flagships -- overall, we are saving about $10 million in terms of our annual cost -- so that's an annual savings.

And that is the total annual savings?

Yes.

Michael Goldberg, Desjardins Securities.

And I don't have a question about other other revenue this quarter, but I do have a question about noninterest expenses in the quarter. You mentioned that they may be about 40 million, below a normal run rate, because of project spend, but typically you have had some seasonality in your noninterest expenses, where the fourth quarter is considerably higher than the other quarters. Can you refresh my memory? Had you said something about getting a steadier trend through the year of noninterest expenses, I guess excluding incentive comp?

You know, in an ideal world, it would be great to have nice, smooth costs. Accounting rules being what they are, we book them as we incur them. Advertising is always big in Q4, just because of the timing of RSP spend. That gets recognized at the end of the year. This particular Q4, we had higher than normal legal and project spend. Those were the three main drivers as to why Q4 was high and Q1 is low.

Project spend in Q1 is always low. A good part of that has to do with the holiday period and the contractors that tend to make up a good chunk of the project spend not being here and the billings not coming through in Q1 as they do in Q4 and Q2. So I don't have a better answer than that, in terms of how to smooth it. We can't smooth it; it just falls the way it falls.

Okay. So there is nothing -- no change, I guess, from the typical pattern that I should be looking --?

No change from the typical -- but I would say last Q4, a quarter ago, was abnormally high. So if you were trying to plot the outlook for this year, I think it would be unusual that Q4 this year might be as much -- as high as Q4 last year, but there will continue to be that seasonality, I guess you could call it, in expenses.

And I also have a question about merchant banking. Is there any accounting change for a mark to market there on some of your merchant banking?

No. We looked at the accounting treatment that you heard Bank of Montreal on Tuesday introduce a year ago. We looked at it. It's pretty technical, the requirements to do that. Basically, you have to have these investments in subsidiaries. For the most part, ours are held in the parent bank and in the agent bank in the US. And that's helpful from a tax point of view, tax consolidation in the event of losses.

You know, I guess if we were starting from first principles, because we do philosophically believe in fair value accounting, we would go to a mark-to-market structure. But to move all these investments between legal entities, and to have to introduce a change to the investment community that has gotten pretty used to our approach, which we think is pretty conservative -- we don't mark up positions until we sell them -- I think on balance right now, we are content to stay with what we have got.

Andre Hardy, Merrill Lynch.

My question relates to expenses in world markets. Were they a bit too low, given what has happened with some departures, and should we expect those to rise? Or are you comfortable with that level at current revenue levels?

And secondly -- sorry to ask yet another question on the retail credit quality. But Wayne, were you talking about loss rates coming down or absolute losses coming down at the end of this year?

Well, not sure about the reference to departures and the expense level. There is no materiality to the departures, and there is no relationship to the expense level. So you can correct me at the end if there's something I missed there. And our expenses in the first quarter are somewhat lower than you should expect over the balance of the year, and a more normalized level over the course of the year, in terms of our plan, would be somewhere closer to the 570 level. But it bounces around a fair bit. So it is low this quarter.

Quentin Broad, CIBC World Markets.

I don't know if Andre got his second question answered with respect to retail credit, but he can come back, I guess. In terms of the credit on card costs in the quarter, can you give us a sense of what they were sequentially, Wayne, so that we can just see or understand the consistency kind of all-in with securitizations, so we can understand, I guess, some of the movement in retail credit, number one?

Number two, just in terms of the loan balances and securitizations of cards, just understanding how much Juniper -- on balance sheet and off balance sheet -- would have impacted the card balances, because you mentioned that your card balances are up, and yet, obviously, that's a little tougher to see when you put all this together. That would be great.

First of all, to go back to the question of dollar versus rate on the overall portfolio, we're talking about the individual components within the portfolio. Mix obviously has a big effect on the impact. If we're successful in growing cards, then we would expect to see the overall rate in the portfolio go up, because card has a higher loss content product. What we are focusing on specifically with those remarks is the personal loan portfolio, where we would expect to see rates decrease. Dollar amounts would not decrease to the same extent, assuming that we're able to get the growth that we're looking for.

The second question which you have asked relates to credit card securitization. I think the question is, what happens to rates on a managed basis -- cleansing (ph) for securitization effects. Is that the question?

Yes. Understanding, I guess, sequentially the provision for credit loss has obviously dipped in Q2. That was partly credit card driven, partly student loan driven. But I just want to understand how the card costs running sequential quarters, what they have been running.

They have been running very flat, with some minor seasonality, in the 4 percent range. And that has been consistent for the last at least year and a half, possibly two. And that's a managed number, which, as I said, doesn't account for the in's and out's related to the securitizations that matured in '03 and then the $1.4 billion securitization which we completed in Q4 of last year.

So then, if I look on the card balance sheet, 8550, which is down from 8689 Q4 despite, obviously, seasonality should be sending that number higher -- how much of that is being impacted by the Juniper sale?

In Q1?

Yes.

Very little, because Juniper was highly securitized, meaning very little of the credit cards related to Juniper went through the loan loss experience line.

No; I'm sorry, I’m talking about your balance sheet balances.

Brian O'Donnell here. As Ron just said, the Juniper balances were largely securitized. You can think in terms of about 90 percent securitized on the balance in the 1 to $1.5 billion range. So both of those securitized assets would have shown up in our supplemental schedule, where we detailed out card securitized balances, as opposed to on balance sheet.

Right. So that's the drop, Brian, from 3.2 to 1.7?

Right.

Right. So then, I don't understand, when you say that your card balances increased, and yet the balance sheet shows it's declining.

Yes. When we said that, he was talking on a managed basis, so what you would need to do is go back to Q1 of last year, add back the securitized card balances excluding Juniper, and then do the same thing in this quarter. And of course, you wouldn't have to exclude Juniper this quarter, but just add back the securitized balance. And that is what drove the 4 percent growth that Wayne talked about.

Ian de Verteuil, BMO Nesbitt Burns.

Just following on on Quentin's point here, the card fees in the noninterest income -- so page 3 of your subpart -- presumably, that is Juniper, because it did look as if, even though you lost share of payments, it did hold straight. Is that why the card fees are down?

No. That actually reflects the absence of credit card fees on the portion of the card portfolio that was securitized. It no longer flows there; it would flow back in through securitization revenue.

Right. So the fact that the on-balance-sheet balances are down is what causes that to go down?

Correct.

The second two questions -- the second one relates to AcG-18, which is this -- pardon my French -- cockamamie plan to require some of the innovative Tier 1 vehicles, which are convertible or exchangeable into stock to be -- for you to adjust those for fully-diluted calculations. What is CIBC's view on the impact of that on earnings?

Well, we agree with you. From an accounting point of view, it doesn't make a lot of sense, but there you have it. So we have a number of preferred shares, as all the banks do. And I know TD earlier today disclosed the impact.

If we did nothing, it would hurt EPS sort of low 20s, 22-23 cents a share per annum, which is obviously not desirable, although economically it's not an issue, but from a reported EPS point of view, that's what the market looks like. So we are looking at what the alternatives are, and going to have to wrestle with the idea of restructuring some of these, only to avoid reported EPS dimunition.

The two choices we have -- and it varies by series, we can -- and one is a fairly straightforward one. The series 24, 25 and 26 and 27 -- we can renounce our conversion rights at the option of the issuer. And I don't want to prejudge that just yet, until we investigate all of the technical issues. This has just come up in the last couple of weeks. We also have three series -- 20, 21 and 22 -- where we could call a meeting and revoke our rights in the meeting, with shareholders, because these rights really are not significant.

If we did all of that, that 22 or 23 cents would be brought down to about 5 or 6 cents a share per annum. And I think our bias is to do something to avoid that EPS drag. But we have not finalized that yet, Ian.

It would seem to me that the soft retractable feature is something which the unitholders would like, because presumably it forces it to be something other than a perpetual preferred. So if you just revoked your right to convert, I would think the unitholder would have a view on that, wouldn't they?

I wouldn't think so, Ian. This is just our own option to convert. We wouldn't contemplate going to -- so, I guess the point is, actually, I misspoke, Ian. 20, 21 and 22 -- you are quite right. The unitholders have rights. We can't do anything about that, so our only options with respect to 20, 21 and 22 would be to early redeem. And indeed, we have that flexibility later this year in all three of those series. So that's what we could do there. But we are not ready to announce that as yet. 23 and 19, we have no option because, as you say, the unitholders do, -- the pref holders have the right to convert, and they want that right.

But tThe second question relates to the unrealized securities gain on the balance on the equity piece of 607 -- now, you have indicated here in the notes on page 26 to the subpart that you -- part of the -- I presume these are the hedges on global payments. So you cap the upside, so the 607 -- really, it's probably overstated (ph) by 55, which is what you would get if those are forward sales, because of the forward sales.

Can you give me a sense of timing on when these start flowing through? And is global payments the bulk of this unrealized gain on the equity side?

Global payments is the bulk. It wouldn't be more than half, but it's in the 200's. These collars are -- we have flexibility, although they have maturities; I believe it's 2006-2007. There's flexibility to accelerate those or to push them later. But 2006-2007 is the current maturities.

So you have an ability to bring it forward, but you have capped the down side?

Yes. That's correct.

Darko Mihelic, First Associates.

This is a question, I think, for Tom. I just wanted some clarification, please, on the retail markets expenses. Did you mention that there was something in Q1 that sort of inflated that number a little bit?

I don't know that I mentioned it. One thing that did inflate the number was we have, up until the start of Q1 this year, held more expenses at the top of CIBC than we would like. And every year, we are sort of chipping away and allocating more out. This year, we did a complete review of the centrally incurred infrastructure costs. As it happened, retail got a little bit more of an allocation this year. I don't know. Chris or Jill, was there anything else unusual in the retail numbers in Q1?

(Inaudible).

Oh, right, yes. Good point. Q4, the Air Canada/Aerogold contract was a contra-expense. So, on a comparative basis, Q4 looked better than it really was, normalized.

But even year over year, it's up more than revenue growth if I adjust revenues. So the allocation that's coming from corporate to retail -- we can expect that for the rest of the year? Is that correct?

Yes, that's right.

Jamie Keating, RBC Capital Markets.

Just a follow-on for Jill, actually. I just want to discuss the competitive environment out there, if possible, Jill, and hear a little bit about what you are seeing, both in the small-business commercial side, from a competitive pricing perspective, and maybe discuss deposit growth there, as well. Also, on the mortgage front, I'm curious; can you describe for us a little bit of what is happening on customer preference for variable product, and where we are trending on that?

Let me first start in the deposit area. The deposit market has been fairly stable over the last quarter. We have not seen the price discounting that we experienced last year, so I would say, overall that market has stabilized. Our growth rates for the quarter about 1 percent, so that has slowed somewhat. And our market shares are stable.

As it relates to mortgages, again, market shares are stable in mortgages. Yes, the competition is intense, and we very much have a consumer that is interested in the variable-rate products at the moment.

So that's the same as it was before, the majority interested in variables, still?

Yes, very much so.

Can you also just let us get a little bit of insight here on the small-business commercial side? Or is that yours? I can't recall.

Yes, small-business is mine. I'm sorry; what was your particular question?

I'm curious. Some of your competitors have reported an increased level of competition and some slippage in market share. I'm just curious if you guys are picking up market share, how that segment is going.

No. If anything, we would probably be reporting the same as they are. It is a very intensely competitive market at the moment. But it has been very competitive for the last year. I don't think that's something that has changed in the last quarter.

Quentin Broad, CIBC World Markets.

I guess, a question for Gerry. Gerry, if you could, further expansion on the notion of enterprisewide initiatives that will improve efficiency, what exactly that means and what kind of timelines that we can expect that those will be undertaken.

There are a number of areas where we can work across the organization to achieve greater efficiencies. One of the examples is in the area of overall marketing and our product distribution. Today, we do have a bit more fragmentation in those efforts than is the most efficient and greater coordination and, as I said in my speech, elimination of duplication of effort and streamlining can help us to achieve efficiencies there and maintain a level of service while cutting down on the cost. There are other examples of that that are throughout the organization. And what it really is is trying to take wherever you have duplication across the businesses and, if it's more effective, centralize some of the functionality and get at that duplication, because you're taking an overarching view.

But does that run contrary to the attempt to get costs out of the corporate and other, as you try and centralize stuff and take it out of these individual operating areas, in order to be more cohesive or comprehensive or whatever? Aren't you taking expenses back up into a non-allocated unit?

Actually, I didn't make any reference to how we're going to account for things, and that's not what the exercise is about. It's about the actual running of these things, as opposed to putting expenses centrally or within the businesses.

But these initiatives would exist over top of the individual operating units, not within the operating units?

Well, not necessarily. It might be integrated within the operating units, and if 80 percent of the activity was in one of the businesses and you had duplicate activities in the others, you may just run it out of one of the businesses, and then roll in the other activities from the other businesses.

We just had an example of this that we are working on right now on our Internet activities, where we're going through a consolidation exercise for some of the retail sites. And they are all being -- the integration of the running of those sites is all going to be run out of the Internet area in Jill's world, and wealth management's Internet sites are also going to be administered out of that area. And the rationale is that there are benefits to be gained by standardization, both from the viewpoint of customer service as well as security and privacy issues. But on top of that, over time, it should be more efficient, because these various areas have been somewhat coordinated, but a little looser than we would like to be, in terms of architecture and that sort of thing. In addition to that, if you look at this model, one area was a much smaller user of Internet sites, but still significant enough, and we have all rolled it into the larger area so that we can achieve scale. Nothing is being moved to a centrally-held business unit.

Have you had enough time to size your expectations as to what this might mean for the bank, i.e., expense coming out of the system?

Well, one of the things we have put forward is that we must be competitive, from the viewpoint of our productivity. And competitive -- we would define the first threshold of that as being to achieve the median of the banks from the viewpoint of a mix ratio. And I'll turn it over to Tom now to tell you how much that would involve.

One NIX point for us is about 120 million. We still want to get down -- we are running around, although Q1 was better than normal, because our project spend was lower than run rate, we are probably running 65.5-66, and that is dragged to a pretty significant degree by mix and by our US performance. We still want to get down to the low 60s, so we are going to be vigilant in all areas. We've got some tech savings still coming in, probably another $50 million run rate over the next two years. We've got more opportunities on the procurement side. The world is changing, and every contract that comes up for renegotiation, we can chip away a bit there and in several other areas. So we are pretty optimistic here that we can get down, as I said, at the end of Q4 -- and I'm hesitant to put too much of a number on it, but into the low 60s over the next, say, 2.5 to 3 years, with revenue assumptions that are not unrealistic.

Quentin, I just went to follow up. I may have confused you earlier when I talked about increasing the allocations of cost from the center. That is merely an accounting point I wanted to make to -- I think it was Darko -- because as Gerry says, all of our -- generally speaking, any infrastructure service, to the extent you either run it centrally or in one of the businesses, and consolidate the effort, it's going to be able to be done less expensively. The performance measurement approach we take, though, is to allocate as much of those costs out to the businesses, in part to performance measure them better, but also to ensure that they are fully engaged in the cost/benefit exercises that they might not be if they were simply held centrally. So that was the point I was making there.

We've got time for one more question.

There are no further questions registered at this time.

Okay. Thank you all for joining us.