Canadian Imperial Bank of Commerce (CM) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to CIBC's fourth-quarter and year-end conference call. Please be advised that this call is being recorded. For optimal sound quality we recommend that all BlackBerries be turned off during the conference. I would now like to turn the meeting over to Mr. John Ferren, Vice President Investor Relations. Ladies and gentlemen, Mr. Ferren.

Thank you. Good afternoon and welcome, everyone, to CIBC's fourth-quarter results call. Our conference call today is being audio webcast and will be archived later this week this evening on CIBC.com. Here to speak to you this afternoon are Gerry McCaughey, President and Chief Executive Officer; Tom Woods, Chief Financial Officer; and Steven McGirr, Chief Risk Officer, Treasury and Risk Management. Our presenters and other members of our senior management team will be available to take your questions following the presentations.

Before we begin I would like to caution you that anyone speaking on behalf of CIBC on today's call may make forward-looking statements that are subject to a variety of risks and uncertainties. Certain material factors or assumptions may have been applied in drawing any conclusions or in making any forecast or projections within these forward-looking statements. Actual results could differ materially from these conclusions, forecasts or projections. Additional information about the risks and uncertainties related to forward-looking statements can be found in the disclaimer in today's press release, at the front of today's investor presentation, and within our 2005 annual accountability report available on our website.

Thank you for your attention. Over to you, Gerry.

Good afternoon. Thank you for joining us today. I'm going to cover four topics this afternoon. First, I will provide an overview of CIBC's financial results. I will then discuss our balance sheet targets, our productivity initiatives and compensation. Let me began with our financial results.

Net income for the fourth quarter was 728 million, up 326 million from the fourth quarter a year ago. For the full year, CIBC's financial performance was disappointing in what was a difficult year for the bank. CIBC reported a net loss of $32 million for fiscal 2005. This included a $2.5 billion after-tax provision for Enron-related litigation matters. While the past year tested our organization, we have put the issues related to Enron materially behind us and made steady progress against our priorities to move CIBC forward. As we enter 2006, we remain committed to positioning CIBC for sustainable, consistent performance over the long term.

Turning now to our two business lines, in retail markets revenue in the fourth quarter was up $121 million from the fourth quarter a year ago primarily due to volume growth across all of our key businesses including deposits, cards, mortgages and personal lending. Retail loan losses are still too high. We are continuing to take actions to address this problem. However as I have said previously, we do not expect to see an improvement in retail loan losses in 2006.

Outside of retail lending, each of our retail businesses are well-positioned. They have well-established client basis, strong market share positions and a history of proven performance. The actions we have taken over the past few months to reorganize our retail operations will further strengthen this business moving forward.

In World Markets, revenue during the quarter was up 173 million over the same period a year ago due to higher merchant banking gains as well as higher revenue and equity structured products. We have made significant progress in this business during the past few years in lowering risk. We have also maintained our market leadership in Canada while making progress in our U.S. business. Moving forward, World Markets is positioned to deliver less volatile earnings.

Let me now turn to our balance sheet. Our priority immediately following Enron was to restore our Tier 1 capital ratio to our target of 8.5% and we indicated then that we would achieve that by mid 2006. As we reported today, we are encouraged by having achieved this objective in the fourth quarter. We expect ongoing improvement in our balance sheet throughout the year and will review our continued progress with our Board in the new year.

In the area of productivity, our strategy is to achieve a median or better position in terms of productivity rank amongst the major Canadian banks. To put more definition on that, we targeted $250 million in annual cost reductions by the end of 2006. We have made steady progress against this target. In the third and fourth quarter of 2005, we have reduced executive staff by 50 or 15%. The reductions included 10 executive vice presidents and above, 21 senior vice presidents, and 19 vice presidents. The severance expense we have booked in the fourth quarter also includes the cost of a broader restructuring which began in the quarter and will continue into 2006 involving over 900 additional positions. Most of the affected employees have already received their notice. We expect to realize annual direct and indirect savings of more than $100 million from these organizational changes.

Organizational changes that affect our people are always difficult; however these changes have been necessary to improve our overall competitiveness and to position CIBC for the long term. At the same time, these changes have also given some of our best people new opportunities and increased responsibilities. I am pleased with the way these individuals are responding in their new roles and the increased focus they are bringing to our business. With the progress we are making, we remain confident that we will achieve our 2006 expense reduction target.

Let me now turn to the subject of compensation. Today we announced a new model for CEO compensation at CIBC. Under the model, my annual incentive compensation for this year and future fiscal years will be determined by our Board of Directors at the end of the following fiscal year. Therefore the determination for my incentive compensation for 2005 will be made at the end of 2006. In addition, upon retirement my outstanding unvested restricted shares and options will only be eligible for continued vesting provided there is no subsequent material adverse event relating to a prior period during which I was President and CEO. I will also maintain a CIBC share ownership level equivalent to six times my annual salary for two years after my retirement.

I proposed this new compensation model because it allows for the assessment of performance with the benefit of a longer-term view. It also underscores my confidence in CIBC's strategy and my commitment to CIBC's long-term performance.

Also on the topic of compensation, you will have noted in our earnings release that our total incentive compensation expense for 2005 is down by 20%. As we have said previously, CIBC is committed to fair and competitive performance compensation. We have also been clear that the degree to which bank-wide performance affects compensation is most reflected at the most senior executive levels. Reflecting this, my senior executive team will see a substantial reduction in their total compensation for fiscal 2005. They will receive no cash bonus for the year and incentive compensation will be deferred.

On the broader topic of organization-wide compensation, our 37,000 employees have worked hard during the year on behalf of our shareholders and our clients and that work should be recognized based on their performance. We believe it is important that a fair and balanced approach be taken towards our employees. They are the foundation of our franchise and at the center of the value we provide our clients and our shareholders. Therefore I believe the best interests of our shareholders are well served at this level of overall employee compensation.

Our goal is to position CIBC for consistent, sustainable performance over the long term. We are making steady progress against our priorities to move the bank forward by building our balance sheet, improving productivity and maintaining our business strengths. I want to thank all CIBC employees for their efforts in 2005. In 2006 we intend to continue to build on the progress we have made. This progress will improve CIBC's performance and position the bank to deliver consistent, sustainable results for our shareholders over the long term.

Thank you. I look forward to your questions after Tom Woods and Steve McGirr have concluded their remarks. Tom?

Thank you, Gerry. On slide five, we had earnings per share of $2.06 in the fourth quarter, although this was helped by $0.62 a share net by the several items of note shown on this slide. As Gerry said, we improved our Tier 1 capital ratio to 8.5%. Steven McGirr will elaborate on this in his comments. And we have taken further steps which I will comment on in a moment to ensure that we deliver on our commitment to reduce costs by at least 250 million by the end of 2006.

Slide 12 shows revenue was up in the quarter, though this was due entirely to the items of note referred to in the summary. Apart from these items, revenue was down marginally with retail markets being up and world markets being down.

Slide 13 shows loan losses being down, although they were up 21 million prior to the release of 50 million in general loan loss allowance.

Slide 14 shows expenses broken down by the line items in the supplemental package. The second column from the left shows Q3's expenses which if adjusted for the Enron and the market timing charges in that quarter would have been just slightly below $2 billion. The increase in Q4 relevant to the adjusted Q3 number is largely due to higher severance more than offsetting the lower incentive compensation.

Slide 15 shows our target expense base for Q4 2006 broken down in the same way as on the previous slide. We have compared these numbers to Q2 2005 when we said our objective was to take out 250 million from our run rate by the end of 2006. I want to emphasize that this is not a forecast but represents where we want to be at the end of 2006. I want to caution you from reading too much into the individual line items because as you know costs such as brokerage commission payouts and incentive compensation are revenue driven, but you should take away from this that we are very committed to getting our costs down and achieving our ultimate objective of having an efficiency ratio no worse than the median of the Canadian banks.

Slide 19. As we indicated in our investor forum on September 7, effective Q4 we have restructured our business line financial reporting. Retail and wealth are now combined into one group called Retail Markets and some of the business units previously reported separately are now combined, reflecting the way these businesses are being run following the reorganization we did in the summer.

We have made three other changes which we also announced on September 7th but which are showing up in the numbers in Q4 for the first time. First we have moved GIC revenue out of what was previously called wealth products into our two respective market segments, personal and small-business banking and imperial service.

Second we have moved personal loan revenue out of the two market segments and into mortgages and personal lending. For each of these two changes we have restated our results for comparability. The historic results are what we showed you on September 7th.

A third change is a relatively minor one and that is as of September 1 we reduced the revenue transfer pricing payments on certain unsecured lending products from our product group to the market segments. We have not restated our results for this but I will provide apples-to-apples comparisons as I take you through the revenue breakdown now.

The revenue in retail markets was 2.06 billion in the quarter, up 2% from Q3 and up 6% from Q4 a year ago.

Slide 20, personal and small-business banking revenue was 618 million, down 29 million from Q3 but 11 million of this drop was due to the lower commission transfer pricing I mentioned a moment ago. The other 18 million was lower volumes of loan sales. Apart from these two items, all other revenue offset, deposit spreads and balances were both up but were offset by lower commissions from mortgages and insurance products. Average deposit balances in 2005 were up nearly 8% versus 2004, just slightly ahead of industry growth. For Q1 we expect revenue to be about the same as higher volumes will likely be offset by tighter spreads.

Slide 21, Imperial Service is the group covering the mass affluent customers of our domestic branch network. And effective Q4 also includes private wealth management which was previously reported separately. Revenue was 236 million, down 10 million from Q3, which was a record quarter. Deposit volumes were up marginally on the quarter as were spreads, but loan sales volumes were down. Average deposit balances were up nearly 3% versus 2004. The outlook for Q1 in Imperial Services for the same are slightly better revenue.

Slide 22, retail brokerage had record revenue of 296 million helped by the TSX which was up 8% on average versus Q3 and volumes that were up 28%. Though November got off to a slower start, the outlook has improved since the federal government dividend tax credit announcement last week.

Slide 23 in cards, Q4 revenue was 364 million, down 4 million versus Q3. Average balances were up 2% versus Q3 and average balances for the full year were up 4% versus 2004. Spreads were down marginally, as was the revolve rate. Interchange revenue was down due to seasonally lower purchase volumes, as was securitization revenue. The outlook for Q1 is for revenue to be similar or slightly lower.

Slide 24, mortgages and personal lending, revenue was up 34 million versus Q4 but 11 of this was due to the change to lower loan commissions paid out to the segments. Most of the balance of the increase was due to mortgage securitization gains and lower amounts of new loans on which commissions are payable. Balances in residential mortgages were up 2.4% from Q3 and 2005 average balances were up 10.6% over 2004. For the first time in eight quarters, the dollar amount of new fixed-rate mortgages exceeded the dollar amount of new variable-rate mortgages.

Balances and personal loans were up 2% on the quarter and 2005 average balances were up 9% over 2004. In Q4, 57% of our newly issued personal loans were secured, bringing the secured percentage in the portfolio to 47% at quarter end, up from 45% at the end of Q3. Outlook for revenue in Q1 is for about the same as balance increases should offset lower spreads.

Slide 27, retail markets net income was down 54 million versus Q3. Revenue was up 39 million as I have just reviewed. Loan losses were up 39 million but 23 million of this was a net adjustment we made to the allowance due to model changes and corrections and a change in accounting for third-party collection agency fees offset in part by a provision release due to the large credit card securitization we did.

Expenses were up 41 million from Q3 due to higher severance, project spending, brokerage commission payouts and advertising, offset in part by lower litigation charges.

Turning now to World Markets on slide 28, revenue was 964 million, up 4% from Q3. Slide 30, capital markets revenue was 347 million, down 12 million from Q3. The equities component of capital markets revenue, which represent about 60% of the $347 million figure was up marginally from Q3 while the debt business was down primarily due to lower interest rate derivative activity. Though it is difficult to predict this early in the quarter, the outlook for equities is for slightly lower revenue in Q1 and for debt about the same amount of revenue as in Q1.

Slide 31, investment banking and credit products, revenue was 239 million, down as expected from 251 in Q3 mainly because we did not have a U.S. real estate finance transaction in Q4. Apart from this, virtually all our business lines were up largely due to the very active loan syndication indication market. The outlook for Q1 is for similar or slightly higher revenue. U.S. real estate will be higher. Europe will likely be lower and the other businesses should be about the same as in Q4.

The outlook in Q1 for Canada appears positive following the announcement last week removing some of the uncertainty around income trusts where CIBC has been the leading underwriter.

Slide 32, merchant banking, revenue 391 million, 294 of which came from the previously announced divestitures of our remaining shares in Global Payments and Shoppers Drug Mart. We had other gains in distributions of 119 million offset in part by write-downs in funding costs of 28 million.

The outlook for merchant banking in 2006 will be for significantly lower revenue than 2005. Revenue will continue to vary from quarter-to-quarter, but will likely fall in a range of 100 million to 175 million for the full year.

Slide 33, the other revenue line was -76 million mainly due to 53 million of interest expense on a U.S. tax reassessment. However, most of this was offset by a recovery on the tax line.

In slide 34, World Markets net income, 328 million. Excluding World Markets' share of the items listed at the top of the press release and detailed on slide five, World Markets' net income would have been 156 million. Over to you, Steve.

Thanks, Tom, and good afternoon. Tom just highlighted the fourth quarter specific loan loss provisions increased to 220 million. The business and government portfolio continued to perform well with loan loss expense down in the quarter. Mortgage portfolio also continued its strong performance. The card portfolio saw continued improvement in credit quality this quarter. The provision was also favorably impacted by a 1.7 billion card securitization.

The personal loan portfolio saw a significant increase in loan losses this quarter with continued pressure in this portfolio. We also updated the provisioning methodology to better reflect the portfolio's loss profile.

Additionally we released 50 million of the general allowance. Continued improvement in the student loan and cards portfolio along with the impacts of card securitization more than offset upward pressure in the personal loans and growth in the business and government portfolios.

Our fiscal 2006 guidance is for specific credit provisions to be within our 50 to 65 basis point medium-term credit range but closer to the midpoint. The current view is that approximately 80% of our fiscal '06 credit provision will be in the consumer sector with the balance applicable to business and government loans.

An overview of our specific provisions as a percentage of our net loans and acceptances is presented on the next slide. In aggregate, fourth quarter specific provisions increased to 59 basis points of net loans and acceptances, just above the midpoint of our medium-term target range of 50 to 65 basis points. Our business and government credit provisions totaled 22 million for this quarter, a decrease of 16 million over last quarter and down 61 million from the same period a year ago. The business and government portfolio loss rate was thereby reduced to 24 basis points down 18 basis points from Q3 '05.

The consumer portfolio loss rate was 71 basis points, an increase of 14 basis points from Q3 '05, the result primarily of continuing pressure in the personal loans portfolio. This was partially offset by securitizations and improved credit quality in the cards portfolio.

I will next break out the consumer portfolio into its subcomponents. The Q4 specific provision for consumer loans was 197 million, up 36 million over Q3 2005. As Tom noted, this includes a net adjustment of 23 million in the quarter. The mortgage portfolio continued its strong credit performance with both absolute losses and loss rates remaining at historical low levels. We expect this trend to continue through (inaudible). The quality of the cards portfolio improved in the quarter with the loan loss provision also reduced by the effects of the securitizations. We expect the card portfolio loss rates to continue to improve in 2006 as well.

The personal and student loans portfolio saw significant increase in the loan loss of this quarter. There was continued pressure in the unsecured loans portion of the portfolio. As I mentioned earlier, updates to the provisioning methodologies for these portfolios resulted in upward adjustments this quarter, further elevating this provision.

We are continuing our focus on reducing risk levels in this portfolio and shifting the portfolio mix in favor of secured loans. Having said this, we expect losses in this portfolio to remain at elevated levels through 2006.

Gross impaired loans shown on the next slide reduced 46 million during the fourth quarter and were down 160 million over the same period last year. As at October 31, net impaired loans were 288 million. Excluding general allowance, down 19 million from July 31 and down 20 million year-over-year. The reduction was driven by declines in the loans in impaired loans in the business and government portfolio.

From an industry perspective, the largest levels of our new corporate credit classifications were in the manufacturing sector at 37% followed by agriculture at 30% and the service and retail sector at 23%. On a geographic basis, credit classifications were substantially all in Canada.

Now let's look at the total portfolio. Net loans and acceptances totaled 146.9 billion at quarter end, largely unchanged from July 31, 2005. Residential mortgages are up 339 million quarter-over-quarter and up just over 4.6 billion year-over-year. Adding back the securitized mortgages on a managed basis, year-over-year growth was over 12%. Personal loans increased by 411 million over the quarter and 2.3 billion year-over-year for a 9.8% increase. Credit cards outstandings reduced quarter-over-quarter by 0.1 billion and were down just under 23% year-over-year, which was in large part due to the 2.4 billion of net securitizations that have occurred over the last four quarters. On a managed basis and including the impacts of Juniper, outstandings are up 5% year-over-year.

Business and government loans decreased by 16 million in the quarter and year-over-year loans have increased 95 million. We continue to view corporate credit diversification as an important objective. Our business and government portfolio continues to be reasonably diversified from an industry perspective, and is supplemented by our credit production activities. We have close to 10 billion of credit protection purchased against our large corporate loan portfolio in order to reduce sectoral and single name concentrations and this is shown in the appendix.

Turning to market risk, this slide displays Q4 daily trading revenue against the value at risk in our trading portfolios. Risk levels were stable during Q4 and averaged 7.7 million, slightly below their levels of Q3. On no occasion did losses exceed the value at risk and 79% of the trading days provided us with positive revenue.

Now let me address capital strength. Our Tier I ratio improved by 100 basis points as we ended the quarter at 8.5% at our medium-term target and ahead of the bank's stated objective of early 2006. The Tier I ratio was helped by strong capital generation in the quarter which brought with it the return to Q1 status of 176 million of preferred shares. We continue to exercise discipline with respect to the balance sheet and initiatives in this respect included the purchase of residential mortgage insurance, credit card securitizations and tight control of the balance sheet in our wholesale businesses. These efforts combined to reduce our risk-weighted assets by 6.3 billion in the quarter.

Management of the balance sheet including risk-weighted assets has been a key focus for the bank. Risk weighted assets have been reduced by $18 billion since 1999. In Q4 we were quite focused on the 8.5% Tier I target so we redoubled our efforts on the balance sheet but we remain committed to maintaining a solid balance sheet and discipline in capital deployment.

Now I'll turn the call back to Gerry.

Thank you. So we will take questions now.

(OPERATOR INSTRUCTIONS) Steve Cawley, TD Newcrest.

First question for Tom, back to that expense slide, number 15, you've got a target by Q4 '06 to have reduced your quarterly annual expenditures by 65 million and you are using Q2 '05 as let's say the beginning date. So we are to two quarters in now. How far along into the 65 million would we be? 10 million? 15 million? Where are we?

It's hard to look at it that way. I don't know, maybe one-third of the way. The reason I say that is when you look at our Q4 numbers, you would think we are farther than that when you take the reported number and take off about 143 million of unusuals but the fact of the matter is over the course of fiscal 2006, we are going to be back filling some of the positions the we have reduced. We will have base salary increases. We and all the big Canadian companies are going to have pension fund expense increases.

So it feels like we're less than one-third of the way there. And I am sorry to be so vague but the 20 million uptick in that oval reflects the cost reductions we will have to achieve just to stay constant and it is a bit of a moving target but we have made some progress. But I would say factoring all that in we may be one-third of the way there.

One quick one for Gerry. You certainly have made this the focus being cost reduction. I would suspect that at some point in time cost reduction bites into revenues and you can only cost so much -- or cut costs so much. Should we expect there to be materially more expense reductions possible in 2007 or at that point in time will the focus be on revenue growth?

Well, we are going to continue our focus on revenue growth all the way through the piece including 2006. And I agree with you that at a certain point taken too far, that cost reductions can impact revenues; however, our target is to get to a reasonable benchmark, which is the industry median, and because it's -- we have set this target against the industry and we believe it is quite reasonable, we do not believe that that will adversely affect in a material way our revenue generating capability.

Okay. One last one for Sonia. This is not the first time I have heard adjustments to retail credit models and I think it is debatable whether or not you -- that one time item that you referred to whether or not it is actually one time. Why does this model continuously need fine tuning?

It's Steve McGirr. I will answer that question. These models basically use statistical techniques that look at behavior in groups or vintages of customers and loans and we use a bunch of models. We look at role rate models, which incorporate the movement of balances across the delinquency buckets. We also look at vintage models, which track and project the performance of volumes originated at a specific point in time. And as we looked at updating our models it became clear that we needed to take higher credit provisions and so we did.

Are you now at the point that you're fully confident that your models are where they need to be to evaluate the quality of the portfolio?

We are confident we are evaluating the quality of the portfolio at the present time, but models are constantly updated in the state of continuous improvement.

If I could just add from a business (inaudible) the key thing that we are (inaudible).

You're fading in and out, Sonia. I can barely hear you.

The key thing that we're doing from a front-line perspective from the business is having a more balanced approach to our lending. So shifting our mix more to secured than unsecured, so that will also over time have quite a significant impact on the overall loss rates. And we are seeing a significant shift already in the fourth quarter in terms of our business focus.

Thank you.

Rob Wessel, National Bank Financial.

Just following up on some of Steve's questions on the same slide, for slide 15. First of all, in the employee comp and benefits under Q4 2006 there is 1 billion and 75 million. Can you give us an idea sort of what type of compensation ratio or what we think would sort of be a reasonable amount to think of for commission expense and incentive bonuses? The reason I ask is because presumably if the markets do well -- it is not to a certain degree is somewhat out of your control if the markets do well or poorly because that number will rise and fall. So should we -- is there a sort of a comp ratio or sort of a normal capital markets related revenue space you've sort of worked off of that we could use as a guide?

Rob, its Tom. I think the best way to think of it -- first of all on the brokerage payouts in that we're showing up five is that we will have a better year. One can only infer that we will have a better year or a better quarter on a run rate basis in late '06 than we had this year. So you can draw your own conclusions. There's no assumptions made in terms of changes to the grid or anything like that.

Sorry, I didn't mean to imply that. I was more saying that you end up meeting all of your targets and doing even better but still have an ending expense base at Q4 '06 that is higher than 1,892 for example.

Yes, that's right. And the challenge with setting a metric on total expense is it has revenue driven comp elements in it is -- it is a moving target and obviously a scenario where we have higher brokerage payouts and I would say even higher incentive bonuses is actually a good outcome because it would mean revenue would go up. But hypothetically -- it's more than hypothetical because it reflects our plan revenue and one of the things you can deduce from this and this is one of the outcomes of being this transparent is a sense of how we feel about the brokerage business as an example.

The incentive bonus number there is a little bit more subtle because it has a couple of moving parts, Rob, and it is really driven off comp to revenue which you can only infer is going to come down a bit from the number that we reported this year. And that is I think logical when you think it through because we project to have fewer staff at that time and particularly in the senior positions.

Okay, and the 1,892, let's assume that everything goes out exactly as you've planned or forecast or implied in all of your assumptions here. The 1,892 target for Q4 '06 builds in or includes a level of inflation, higher base salary increases, the pension and post-retirement, things like that and all the other items? Like this basically implies a certain level of inflation.

Yes, and you could figure that out for yourself. The base salary increases at 10 million -- that's 40 million per annum. And you could approximate that yourself. And we won't know that number until -- well in fact, actually that one reflects the base salary increases we have put in place effective January and that's roughly 2 to 2.5% for most divisions, not the executive positions. The pension also is already locked in because that is a function of the discount rate in place at September 30th for us and as I said, that is something that is going to hit all companies. So for us it's about an $80 million annual increase in cost for '06 that we're going to have to offset in other ways.

Just moving onto some quicker items, your effective tax rate after making all the adjustment on the slide right below that on slide 16 is about 31%. That is a little bit higher than what we have seen in the past. Is this a little bit more normal? I know people ask this question every quarter, but you're usually a little south of 30. Is this sort of a little higher or should we think 31% as sort of closer to what (indiscernible) normally?

Well, really anything in the 29 to 32.5, that is about as fine a degree of precision as you're going to get because it is so driven by where our liquidity pools are located and business mix in the U.S. U.S. tax rates are higher, so to the extent we do better in the U.S., our weighted average tax rate is going to be higher. If you had to pick a number, 31 is probably the best number to use.

In the supplemental on Page 25, the unrealized net gains on losses in the chart in the middle for the estimated fair value investment securities?

Just bear with me one second. Slide 25, yes.

Chart in the middle, the Q3 '05 number is 841, and we're now down to 69. There are references to limited partnerships or other things that generate gains. Can you give us an idea of the magnitude of what they are this quarter and what they were last quarter, and perhaps some flavor for how they have trended?

This chart is the format all the banks use. It has become a bit of an anachronism, because much of our merchant banking portfolio are in entities that are not corporate legal entities. Therefore, we can't call it equity. But if you look in that -- you see the 217 number, so this is Page 25, the middle slice, the fourth line down in the third column, equity 217. Take that number and go in the same column to the top of the page. Three numbers down you see 272?

Yes.

That is the unrealized gain in other assets. Virtually all of that are LPs and equity-accounted investments in merchant banking. So take the 272, add 217 and you get roughly 480. That's the current unrealized gain in rough terms. Even that is a bit misleading because in cases where there is no publicly-traded market for some securities, we don't mark it up. So we feel better than the 480 number in terms of the unrealized gains.

Just to answer your other question which, unfortunately, is going to get a little bit more complicated as well, that 217, you see the number to the right, the 735? You may ask, well, that's a bigger drop than we realized on global payments and Shoppers Drug Mart. The reason for that is the 735 has to be netted against the hedge of 132, because we capped out our gain. So the hedge was a -132, and that is in the footnote. So you take 735 minus 132, you've got about 600. 600 minus 217 is about 400, which is the proceeds of the global and the Shoppers.

Okay, and I have a question. Is Brian Shaw in the room?

Yes.

I have a question for Brian, I guess. The underwriting and advisory fees -- not to put you on the spot -- but have come down quite meaningfully and were lower this quarter at 147 million than they have been in quite some time. This is the lowest I guess we can see on this chart on page 3 of the supplemental. Is there a sense that -- is this primarily market-driven or is there a loss of marketshare built to there or is there something going on there maybe a little less advisory revenues that you think is sort of sorting itself out because there is a stronger pipeline or is this unusually low or should we think of CIBC as maybe just having -- they had a fantastic year last year in that particular line item and now we're getting back to a more normal number?

Rob, it's Tom. Q3 and Q2 in fact the last previous three quarters were pretty spectacular quarters in Canadian investment banking. So I think the best way to look that is -- I mean that is an expected drop. Going way back you see numbers in the twos. That reflects a more active business we had in the U.S. and we do have today in terms of underwriting and advisory.

Looking forward, what I said in my comments were that depending on your view of the income trust market that will be the main driver on that 147 number. Brian can elaborate, but the pipeline for income trust is starting to pick up again. How much of that will close in Q1 is up in the air. I think it's fair to say we feel pretty good about the business overall. It's a question of how much gets closed in Q1 versus Q2.

James Keating, RBC Capital Markets.

Two questions if I may. One is to revisit that slide 15 expense slide but thinking of it a little more broadly. The bank is starting to slow down its card growth a bit, understandably, as well as the unsecured credit lines. Spreads in mortgages Tom just mentioned look like they are maybe challenged a bit next quarter if everyone's going fixed. I just wonder if you can give me a bit of a tutorial on where some of the revenue infill might come for some of these businesses and how much focus there is indeed there, Gerry? As I think you mentioned on the revenue side this year to try and get to the midpoint of the peer average on cost of revenue -- just curious and worried that it might be a little challenging on that revenue. That's one question.

Jamie, it's Tom. I will start and my answer won't differ that much from the answer I believe I gave last quarter. Recognizing we give probably as much or more disclosure line by line in the scripted comments. So you can get a reed for certainly Q2 and even I would say into Q3. The way I'd summarize it is when you look at the broader retail and I'll let Sonia elaborate if I miss anything here -- I think it is fair to say that over the year in fact as we have said before, low single to mid single digit revenue growth feels about right for us. Okay? And when you then drill down into cards, mortgages and deposits, part of it is your view on rates and how much the shift from fixed to variable will continue or vice versa rather -- I'm sorry -- from variable to fixed. Spreads are tighter for us on fixed. So that's -- cards are probably going to depress it a bit in terms of volume. That's a call on the market you can make. Clearly we have had a great market for the last three years.

Card business for us, the rate of growth we have had over the last two or three years is not going to continue, but still the performance last year was pretty impressive as well. Higher short interest rates will compress spreads somewhat for us. The state of the economy will drive interchange and that is a very big part of our revenue base as well. Deposits, spreads have held in. Banks have been pretty disciplined in their pricing there. The bank raised rates twice, two times 25 and the banks I think raised our rates 15 points.

So the outlook for deposit spreads is probably a little negative but it has held in pretty well the last couple of quarters. So I think you have to put the pin in terms of low single to mid single digit revenue overall. We feel good about our relative position in those businesses. World Markets as we said, the big change is going to the merchant banking. I think Brian can elaborate in terms of our market position in the trading and underwriting businesses continues to be very good, reflected by our position in underwriting the number one position last year despite pretty significant staff changes. So that is about as much guidance as I can give you on revenue.

Okay, Tom. That's good. Could I also just sneak in a question here on the card business, two-parter? One, I want to just want to understand from Gerry's perspective what the appetite would be for trying to spin this business out now that the trust business is alive and well? From a business management perspective, are there any particular hurdles or it's a good appetite for perhaps trying that little lever? And on that subject, I am curious to know if I can just get an update from perhaps Sonia or I don't know, Walt or someone else that's around -- but on how the card specifically the Aerogold is defending itself against some of the other more aggressive offerings. It seems to be that perhaps RBC or TD are giving a go at trying to take a bite out of marketshare and I just want an update as to how you feel you're doing there?

Okay, Jamie. The card business is an important business to CIBC and it is a business where we intend to continue to grow. We have a marquee position in the marketplace and it is a business that we intend to have a long future with at CIBC. In terms of the Aerogold portfolio and how it is performing within the card business, our growth in the Aerogold portfolio was extremely strong and over the course of the last couple of years had slowed down dramatically.

I am going to turn this question over to Walt Macnee to talk about both the Aerogold portfolio progress and the balance of the progress within the card business. However, I did want to reiterate that the card business is a business that is very important to us and it is a part of CIBC's future.

Jamie, we have chatted about this before. We obviously had some challenges a couple of years ago with Aerogold. It has come back nicely for us. You mentioned RBC and TD and I'll give them passing reference that they are doing a good job, but the difference in the size of the overall portfolio of this is significant. The Aerogold portfolio on its own is much bigger than some of our competitors in their entirety. So good growth rates. It's not -- our growth in the overall portfolio is not matching the total market growth. We do have more aggressive competitors out there that are fueling that market rate. But what we are concentrating on is driving profitable growth and that is an area where I think we have clear leadership. And while our revenues aren't -- revenue growth rates are not as strong, our growth in after-tax profit is very solid.

Just if I may, just on Gerry's answer, are you saying that you would look at maybe a piece of it being out in the market or you wouldn't? I am just curious and didn't quite understand your answer on that, Gerry.

I think my answer was very clear and I did not say anything about any piece of the business being looked at in any way.

Okay, now that's clear. Thanks Gerry.

Susan Cohen, Dundee Securities.

You made some significant progress on the capital front this quarter. At what point would you be willing to relook at increased dividends and share buybacks?

As I indicated in my remarks, we will continue to build the strength in our balance sheet through our ongoing earnings and in the new year we will review the progress in building our balance sheet with our Board.

Okay, so you cannot give us any guidelines at this point in terms of what level would trigger a move in one direction? It still has to be discussed at the Board level?

That is correct.

Okay, thank you very much.

Michael Goldberg, Desjardins Securities.

I want to start off with risk-weighted assets. As you noted, down about $6 billion through more effective balance sheet management during the quarter. How much more can it be reduced before it has a meaningful negative topline impact?

Steve McGirr. We have been fairly consistent over the last few years at being fairly disciplined managing the risk-weighted assets. When risk-weighted assets come down there usually is a revenue impact. But what we're focused on is working within finite resources and optimizing our decisions at the margins. So having said that, I don't expect our risk-weighted assets to come down very much more than this and in fact I don't think revenue deterioration is going to be an issue.

Is there still room for more of the mortgage portfolio to be insured for example?

Yes, there is substantial room and from our perspective that is simply a cost benefit analysis that we will do periodically over time.

Okay, I guess Susan asked my next question. I want to turn now to the releases of general reserve and I am a little puzzled by it. Can you explain why you released general reserve this quarter?

The student loans improved in their credit performance and the most recent cohorts of student loans had loss rates that were declining. With the cards portfolio in the Q4 securitizations, we had a lower loss rate that resulted in an adjustment there to the general allowance. And there was some offsetting pressure against that in the personal loans and a little bit of growth in the business and government portfolio, so those are the factors. We obviously regularly review that with the external auditors and with the regulators, but we had positive negatives and the net effect was reduction of 50 million.

One thing that I note was that your net impaired loans net also of general reserve so it becomes sort of a surplus allowance number actually weakened somewhat this quarter as a result of releasing the general reserve. Is that measure at all any consideration?

I will turn that question to Brian O'Donnell.

We look at the general specifically under a constant model that has been reviewed with AUSPY (ph) and so as he said, we look at 4 or 5 components of our portfolio and that is the basis or that is the driver for our consideration primarily in terms of releasing generals. The additional ratios that you talked to are our other considerations that one might look to in terms of your coverage but the bottom line is we believe our coverage in this regard continues to be very strong. Our general allowances continue to be at 84 basis points of our risk-weighted assets and so we feel very good about our position in that regard.

Okay, I have one final question. Ordinarily your fourth-quarter expenses spike up seasonally but not this year adjusting for irregular items. Or is the improvement in productivity actually better already than it appears to be on the surface offset by normal seasonality that actually is built into the numbers?

Michael, it's Tom. That is another way to get at the question. I think I forgot whether it was Steve or Jamie asked and there is so many moving parts. I'm sorry to be vague on this, but in an attempt to help you, I think the short answer would be yes, we have made some progress in Q4 but having said that, advertising was seasonally up. Project spending was seasonably up. You've adjusted out I assume for incentive compensation but if you haven't, that obviously is well down. Bottom line is we have made a little bit of progress but there is still lots to go and that's why we have put the plan in place throughout 2006.

Okay, thanks very much, Tom.

Mario Mendonca, Genuity Capital Markets.

Probably a question for Tom. Throughout the year, the average bank has experienced fairly decent growth in net interest income, just basic net interest income and maybe making the exclusion for trading net interest income. CIBC hasn't quite been at the same pace as its peers and I imagine there's a lot of factors that are driving that. I want to understand the extent to which the shift from unsecured to secured is part of the explanation or it is it mostly just the securitization activity, the higher securitization activity sort of changing the geography of where earning fall? Is there anything you could help with in that regard?

Sure Mario. Certainly of the two, the latter is way more significant thus far. The delta in Q4 for the -- still relatively minor shift from unsecured to secured in the new loans is pretty minor, so there's a whole number of factors. Obviously you referred to going back in time. The decline in size of our corporate loan book just if you're talking absolute dollars of NII would be the main contributor to that. But short rates have increased. So that has tightened spreads generally. Consumer preference generally, new deposit accounts or lower spreads in the legacy account; so there is a number of things that have come in. But in time the shift from unsecured to secured will have some impact but in the scheme of things not a huge impact. I think the more important issues will be the extent to which you see a shift in mortgages from variable to fixed and pressures in the short end that affect the card business.

And on the securitization front and this is -- you can probably talk about the geography of securitizations for awhile but that is probably not worthwhile. What might be helpful for me at least would be to understand a dollar of securitizations once it has been secured, a portfolio of credit cards securitized versus a dollar on the balance sheet, presumably the one on the balance sheet generates more earnings or there wouldn't be any -- if that weren't true, then you would securitize everything I suspect. What I'm trying to understand is just the magnitude of that difference.

Brian O'Donnell will take that, Mario.

Perhaps I will start off by referencing page 16 of the supplemental package which lays out the geography portion of your question. It shows the impact of our cumulative securitization programs on each of the lines of the income statement. But in terms of your real question or your follow-on question, each securitization program brings with it its own cost and so yes, there is a cost of doing this business. What we almost have to do is have to trade off that cost to the benefits and the benefits are numerous including funding benefits and other balance sheet impact. So while -- and each program will have its own costs associated with it. Our obvious priority is to focus on those that are our most beneficial and primarily I guess (indiscernible) us the residential mortgage securitizations would be at at the lower end of (inaudible).

But at the end of the day once something is done, would you rather -- which one generates better earnings, the one that is on balance sheet or off-balance sheet after it has been securitized?

Well as I said, each securitization program will have a securitization fee associated with it. And what you have to do is compare the benefits, the funding and other benefits that you get for having done the program versus not having done it. Clearly we are actively in the securitization program. So by our assessment and in each of our trades we're comfortable with the asset (ph) management exceeds the cost of having (ph) the securitization.

Maybe just one quick question. The scorecard doesn't appear in the MD&A. The CIBC scorecard. Is that something we will get at some point?

Mario, it's Tom. We're going to post our annual report on December 11 and so you'll see our objectives there. I can tell you that there is no material change in the objectives. For example a 10% medium-term EPS growth is still our objective. The one thing we have done and rather than give you numbers because I will wait till it shows up, we have upped the ROE target just to bring it more in line with the EPS target because 10% EPS -- I mean if you achieved that, you would be well north of the 14 to 18% ROE objective that we had before.

And because it's -- your medium-term is still three to five years, right? You can't really provide us a base then on which to apply the 10%?

I think you can work it out for yourself. In fact I'll tell you. Based on as the as lawyers tell us the items of note in the quarterly results, you could work out our 2005 EPS at about $5.75 and last year's I think was around $5.50.

I came up with about $5.80 so I think we're in the same ballpark. Thank you.

Quentin Broad, CIBC World Markets.

I will segue off that question to Gerry I guess. I think the number that was quoted on fiscal 2004 was $5.53 so in Tom's number so can you just talk about the 10% goal, Gerry? On a three-year basis which would take us out to 2007, which means there appears to be a tremendous amount of work if $5.53 was supposed to be 6 and change in 2005 and first call certainly wouldn't expect you to be at $6.60 to $6.70 in 2006. So I am just trying to understand how you -- given you left the goal at 10%, how your comfort level is that that's still an achievable mid-term goal?

We still believe that looking out over the next three to five years that it is a reasonable goal. There are three factors -- well there are a myriad of factors that would affect whether or not we can achieve that goal, but the factors that are most important in our thinking are our productivity initiative and we've laid out how much that is and what contribution it should make to incremental earnings. In addition to that, we believe that we will grow at industry growth rates in our mainline businesses and we think that that is mid single digits. And the majority of our businesses have been able to achieve that and that is demonstrated by their consistent marketshare positions.

Then the last factor is of course the excess capital the business generates and the reinvestment of that in some form to generate incremental earnings. And between those three, particularly with the productivity initiative over the course of the next 12 months, we think that we could hit those targets over the next three to five years.

But the three to five years continues to roll out every year three to five years or did we put a pin in it on 2004?

I am now discussing three- to five-year outlook from where we are today.

Okay. On the issue of capital, I understand your answer in terms of going to the Board etc., but how much of a role does TCE tangible common plan in the decision-making of management recommending to the Board that you engage buybacks versus dividends relative to Tier 1 capital?

Quentin, it's Tom. The answer is somewhat in the sense that our tangible common equity ratio at the end of Q4 was 6.3, up from 5.6 in Q3. Now that is lower than most banks; however, that in itself does not do justice to the fact that we have as you know a fairly large component of perpetual preferreds and some of the rating agencies have another method that they do that they use that gives us credit for half that. So we would aspirationally think of maybe someday getting that tangible common equity ratio up to 7, but part of that depends on the amount of perpetuals we have and that would drive a Tier 1 ratio well north of where it is today.

So it is something we factor in because conceptually tangible common equity ratios mean more to us than Tier 1 because you're really covering all your pref and your debt and clearly being able to pay dividends on pref is almost or essentially as important as being able to pay interest on debt. But because our capital structure makeup is a little different, we're less focused on that perhaps right now than we are to Tier 1 and most market participants seem to focus on Tier 1. So it is a factor but it is not a big driver, Quentin.

It certainly would take a group bigger impact from a share repurchase program given where current share prices relative to book value are, right?

The short answer, Quentin, is Tier 1 is our main focus and tangible common a secondary focus.

And then final and if I think maybe you and Tom, the notion of normal severance, what is that versus higher than normal severance?

40 to 60 million a year probably.

And so we should think of this year then there's about 158-ish million of severance in the expense load this year?

Yes, you are very close.

Okay, thank you.

Andre Hardy, Merrill Lynch.

I have a few questions. I'll start with the first. If you look at slide 48, which relates to Wood Gundy, it appears that the AUA per rep are far below the market performance, so the TSX is up 8% sequentially and you've got AUA per rep going down. TSX is up 25% year-over-year and you don't have a very big increase in AUA. Now I realize that there is fixed income in there but could you help me understand the trends there? And I have another question after.

Let me start, Darko (ph), and if Sonia or Chris want to chip in. Part of the problem with that Q4 number is I think Chris got this right. It's a spot number and the profile of the TSX through Q4 was sort of like a saucer in that it started at a level, it went up and it came back down. Interest rates went up towards the end as well. So the value of our assets both in terms of fixed income and equities was well down on a spot basis. So that explains a good chunk of why -- if you're thinking what the TSX did on average, which was the number I quoted, it is misleading to look at a spot number here. So that would explain all or virtually all of it.

That makes sense. My other question is on the 900 positions. Since you have told most people who are going to be affected, can you tell us which part of the bank those 900 people are going to come from? Maybe related to that question, Sonia, if you could talk about sales capacity. We see that your number of Imperial Service reps is flat but what about mortgage specialists, personal bankers and so on?

Sure, if I could touch on the retail markets piece of things, about 350 of the 900 is from retail markets partly Q3, the remainder in Q4. About 27 of the executives are retail markets. Sales capacity, we have had no decreases in sales capacity and we would look to be maintaining at current or slightly higher levels and all of our changes have pretty much come from span of control management type roles.

What about increases in sales capacity? Some of your competitors have increased the number of reps they would have.

Well, we are always evaluating on that front. Certainly from a high value sales capacity Imperial Service and our investment specialists etc., I would say that we are well ahead of most of our competitors. So they are more in catch-up mode but where we see opportunity for more growth, we will certainly continue to expand. I have talked before about adding Imperial Service into some new markets that we're not currently in, so that would of course -- we would add some capacity there.

Thanks.

Thank you. Ian de Verteuil, BMO Nesbitt Burns.

All my questions have been asked and answered, thank you.

Darko Mihelic, Blackmont Capital.

It has been a long call. Same thing with me, all my questions have been asked and answered. Thank you.

This concludes the question-and-answer session. I would now like to turn the meeting back over to Mr. Ferren.

Thank you, everyone. Gerry has a few last remarks.

Thank you very much, everyone. Again it has been a challenging year for CIBC. We do look forward to 2006. We believe we are making steady progress against all of our priorities and I would like to thank everyone for participating today and I look forward to continuing to discuss our progress in the months to come. Thank you.

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