Canadian Imperial Bank of Commerce (CM) 2005 Q2 法說會逐字稿

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

Thank you very much. Good afternoon and welcome, everybody. Our conference call is being audio Webcast and will be archived later today on CIBC.com.

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 and Chief Operating Officer, Tom Woods, CFO, and Wayne Fox, Vice Chair, Treasury, Balance Sheet and Risk Management. Also on hand to respond to questions -- Sonia Baxendale, head of Retail Markets, Brian Shaw, head of World Markets, and -- sorry; is Victor here? Sorry about that -- Victor Dodig, for the first time, head of Wealth Management.

Thanks. I will turn it over to John.

Good afternoon, everyone. Today CIBC reported net income for the second quarter of 440 million, EPS were $1.20 and (technical difficulty) adjusting for a provision of 75 million, or $0.21 per share related to matters involving CIBC's dealings with hedge funds in the U.S., EPS were $1.41, up 6% from the second quarter of 2004. ROE on the same basis was 19.2%, up from 18.4 for the same quarter last year.

Our balance sheet remains very strong with credit and market risks in tight control and merchant banking portfolio reduced to gain. I would characterize this as a solid quarter. We repurchased another 2.2 million shares during the quarter, bringing our total for the year to date to 10 million shares, or almost 60% of what we are allowed to under our current normal course issuer bid. At the same time, our Tier 1 ratio improved to 10.7%.

For the rest of 2005, we anticipate continued low and stable interest rates, which should provide a positive environment for our retail and wealth management businesses. However, capital markets performance is less certain. Despite a recent widening of credit spreads, we expect our credit quality should remain stable through the balance of the year.

We are well-positioned for solid performance against our medium-term targets. As you know, our key objectives continue to be steady growth on a strong balance sheet and a continued focus on our clients. As evidence of our ongoing confidence, this morning our Board approved another increase in our common share dividend to $0.68 a share. We have now raised our dividend 66% over the past two years.

I will now turn the mic over to Gerry McCaughey.

Thanks, John. Overall, the second quarter was a relatively solid quarter for CIBC's operating businesses. World Markets benefited from the continued strong Canadian equity markets and higher merchant banking revenues, but experienced slowdowns in other markets. Revenue for the quarter was down slightly from Q1.

In terms of individual businesses, commercial banking and capital markets were down in the quarter while merchant banking was up. These two essentially offset each other, while investment banking and credit products were essentially flat over the quarter. Despite similar revenue quarter-over-quarter, World Markets profit was down $21 million after-tax excluding the charge related to U.S. hedge funds. Tom Woods will provide more detail on this in a few minutes.

Wealth Management delivered a strong quarter. Revenue was at its strongest level in five quarters. The revenue increase was driven almost entirely by a strong performance in retail brokerage over the last quarter. Imperial Service also delivered a record quarter, slightly ahead of its previous record which was last quarter despite three fewer days. Expenses were up moderately in this business primarily due to volume driven expenses. Profit was up slightly excluding the $37.5 million charge related to U.S. hedge funds.

Our Retail Markets delivered results consistent with Q1 despite three fewer days and seasonal lows in our dominant cards business. Loan loss experience improved during the quarter, driven primarily by lower credit card provisions as the result of additional securitizations in the quarter and improved loan loss ratios due to favorable bankruptcy experience. However, we expect the balance of the year loan losses to be close to Q1 levels, as we do not anticipate any additional securitizations later this year.

So, in summary, Q2 was a solid quarter for CIBC's operating business. I would characterize our performance as steady in what were some overall moderate market conditions.

In addition to our business strategies we outlined last quarter, three overarching areas of focus to further enhance our operating performance and support CIBC's goal of performing consistently over the long term. These areas that we highlighted were focusing on our clients, productivity and credit. The new organizational structure we announced in the past quarter support these areas of focus. By merging our Retail Markets division with parts of our Wealth Management business under Sonia Baxendale, and focusing on traditional wealth businesses under Victor Dodig, our goal is to increase the value we deliver to our clients as well as drive improved efficiency, productivity and accountability across all of our businesses. Sonia and Victor are actively engaged with their businesses and will be refining plans for moving each business forward. I will be providing more details on our plans and our progress in subsequent quarters. I will now turn it over to Tom Woods.

Thanks, Gerry. I'm going to refer to the slides which are on the Website. Slide number four summarizes the quarter, which had reported EPS of $1.20, as John said, including an increase of 75 million in the accrual for the eventual settlement of a hedge fund financing investigation, or $0.21 a share. This has been allocated 50% to each of Wealth Management and World Markets. Results were helped by good retail brokerage, better than run rate retail loan losses, and good merchant banking revenue.

Results were hurt by the short quarter, slower capital markets activity, higher project spending and tighter margins. Although we have reorganized our Retail Markets and Wealth Management divisions, the reporting format has not yet changed. We are looking into alternative reporting formats and could change as early as next quarter.

Slide six summarizes our revenue. I will provide more detail on this on a business-by-business basis in a moment.

Slide seven summarizes our expenses; up 131 million on the quarter or up 56 million excluding the increase to the hedge fund financing accrual. Most of the increase was due to higher project spending as discussed last quarter, in particular our move into new premises in New York. We expect that most expense lines will be flat to down in Q3.

Slide nine. Retail Markets -- our first business. Revenue was 1.31 billion, just slightly below Q1 revenue if you adjust for gains on sale of assets in that quarter.

Slide 11, in personal banking, revenue was down 2% from the Q1 record level, mainly because there were three fewer days in the quarter. Deposit balances were down 1% on the quarter and up 9% on the year. Loan balances were up 1% on the quarter and 7% on the year. Industry pricing remained competitive but there was no substantive change this quarter. We expect higher personal banking revenue in Q3, helped by continued growth in balances.

Slide 12. Small business banking revenue was down 4% from Q1 due to the shorter quarter. Deposit balances were down 1% on the quarter and up 8% on the year. Loans were up 2% on the quarter and down 3% on the year, primarily due to loans transferred to commercial banking in Q1. Q3 revenue in small-business should be higher.

Slide 13. In cards, revenue was 332 million. Q1 revenue of 383, adjusted for the gains on sale of the ACE Aviation shares, would have been 349 million. The drop in revenue in Q2 was due to the effect of three fewer days, higher securitization and seasonality. Balances were down 2% on the quarter as expected and were up 4% on the year. Purchase volumes were down 7% on the quarter due to seasonality and were up 5% on the year. Market share was down marginally in outstandings but well up in purchase volumes. Aerogold and Aventura, our two premium cards, continue to perform well despite heightened competition. We expect higher cards revenue in Q3.

Slide 14. In mortgages, revenue was up marginally from Q1. Balances were up 2% on the quarter and 10% on the year. Our market share held at 14.7%. Spread narrowed a little with price competition increasing as it usually does in the spring. Mortgage revenue should be about the same in Q3 and higher in Q4.

Slide 16. Retail Markets net income. 263 million, up 6 million from Q1 adjusted for the gains on sale in Q1. Loan losses were down 23 million primarily due to securitization of assets and reduced loss rates in cards. Expenses were down 12 million from Q1 mainly due to lower compensation accruals. Compared with Q2 a year ago, retail revenue was up 5% this quarter and net income was up 32%.

Turning now to our second business, Wealth Management, slide 17. Revenue was 663 million, up from 653 in Q1.

Slide 19. Imperial Service is the group serving the top 15% of our branch banking customers. Revenue consists of transaction account and loan spreads and a share of GIC, mutual fund and other wealth management product revenue. Revenue remained strong in Q2 at 200 million. Funds under management were up 1.5 million or 2% versus last quarter and 6% versus Q2 last year. We expect Imperial Service revenue in Q3 to be higher than in Q2.

Slide 20. Retail brokerage revenue was 288 million, up 11 million or 4% from Q1, mainly due to higher trading volumes which were up 2% versus Q1 in full-service and 21% in discount. Assets under Administration in CIBC Wood Gundy were up marginally versus Q1 and up 8% versus a year ago. TSX volumes in the month of May to date are a little lower than the Q2 run rate, and therefore, the outlook for -- and the outlook for new issue equity is not quite as strong. Therefore, Q3 revenue will probably be a little lower in retail brokerage than Q2.

Slide 21, Wealth Products’ revenue was 124 million, down 6 million from Q1 due to the impact of three fewer days and the CSB campaign revenue in Q1.

Slide 22, Wealth Management net income was 78 million, or 115 million before deducting Wealth Management's share of the increase to the hedge fund financing accrual taken in Q2.

Our third business, World Markets, slide 23. Revenue was 742 million in Q2, versus 749 in Q1. So, down marginally.

Slide 25 in Capital Markets revenue was 325 million, down from 349 in Q1. The equity component of Capital Markets revenue which represents about 60% of the 325 number, was down from Q1. Our arbitrage strategies did not perform as well as in Q1. New issues were down marginally from the strong Q1 levels. Agency business was about the same as Q1 and retail structure products were higher. The outlook for equities in Q3 is mixed. New issues will likely be down, arbitrage should improve and client structuring and agency business will likely be about the same or a little lower.

On the debt side, revenue was also down from Q1 as volumes fell in the wake of the auto sector downgrades and the yield curve flattening. Although we are structurally long across our debt books in order to serve our clients, our risk levels have been moderate, which meant our downside was limited when spreads widened. Fixed income activity to date in May continues to be slow as buyers seem to be waiting for the market stabilize.

Slide 26. Investment banking and credit product revenue of 299 million was a little higher than in Q1. The U.S. represents about 50% of this number with Canada about 30%. U.S. revenue was up marginally due to another strong quarter in U.S. real estate finance and a CDO (ph) restructuring gain.

In Canada, revenue was down a little due to lower new issues and M&A. In Canadian equity underwriting, we maintained the number one position for the year-to-date. The outlook in this business is mixed for Q3. There's a reasonably good Canadian equity pipeline, but the U.S. market is less active. Our M&A pipeline in both markets is good, but probably more Q4 than Q3.

Slide 27, Merchant Banking had revenue of 61 million, well up from Q1, with gains and other income of 87 million net and write-downs of 26 million. Merchant banking revenue will continue to vary quarter-to-quarter, but we would expect a normal run rate to be closer to Q2 revenue than Q1.

Slide 28 shows World Markets net income of 115 million or 152 million before deducting world market share of the increase to the hedge fund financing accrual. Now, over to Wayne Fox.

Thank you. Thanks, Tom. Good afternoon, everyone. As Tom has highlighted, the second quarter of 2005 saw continued overall improvement in our portfolios as total growth impaired loans, as well as specific provisions, continued to improve, and our capital ratios remained strong with Tier 1 at 10.7% and total capital at 13.4%.

Fiscal 2005 guidance is for specific credit provisions to be within our 50 to 65 basis points medium term target range. And our current view is that approximately 80% of our fiscal '05 credit provisions will be in the consumer sector with the balance applicable to business and government loans.

During the quarter, our general allowance remained unchanged and is 86 basis points of risk-weighted assets. As advised last quarter, we expect our level of general allowance will range between 85 to 90 basis points of risk-weighted assets, subject to any reduction being reviewed with OSFI and our external auditors.

A recap of our specific provisions as a percentage of net loans and acceptances is presented on the next slide. In aggregate, second-quarter provisions were down to 45 basis points of net loans and acceptances, below our medium-term target range of 50 to 65 basis points. The consumer portfolio loss rate was 53 basis points, a decrease of 9 basis points from Q1 of '05 -- the result primarily of the effect of credit card securitization and lower bankruptcies in the quarter.

The business and government portfolio loss rate increased to 22 basis points from 10 basis points in Q1, primarily due to lower recoveries in the quarter. In dollar terms, specific provisions for the second quarter were 159 million, down 19 million from last quarter and down 48 million over the second quarter of '04. Our business and government credit provisions totaled 19 million, an increase of 10 million over last quarter but down 14 million from the same period a year ago.

The Q2 consumer-specific provisions of 140 million was 29 million lower than Q1 and 34 million lower than Q2 of '04 primarily due to lower credit card provisions. We expect the remainder of '05 to be closer to Q1 levels, assuming no further securitizations with recent actions taken to further manage the risk level of the consumer portfolio leading to lower loss levels over time.

Our gross impaired loans shown on the next slide remained relatively flat at 1.1 billion during the second quarter. Year-over-year, gross impaired loans reduced 176 million or 14%. As of April 30, net impaired loans were 348 million, excluding general allowance, up 60 million from January 31 and up 8 million year-over-year. As a percentage of total loans and acceptances, net impaired loans were 24 basis points at the end of Q2; that's compared to 20 basis points at the end of Q1 and unchanged year-over-year.

From an industry perspective, the largest levels of new corporate credit classifications were from the agricultural sector at 41%, followed by the manufacturing sector at 32% and the service and retail sector at 17%. On a geographic basis, credit classifications were substantially all in Canada. Now let's look at the total portfolio.

Net loans and acceptances after the general allowance totaled almost 145 million at the quarter end, up 1.1 billion from January 31 '05. Residential mortgages are just up over 1 billion quarter over quarter and up 4.6 billion year-over-year. Adding back the securitized mortgages on a managed basis, year-over-year growth was approximately 11%. Personal loans increased by 598 million quarter-over-quarter and 2 to 5 billion year-over-year for an 11% increase. Credit card outstandings reduced quarter-over-quarter by 473 million and were down just under 18% year-over-year, in large part due to the $1.9 billion of securitization of this portfolio in Q4 of '04 and Q2 of '05.

On a managed basis and excluding the impacts of Juniper, outstandings are up 6%. Business and government loans increased by 215 million in the quarter while year-over-year loans have been reduced by 0.8%. Our business and government portfolio continues to be richly (ph) 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 active loan portfolio management to groom the portfolio and improve returns. Further detail on our diversification and credit hedging activity can be found in the appendices.

Turning to market risks, this slide displays the Q2 daily trading revenue against the value at risk in our trading portfolios. Risk levels were stable during Q2 and averaged approximately 8 million, slightly above the levels of Q1 but significantly below historical levels and consistent with our goal of constraining revenue volatility. On no occasion should losses exceed the value at risk and 79% of trading days provided us with positive revenue.

This final slide displays that risk-weighted assets have declined by 26.9 billion since the end of 1998. Over this same period, our Tier 1 ratio has climbed from 7.7% to 10.7% at the end of Q2. Since 1998, wholesale risk-weighted assets have declined by 52 billion, of which more than 70% is related to the reduction in the wholesale credit portfolio. During the same time period, retail risk-weighted assets have increased by approximately 25 billion, primarily due to strong growth in mortgages, credit cards, and personal loans. Q2 risk-weighted assets were unchanged from Q1 levels (technical difficulty) declines in wholesale risk-weighted assets were fully offset by retail growth.

And with that, I will turn it back to Kathy and John.

Okay, we're open for questions.

(OPERATOR INSTRUCTIONS) Steve Cawley, TD Newcrest. Mr. Cawley, please go ahead. Your line is now open.

On the securitization, the income was 18 million in the quarter. The gains were much higher than we have seen in previous quarters and you alluded to that, and you said that in the next few quarters that we should not expect the same level of securitization. Is that right?

It's Tom. We did a second card securitization in Q2. That might occur in the future. But, unlike the mortgages where we have been doing that virtually every quarter under the CMB program, any future card securitization might be fairly sporadic. It's more an opportunistic approach to the market to diversify our funding rather than tapping into the established CMB program.

How much, Tom, would that have helped retail PCLs?

I'm going to give you a round number and then I will check it. What, Chris? About 10 million? 10 million in the quarter roughly. We will correct that, but that's give or take $2 million in the quarter.

One more on securitization. You reduced your discount rate to calculate gains on sale. And I was wondering was that -- did that at all materially improve your gains?

No. The answer is no from the expert here. This is very complicated, Steve. We can certainly give you a briefing on that. But, the answer is no.

One other one on the consumer front. The formation is still pretty high on the impaired loans formation on the consumer front. Can you give us a little bit of color on that? A little bit more than what Wayne gave initially?

I will ask Susan Walker, Senior Vice President of Retail Risk Management to make a few color comments (inaudible).

We did see an uptick in personal loans (indiscernible) in the quarter. There had been an uptick previously in the early stage delinquencies which was captured in our provisioning model. And so, those have been recognized. And the good news is we are starting to see early stage delinquency begin to come down. So, that improvement over time should flow through the portfolio.

One last technical one for Tom. The AcG 13 was (indiscernible) of 21 million in the quarter. What was it after-tax?

Most of that -- I think that's on slide 55, I think, if people want to -- or 56 is on the in effect FX of hedges? And these are hedges bringing -- or swaps bringing our floating U.S. back to Canadian floating. So, that would presumably be a normal tax rate, Steve. 32, 33%.

So that is a pre-tax number, correct?

Correct. I should tell you, Steve, I know you and some of the others in your discussions where their investor relations staff raised this, from the standpoint of should that be taken out of a more normalized EPS. I think you have to be careful in doing that. These particular swaps have the effect of hurting our reported NIM. So, while you may want to look at AcG 13 gains and losses quarter by quarter it's a bit of an unusual item. You know, I think you have to factor in that NIM because of what happened to the interest rate spreads in the currency, gets hurt by that. So, if you penalize a Company's EPS for AcG 13, I think you also have to look at the NIM and say it's probably a little lower than it would otherwise be.

Maybe we could talk about this at great length after the call, Tom?

Rob Wessel, National Bank Financial.

I just have a couple of quick questions. I think mine are easier than Steve's. If you go to slide 66 in the investor presentation, and I apologize, Wayne -- I think you had mentioned that with respect to PCL guidance -- and maybe I misunderstood -- but you had given a percentage breakdown between what you thought the provision levels would be from retail and what you thought they would be from business and government?

That's correct.

What was that number again? I am sorry.

80% consumer, 20% corporate and (inaudible)

And then I wanted to take you to slide 16 on page 8, and I just wanted to ask about the credit card loss ratios. It said improved loss ratios in cards. Can you give us the actual loss ratio, say, this quarter and last quarter?

I guess we can't. We haven't actually (indiscernible) that information. But, Susan, do you want to make a few comments about the trends in the credit card portfolio (technical difficulty)

You can give the loss ratios, too, if you like.

Looking for the loss ratios now. The trends have been very stable over time in our card businesses. I'm not sure if you're looking for the owned or the managed number post-securitized, so if you could let me know (technical difficulty)

I will take both.

(inaudible) been running at 4%. I think were down in the 80s about now.

And I may have misunderstood it and I apologize if I do, but if you go to slide -- it's in the appendix -- it is, I believe it's slide 62 down in the bottom right on page 31. Now, it looks like the card balances when you go to the balance sheet and adjust for securitizations -- and correct me If I'm wrong -- are still down meaningfully. And so I guess my question is, is that an important number that it's -- is that correct? Has it declined meaningfully? And if it has, does that speak to you either a change in risk tolerances for the bank with respect to that portfolio or is it a lost market share or have I just gone off in the wrong direction?

Three things, Rob -- it's Tom speaking. One, Q2 seasonality hurts us a bit and I mentioned that in my script.

I was thinking year-over-year, Tom.

Year-over-year. Okay, then the second reason is securitization, which, correct me if I am wrong, we did about what 700 million in Q2. Was that the number? (multiple speakers) 543 in the second quarter, Rob. So that is a straight reduction. And we did an earlier deal for what size, Chris? 1.4. And when was that done? Q4. So, roughly $2 billion has been done if you're comparing Q2 '05 to Q2 '04. And then juniper we sold; that was consolidated in.

So there's nothing to that credit card portfolio. It's generally been reasonably stable or --

(multiple speakers) nobody said that. As I said in my comments, Rob, market share and outstandings was down marginally in Q2. That was versus Q1; probably down a little bit more versus Q2 last year. So it's several items. But the market share component would be a relatively small component.

Okay. One more quick question on the buyback. The buyback activity this quarter was -- it was -- I think fair to say sort of meaningfully lower than it has been, say, in the previous four. I guess my question is, is there a reason or is there any conclusions we should draw from that or are you sort of managing to a certain capital level? Or was it just -- you looked at your stock and you thought maybe we would be better off to buy back more stock after the quarter?

It's Wayne Fox speaking, Rob. No, I think if you looked at all of what's been going on over the last couple of years, we have been very consistent in our application of our share buyback program. I think the only exception of course was the decision by Mr. Li Ka Shing to dispose of his (technical difficulty) in the bank (technical difficulty) couple of months ago. We took that opportunity (multiple speakers) meaningful participants. So, if you factor that in, I think you will look at this over the course of the year-to-date if you like well on track and in fact arguably ahead of our program. And we're committed to the film of (inaudible) buyback.

Michael Goldberg, Desjardins Securities.

A couple of questions. First of all, net interest margin excluding trading revenue narrowed. And I am just wondering broadly speaking, is the narrowing due to product spreads, ex, or the flatter yield curve?

Rob, it's Tom. I heard product spreads and flatter yield curve. The answer is it was due to all three. Product spreads, particularly in mortgages, typically happens in Q2 with the spring campaign or a little tighter not hugely. Deposit spreads were more or less the same with a bias to the downside perhaps. Mix certainly hurt us because -- every Q2 because of seasonality in cards. The representation of cards is a little lower. And the flattening yield curve as I alluded to indirectly to the answer to Steve's question at the beginning, we rely on U.S. funding for some of our Canadian financing. We bring it back through swaps. The U.S. curve as you know flattened more than the Canadian curve. And that hurt our NIM. So, those are the three reasons.

I also had a question about slide seven. I'm just wondering a couple of things. First of all, is all of the 22 million that you mentioned, Tom, project spend, or how much actually was unusual project spend during the quarter.

Our project spend is spread out amongst some of the lines. The bulk of it happens to -- in this reporting format, the fall in there. And the vast majority of that 22 as I recall was the higher project spend, which was up about 35 million in Q2 versus Q1. Now, you recall in the Q1 Webcast I said I thought would be up about 40 million. Ten of that by the way was sublease losses we took on our New York real estate consolidation, which I point out we don't -- we haven't tried to classify that as an unusual item, but that's not a common charge. So, most of that 22 would be project spend Michael.

Also, the 18 million increase in professional fees; is that related to project spend also, or --?

A good chunk of that, probably 10-ish, would be project spend. And most of that would be in respect of assistance we had from external consultants on some of our governance initiatives.

Should we look for that to move back to lower levels in the next couple of quarters?

Yes, that would be one. I should point out as well that the Q1 number for professional fees was abnormally low as it always is in Q1. We get rebates from certain consultants booked in Q1. So that project spend of 86 -- I don't have the plan in front of me, but my recollection is that should be lower -- probably not down to the 68 we saw in Q1 for the reason I mentioned though.

Ian de Verteuil, BMO Nesbitt Burns.

Thank you. Two questions. The first one relates to the charge with respect to mutual fund financing. And I know, obviously, given the state of events you're going to have to be careful. But, I wanted to just make sure that I was clear that these activities related to largely the Oppenheimer business which was sold to Fahnestock quite a period ago, or is there something new in terms of activities that this charge relates to?

It's Tom. No, there's nothing new here. This relates to what we disclosed back in -- well, we probably disclosed it even prior to that. But, the first reserve we took was in Q1 '04, and it's that very investigation that we're part of with the SEC as well as the New York Attorney General. Nothing new.

The second question relates to capital. In quarter, I think you issued about 400 million of non cumulative preferreds. And the majority of it doesn't look as if its eligible for Tier 1 status because you are (indiscernible) on the non (indiscernible). It looks to me as if CIBC has a slight need-to-fund (ph) attitude towards gearing up its Tier 1. You always seem to max on that number, even if it means you're issuing non (indiscernible) which don't even get Tier 1 status. I was wondering is there some reason that you -- you know, it doesn't look as if your common equity is growing that much because you are aggressive on the buyback. Why would you be layering in more sort of Tier 1 and waiting?

It's Wayne Fox. Good observation. We're not actually trying to do what you suggest. We're trying to prefund, however, some (technical difficulty) redemptions that we would make in some of our existing (inaudible) share (technical difficulty) I think you'll see this normalize by the end of the year.

So, some of these (indiscernible) preferreds (indiscernible) will come out and the other stuff will move into Tier 1?

That is correct. And as you well know, the definition of capital continues to unfold. And as you know, these newer issues are more stable, if you will -- permanent Tier 1 capital.

Just the last point -- I said two questions; (indiscernible) sneak in a third one. The questions earlier with respect to credit card receivables and the decline -- if I just use page 6 of the sup pack with the CIBC Retail Markets, and I look at the card loans administered, presumably that puts together both securitization together with on balance sheet. And that is really an indication of how the card business is running. Is that right?

Ian, it's Tom. Page 6 of the --

Of the supplemental pack where you gave card loans administered.

Yes. I guess, Chris, the Juniper (multiple speakers). No, I didn't. So that would. And just to your earlier questions, current balances year-on-year are indeed up 4% when you strip out the Juniper and you look at it on a managed basis, which excludes the effect of securitization.

So, this really would be the number to focus on in looking at PCLs and things like that?

Yes.

Susan Cohen, Dundee Securities.

Just a question on your merchant banking portfolio. You're now down to just a little over $1.5 billion. And correct me if I am wrong, but I thought that was basically your objective in terms of where you would like to be (indiscernible) get the merchant banking portfolio down to?

It's Gerry McCaughey here. We set a target of 1.5 shortly after we went through our old target, which had been 2 billion. And around the same time as we executed our sale of some of the assets in the merchant bank -- and that brought us down to about 1.7. As I have mentioned in two of these Webcasts, we at the time did a calculation of the future commitments that we had to meet, as well as the expected runoff of the portfolio, and then allowed a reduced budget in terms of new purchases. And that took us out over a couple of years down to about $1.5 billion. That -- we have gotten down to that 1.5, basically as a result of a better-than-expected experience in the runoff of the portfolio and the taking of profits. However, that is not what we consider to be the optimal level of that portfolio. We actually would prefer that over time the portfolio run down to a lower number, and there are a variety of reasons for that. One was to use several yardsticks that are available in the marketplace. One would find that a portfolio for CIBC in the 1 billion or less level would probably be closer to optimal. We did set the 1.5 target because it was a reasonable target and it was a number that was below the level that we were at when we set the target and the intent of that was to continue the discipline in reducing the size of this portfolio. Given the expected rate of maturation at this point and the commitments that we still have, it is not yet to appropriate to move that 1.5 down, but we will be assessing that in the quarters to come. And if we set another target it will be a lower target.

Okay, so you might in fact look towards a $1 billion target and might that be two years away, five years away? Do have any sense of a time frame for that?

Well, I didn't say that we were going to set a $1 billion target. I said that our next target would be lower than 1.5 billion. And I do not have a time frame at this time.

Perfect, thank you. And perhaps just one other question on your expenses. Your employee compensation and benefits in the second quarter was very close to your first-quarter level, and yet you did have some areas of capital market weakness in terms of the revenues. Would you expect perhaps for that number to be lower going forward to reflect some of the potentially lower payouts in the capital market side?

Susan, it's Tom. It's hard to give a good answer to that. We look at comp every quarter on a formulaic basis. Some businesses are driven off topline, many are driven off not bottom line, but net income before tax and incentive comp. As we get later in the year, we can fine-tune those ratios a little bit better. So typically in Q1, perhaps, we are a little bit more cautious and we just stick with the formula. As it happened in Q2, we did deduct a relatively small amount off the bottom formula-driven numbers. But it's hard to speculate what Q3, Q4 might be.

Andre Hardy, Merrill Lynch.

Thank you, I have two questions. The decline in the loss rates on the credit card portfolio, is that simply better bankruptcies or are you actively trying to reduce risk there as well? And if that is the case, does that contribute to the decline in net interest income margins? And my second question takes us back to slide 56, where the impact of ACG 13 on your credit risk was not very much. Given that your long production and credit spreads widen during the quarter, I would have expected a bigger gain there. Can you please help me understand what happened?

I will deal with the credit card question, Andre. It's Wayne Fox speaking. Just think about the credit card business over the last several years. As you probably note, we have been growing the business at close to 20% per annum over the last three to four years. So we have been in a rapid period of growth and we have captured a significant market share, if you like, over the same time horizon. And we have profited, if you will, by some of the consolidated (technical difficulty) industry.

Having said that, the credit costs associated with this business are a little larger, if you will, than our current risk appetite. They pierced the 4% range or the 400 basis point range over the last few months or so. We think we have now gotten to a market position and given credit conditions and our expectations going forward, we would like to see those costs come down a little bit. So if they got into the 3.5 to 4% range, that would be where we would be trying to guide this large missile. As you all now, this is over and above other costs the rest of the industry experiences, but as you well know, they drive exceptional returns and profits to the bottom line. So entirely intentional, and it's a difficult task to do, but I think over the next several quarters you will see that those costs will tend to trend a little bit lower. And they're absolutely helped, if you will, by the improving bankruptcy picture, but it was really a management initiative (technical difficulty).

Okay, so that probably didn't help your spreads in retail either, right?

I will leave that one to Tom as well.

No, it didn't. On the ACG 13 question, Andre? That number is net of a number of things. We are long, as you know. We did, however, have some losses in that on positions that actually went the other way. A significant component of that -- and actually, this slide maybe could be clearer. That number includes the cost we bear for buying protection. Okay? So that 2 million -- and I don't have that specific number, but if you were to take out that latter number, that 2 would probably go up to, it certainly would be under 15. But it might be around 10, depending on what you put in or put out. So that technically isn't just ACG 13. It has cost of buying protection in there as well.

Darko Mihelic, First Associates.

Hi. Thank you. I just thought I'd circle back here again to the net interest margin, Tom. With regards to your previous answer, with respect to the declining quarter over quarter, 13 basis points, let's call it decline in net interest margin, you said it was a mixture of decline in product spreads, the flatter yield curve and some seasonality with respect to the mix. So if I am reading this correctly, assuming no change in yield curves, we can expect a pretty big seasonal bounce going into Q3. Would that be a fair statement? Or may be perhaps you can give me how much margin was impacted by the three different factors?

Darko, I don't have a split. None of those three had an overwhelming effect. All three of them contributed. So it's hard to be too precise about that. I frankly wouldn't be as bullish as the way you hypothesized it, I guess, in terms of any bouncebacks. Certainly, the current seasonality, you know, if history repeats, should help us. Again, historically, mortgages, Q2 is the toughest quarter in terms of spread. What happens in the U.S. yield curve is hard to know. I'm hesitant to guess. But I don't think I would say that you're going to necessarily see a huge bounceback, all things being equal. But you should see some.

Michael Goldberg, Desjardins Securities.

Thanks. Just noticing your business lending is pretty flat year-over-year, quarter-over-quarter. And I'm just wondering if you could give us some color about your appetite for business lending and also the pricing environment that you're finding right now?

Wayne Fox speaking. And you're all welcome to chip in. I don't think our strategy in terms of lending, if you will, for the large corporate and commercial business segment has changed. We continue to be aggressive underwriters and structurers of credit. One thing, though, that differentiates us, I think, from our peer group in Canada is we are also equally committed to distributing the risk into the market and/or hedging that exposure over the business cycle so that you will see through our portfolio of management activities there will be a lot of hedging and related activities to eliminate the concentration risk or the event risk over the cycle.

So I think if you also look at the underwriting statistics or the lead tables, if you prefer, you'll see that we continue to have a leading role to play in that marketplace in the Canadian context in particular, but mind yourself that we are also very act is in both the U.S. and Europe.

Pricing and related conditions in the credit markets have become very loose, as you well know. Leveraged financing in particular has reached pinnacles I think most of us have not seen in our career. So you have to be very careful and cautious in terms of your structuring, underwriting and distribution. (technical difficulty) experience because it's not inconceivable at some point the market may back up and you will have some hung underwritings.

But I think our credit risk appetite continues to be quite healthy. We're here to serve the clients, help them access the marketplace. But we will try to disintermediate that risk into the marketplace to the best of our ability.

Michael, it's Tom. Maybe I'll just add to Wayne's comments on the corporate side by a brief comment on the mid-marker or commercial banking side. You saw our revenue was down a bit this quarter. What is happening in this market, and this is the small public company or large private company market that all the Canadian banks are generally aggressively seeking out, that market is getting particularly competitive the last three to six months. And it really depends on the sector. The oil and gas and real estate sector are quite strong in terms of demand. Many of the manufacturing companies, however, the loan demand there isn't as great. Currency is a concern.

We have not stepped back from it, but it's becoming quite competitive and there are some deals that we have not chosen to step up to just based on price. The outlook, however, is a little better going into Q3 than what we have seen. But overall, that's been part of the reason our loan balances across the broader corporate commercial side haven't grown compared with what they have, say, the last couple of years.

Quentin Broad, CIBC World Markets.

Good afternoon. I guess for Gerry, just in terms of Tier 1 capital ratio, if I look at where the bank is focused having the minimum at 8.5, I think John has said previously in these times you would like to have it higher. But just looking at what these times represent now, and what you see in front of you, Gerry, is there a Tier 1 capital ratio that looks too high and is 10.7 that ratio, given the comments made by Ian in terms of constant replacement of the capital? Rather than simply letting it run down, you seem to keep stuffing it full and keeping these levels elevated.

We are satisfied with our Tier 1 ratio as it stands. We have been raising our dividend in line with our policy, and between that and our share buybacks, we have been using all of our earnings on an ongoing basis. So what that means is that we have stability at this time in our Tier 1 ratio, although at a high level. And we're satisfied with that for the moment.

Is that to support growth that clearly on an RWA business hasn't seemed to be -- been happening over the course of the last couple of years at least, Gerry? I mean, why keep it so elevated? I mean, I understand stability, but it doesn't appear that we are heading into a real unstable environment at this juncture.

Well, having an elevated Tier 1 ratio is in line with our stated policy of staying at the lower-end risk of the spectrum in terms of the industry. In addition to that, we want to have flexibility in terms of if there were opportunities that came up. And if those opportunities were created by difficult industry conditions, you have got to have your powder dry. So we're keeping our options open by having a higher Tier 1 ratio, and at the same time, if that Tier 1 came down to the 10% level, that wouldn't bother us either. But for the moment, we're keeping our powder dry.

A second question, I guess, in terms of -- and I'm not sure if it is for you, Gerry, or Tom, or whom. But I think for the first time, you put in disclosure that you would like to have an efficiency ratio at the median of the Canadian banks. So I guess I'm trying to figure out exactly what that means against current levels. It looks like it's about 62%-ish, which would mean quite a bit of revenue dropping to the bottom line.

So I guess a couple of things. First, why have you used that kind of benchmark for yourselves versus let's say a target revenue expense gap? Secondly, do you have a timeline to where you would like to achieve that median efficiency ratio? And is there any kind of restructuring charge that obviously I would've thought you would've had to announce it. But just in terms of trying to get there, is this a drastic carving of expenses, or is this an evolution that you think has to happen with a combination of rev and expense line changes?

Well, the first question that I would answer is why were we're using the median as our target. And the reason why is because, first of all, it shows where we should be competitively. One would presume that to be competitive from a productivity viewpoint, you should be at least at the median of the industry.

The second reason why we're using this is because it therefore is a moving target, and it shows that this is an ongoing discipline rather than a onetime exercise. And let me explain what I mean by that. We believe that our competitors are currently engaged also in streamlining activities and efficiency improvement to improve their cost income ratios. And so right now, we know what our gap is to the industry median. But that's a snapshot today. And as we come into line with our costs in relation to our income, we will have to look again at the industry. And if it has moved and the median has moved, it means that we will have to take further action. So using this as a measure provides a dynamic target to that will move with the industry as opposed to a onetime event.

And so, where does that leave us today? It leaves us today with a gap between ourselves and the median of the industry. And the way we measure that gap, it's between 225 and $250 million of expenses if you were to hold revenues steady, or if you were to have a lesser expense reduction, you would have to have a commensurate revenue increase. And we think that over the course of the next two years, probably by the end -- probably a little less than that, probably getting to our target by the end of calendar '06 -- that we could close that cap, meaning that we could achieve 225 to $250 million of expense reductions without having a negative impact on revenue.

And there are three areas that we are going to be looking at in terms of achieving those efficiencies. We do not at this time anticipate any major charges as a result of this, although I wouldn't say that I can be certain that there will be no charges. But there will be costs to getting this done, but we intend to absorb those costs as part of our ongoing business operations rather than trying to take a charge all in one quarter.

And we have a number of areas we're looking to; there are three major buckets generically that we intend to look at in terms of our efficiency improvements. The first is that right now, we do have a high level of project spend because of the number of major projects that do run their course during the period that I talked about. And we do not anticipate having to replace those projects with other large projects, and that will be helpful in closing the gap.

The second bucket or area that we're looking at in terms of improving our efficiency is in the area of as the business grows, we have identified a number of opportunities to restrain the growth of expenses in relation to the size of the business through leveraging our scale. And the third area is areas of actual reductions as opposed to the other two buckets that I identified. And I'm not going to give you any specifics on those reductions at this time, but we will talk about them as we implement them in the quarters ahead. Does that answer your question?

It does. If I could just have one final clarification, Gerry, just so that we can understand the benchmark of what the gap is. You seem to be alluding that it's a measurement that the bank would take versus simply let's say taking out the onetime charges, looking at the NIX today, comparing the NIX to the banks and determine -- obviously that's an easy way to determine where the median is. It sounds like with that kind of 250 million expense, if I use the top and use the current quarter annualized revenue number, that that's only about 200 or so basis points, which looks a little different from where I think a median, just looking at your NIX verses the median of the bank. So is there other calculations or changes to try and modify for business composition that Tom has talked about in the past that goes into your definition of median bank versus yourselves?

Well, we believe that the gap between ourselves and the median is a little bit more than 200 basis points, and Tom Woods can outline for you the competitive field and how we arrived at those numbers. Tom?

Thanks, Gerry. Well, first of all, the median will be what it will be. I mean, in Q1, the median, if you exclude the number one and number five firm, was around high 63s, low 64s. So for the moment, we have been looking at ours as being call it 65.5, 66 on an adjusted basis versus 63.5, 64, i.e., 200 basis points, recognizing that is probably -- that 63.5 is probably going to go down, Quentin. But right now, 225, 250 million or a little over 200 basis points is where it works out. Now if our competitors improve, as Gerry referenced, then the bar will get higher. And we will have to react both on the revenue line as well as on the cost line.

Ian de Verteuil, BMO Nesbitt Burns.

This is a question for Gerry. And it relates to CIBC World Markets. One of the things that I certainly noticed is a fair amount of pressure on the part of regional broker dealers in the United States in the high yield business and their margins in the cash equity business. And a number of them have talked about structural changes, whether it be better visibility on pricing, on height yield, or just, you know, push back from investing clients in the commissions they pay. I guess, Gerry, what is your perspective on CIBC World Markets' position in the United States today versus, say, I don't know, a year ago. Do you think that that trend to squeeze margins is a secular trend, or do you think it is just a reflection of, you know, we're in a tough equity market?

I am going to turn it over to Brian Shaw, who is both an expert in World Markets, but particularly expert in the areas of high yield that you talked about. However, in terms of your overall question as to the position of World Markets in the U.S., over the last few years, we have improved our position dramatically. We are using much less risk in the business. We have moved the business in a direction where we are very focused on a smaller number of industry groups where we have managed to achieve profitability. It is not robust profitability, but the business is operating in the black. And most importantly, it is operating at a profitable level, with levels of risk that are acceptable to CIBC within the context of our risk strategy. So, overall, the business is fairly solid. It is smaller; it is less risky; and it is profitable. There is lots of room for improvement, and I'll turn it over to Brian to talk about that and the specifics of the question that you put to us. Brian?

Thanks, Gerry. In the question you raised, if I understand it correctly, is is there compressed margins or margins continuing to be compressed in transactional businesses in the U.S. referencing high yields and cash equities?

That's correct.

I think it is absolutely fair to say that whether it would be in the U.S. or in Canada, that there is some margin compression going on in what I would think of as commoditized transactional businesses. And we all, whether it be Canadian banks, U.S. banks, investment banks, have to face that. I guess there are some other factors that play out here, though. To the extent one can migrate some of that transactional business to electronic sorts of methodologies, you can probably do it on a lower cost basis.

Secondly, as Gerry referenced, there are some ways where we are taking costs out of those businesses and also improving them by taking capital out of them. You know, certainly I guess if you looked at our '05 plan and it has been to some extent discussed in past conference calls, we have a variety of what I would call modest, narrowly targeted initiatives to improve the businesses, whether it be cash equities or high yield. And those aren't heavily capital-intensive initiatives, but they are efficiency-oriented initiatives. So we are attempting to offset that margin compression by efficiency improvements. And I think we're having some degree of success in that, but I think the general inference or perception in your question is correct; there is margin compression.

And as you look at the business, I think, Gerry, you said the business is operating in the black with reduced risk. So you have taken risk out, but the profitability has stabilized. I mean, is it just that there were too much expenses before?

Well, one of the biggest changes that we have made, and this is not new this year, is in the last credit downturn, we were holding a fair bit of credit risk. And thus we had our fairly negative experience in terms of loans losses. The business today underwrites to distribute and has much lower hold levels than it had in the past. And that would be the first area that I would identify as being a much less risky way to operate the business.

In addition to that, we continue to operate throughout all of World Markets at lower levels than our limits in terms of market risk. And that is partially driven by diminished opportunities in the marketplace. But the fact remains that, dollar for dollar, we are operating both on the credit and market risk side at a much lower level of risk. And probably the simplest measure of that is the fact that World Markets peaked out using a little bit more than $5.7 billion of capital, and today is running on $2.7 billion of capital. And that is the -- I think a somewhat simplistic proxy for what I mean in terms of the lower risk.

Thank you very much. That's very helpful, guys.

Jim Bantis, Credit Suisse First Boston.

Good afternoon. It looks like a lot of meat to the call at the end here. With respect to the 250 million expense gap that we talked about, could you, I guess, give a breakdown with respect to those three buckets on how that 250 would be broken up between project spend, leverage scale and actual reductions? And the second question I wanted to talk about, when you -- looking at your productivity ratio, you're obviously staying relative to your peers, but obviously business mix is pretty important in how we get to there. Right now, retail is roughly about 75% of earnings right now, and where do you see that number going to, particularly now with the new strategic direction that you're putting Victor and Sonia in charge of?

The first thing is that I will try to give you a sense of direction on the three buckets, but I'm not going to give you numbers behind each one of them, particularly since the third bucket, which pertains to actual reductions and activities that we'll be taking, I will be talking to you each quarter as these activities take place. And I think that the magnitude of the buckets from a relative viewpoint will become more evident as we roll through that. So that would be the first element that -- the first answer that I would give to the question. The next is that -- I'm sorry, what was the second part of your question?

As you said, you can give me a direction with respect to the split among the three buckets. And then the second question, Gerry, specifically was with respect to the retail wealth management risk representing 75% of earnings this quarter, and where do you see that going with respect to the strategic initiatives that you're putting Victor and Sonia in charge of? And how does that really relate to a productivity ratio going into 63%? I mean, doesn't business mix put you at a disadvantage with respect to this?

The target that we have -- that target that we've set, it wasn't so much in terms of earnings, it was in terms of capital usage, when we set about reducing risks within CIBC was to achieve a 70% capital usage in our retail businesses. We actually went through that several quarters ago when we achieved a 72% capital usage in our retail businesses. At the end of last year, given the reductions that had taken place that had passed our goals as well as our desire to give some flexibility to the World Markets business to grow if there were opportunities, we widened the band of capital usage so that the retail component could fluctuate between 65 and 75%.

As of now, we're still around 72%, and that is not because of restraints that we have on World Markets. It's because they are operating at what they consider to be their optimal level. And if there were opportunities, they would take advantage of them. So for the moment, I would say that you will not be seeing much of a shift in terms of the retail to wholesale ratio, but that is driven by the fact that there are not a lot of opportunities for the business to grow in World Markets as opposed to restraining one of the businesses one way or another. Does that answer your question?

Yes, it does. If I could just -- you had mentioned that World Markets -- that getting closer to an optimal level? Is CIBC World Markets in the U.S. now EVA-positive this quarter?

No, it's not EVA-positive, but it is profitable, excluding the increase to that hedge fund financing reserve. But it is not yet where we would like it to be.

Jamie Keating, RBC Capital Markets.

Good afternoon, all. I have a really simple question here. I'm looking at the market shares through slides 35, 36 and ultimately slides 39 and 40. I'm just trying to piece together how you're feeling about where your market shares are going here and I'm actually zeroing in a little bit here on Imperial Service, which by productivity numbers and so on appears to have done quite well. It's clearly leveled off in terms of financial advisers recently. And yet the market shares, as far as I can tell, haven't really responded, at least in fixed-term investments, mutual funds and so on.

Tell me if I'm misinterpreting or how you feel about what is going on here. Is there an opportunity for even a call to further improve productivity, or do we see another leg up or a leg up on market share, period? Can hear me okay?

Can you just repeat your question?

Sure, slides 39 and 40. Trying to understand how to reconcile market shares in mutual funds and fixed-term investments, which look quite flat relative to Imperial Service productivity numbers recently, which appear to be up.

Sure, a couple of things. One, we should disaggregate -- to some extent you have to disaggregate the two pieces of that, because Imperial Services is only one portion of it. But, I would say across the board in Imperial Service, we have continued to grow our share, our market share or share of wallet in all of the investment categories, as well as in the cash management and lending area. So that does continue to grow. We continue to consolidate and continue to have positive experience in the Imperial Service space. Where I would say that we have continued opportunity is with the broader base of our CIBC distribution group, where we are not as strongly penetrated on the investment front and there is room for continued opportunity in that area. Does that answer your question, Jamie?

I think so. I'm getting the message that the branches are in need of a productivity and sales improvement, or, you know, productivity of sales improvement.

I think there's opportunity for growth in our retail and small business segments in the investment category.

We have time for one last question. Michael Goldberg, Desjardins Securities.

Thank you. Again, following along the lines of the revenue expense gap comments, aside from aiming to close the current revenue expense gap that you talked about, Gerry, what are you doing so that even after the gap has narrowed, that this becomes more of a continuing discipline?

Michael, as I mentioned earlier on, the new set of measures is intended to make it a continuing discipline because the direction of the industry is in the direction of improving NIX ratios. So once we close the gap, one would presume that our competitors are working today with their sets of initiatives to improve their ratios. I think that we will find that since it is a moving target that we will have to do more in order to keep the gap closed. And that is why we have selected this particular measure.

One of the things, Michael, that I would just want to mention here is that we have talked about a number of initiatives that are our overarching focus in the bank. And in our scorecard, we put down that our annual target is 10% earnings per share growth. And we believe that if you look at what our earnings can improve through topline growth in line with our track record, as well as an incremental improvement in our expense experience of $225 million, if you put that together with our share buyback activity and the improvement that we are expecting in our credit experience, if you add all those numbers up, it goes a long way towards establishing the foundation for the 10% annual earnings per share growth that we have put into our annual report scorecard.

And all these things will work together to keep our earnings growing in line with what we have said are our targets. And these are multi-year goals and will be accomplished within the risk envelope that we have been talking about over the last few years. And I believe that those types of productivity increases in relation to our earnings base are substantial because they're a net pickup versus our competitors the way we have set this goal up.

So ladies and gentlemen, thank you for attending and have a nice day. All the best.

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