Canadian Imperial Bank of Commerce (CM) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the CIBC first-quarter conference call. Please be advised that this call is being recorded.

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 first-quarter results call. Today we are speaking to you from Québec City. Our conference call is being audio webcast, and will be archived later 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 Steve 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 forecasts or projections within these forward-looking statements. As a result, actual results could differ materially from these conclusions, forecasts or projections. For more information, please refer to the note about forward-looking statements in today's press release, or within our 2005 Annual Accountability Report available on our website.

Thanks for your attention. I will now turn the meeting over to Gerry.

Thank you, John. Good afternoon, and thank you for joining us. Today, I'm going to discuss our first-quarter results and the progress we're making against our key priorities to move CIBC forward. I will then turn it over to Tom Woods and Steve McGirr for a more detailed financial and risk review.

Let me begin with our financial results. This morning, CIBC reported its first-quarter results. Net income for the quarter was $580 million, and the earnings per share were $1.62. Return on equity for the quarter was 25.6%, and our tier one ratio improved to 9%.

With our first-quarter results, we're off to a solid start to the year. We're making steady progress toward our key priorities of maintaining and enhancing our business strengths, improving productivity, and strengthening our balance sheet.

Let me comment briefly on each priority, beginning with business strengths. Retail markets revenue was up 4.5% from the first quarter a year ago, after excluding securitization activity and last year's gains on the sale of ACE Aviation and Republic Bank Shares. Volume growth across all business lines and higher treasury revenue were offset partially by margin compression.

Retail brokerage revenue was up 5.4% from a year ago. Doing the quarter, Wood Gundy reached a new all-time high, with assets under administration reaching $116 billion. Retail loan losses were lower this quarter, helped by reversals in agriculture. However, our retail loan losses remain too high, andwe're continuing to take action to address this issue. As we have said previously, we do not expect to see improvement in 2006.

During the quarter, we continued to take steps to further strengthen our retail business, including realigning our cards business under our retail management structure. This follows the recent integration of Imperial Service into retail, and combining our GIC and deposit groups.

These organizational changes are foundational. They reflect the steps we're taking to make our organization more effective. They are bringing increased focus to our clients, and they set the stage for continued growth in our retail and wealth businesses.

In World Markets, revenue was down from a strong first quarter a year ago. Capital markets revenues were higher, while investment banking, merchant banking and treasury revenues were lower.

During the quarter, our World Markets franchise was again recognized as the Top Equity Underwriter in Canada for 2005, and led the market in total number of equity underwritings, structured products sold, and income trust deals.

Moving forward, growth in our wholesale franchise will continue to be both supported and focused. This means continuing to invest in our client franchise, particularly in the areas of talent, credit, product innovation, and financial resources.

Our second priority is to improve productivity. This is about increasing our overall competitiveness and making the organization more effective. We have targeted a median or better productivity position amongst the major Canadian banks. To put more definition on that, we've set an objective of 250 million of annual cost reductions by the end of 2006. As we reported in our first quarter results today, we continue to make progress in this area, and remain confident that we will achieve our 2006 expense-reduction target. Tom Woods will expand on our progress in this area later.

Our third priority is our balance sheet and capital usage. We have made steady progress in this area. Our tier one capital ratio is now 9%, above our minimum objective of 8.5%, and up from last year's third quarter of 7.5%. Now that we have surpassed our tier one objective of 8.5%, we will maintain a strong capital position while balancing capital deployment opportunities to fund our future growth.

Our objective is to position CIBC for consistent, sustainable performance over the long term. We remain committed and focused on our business priorities to move the bank forward, and we intend to continue to build on the progress we have made through the remainder of 2006.

Thank you, and let me now turn it over to Tom Woods. Tom?

Thank you, Gerry -- slide five. As Gerry said, we had EPS of $1.62, and our tier one capital ratio improved to 9% in Q1. It was a very clean quarter, which I would summarize as follows. First, expenses were well down, partly helped by seasonality, but also because of the steps we've taken to become more efficient and competitive in this area. We are well on track to achieve our $250 million cost reduction objective by Q4 this year, which we detailed in our last webcast.

Second, loan losses were helped by continued reversals this quarter in our U.S. corporate and agriculture portfolios. As Steve McGirr will comment in a moment, such reversals will inevitably come to an end, and our retail loan loss situation has yet to turn the corner.

And third, we had unusually low merchant banking gains this quarter. In other words, this quarter's good results were not driven by higher securities gains. As I will get into in a moment, we feel confident merchant banking revenues will increase throughout the year.

Slide 10 -- I will discuss revenue in a moment, but first a brief review of our costs. Here, you can see in the same format we showed you last quarter how we performed in each of the major cost categories. The far right column shows the Q4 target versus the baseline we set, which was Q2 of last year. The $65 million reduction target multiplied by 4 works out to just in excess of the $250 million number we have quoted.

In Q1, we are actually running ahead of that target. $89 million annualized is over 350 million. So while we expect cost items such as advertising and project spending to increase as the year goes by, we are on the right track.

Slide 12 -- revenue in retail markets, 2.06 billion in the quarter, down from Q1 a year ago on a reported basis, but up 4.5% if adjustments are made for securitization and for the gains on asset sales.

Slide 14 -- in personal and small-business banking, revenue was 510 million, but this is not comparable to the revenue reported last year, because we have changed our internal transfer pricing arrangements between the retail front-line groups such as this one, and the mortgages and personal lending product group. The main change that we have reduced significantly the amount of commissions transferred to the front-line retail groups, for lending products. The reason we did this is we have changed the method of performance evaluation of each of these groups to one that places less emphasis on sales of new loans and more emphasis on the broader client relationship.

Adjusting for the transfer pricing change, revenue this quarter is down 5% versus Q4 last year because loan sales were down. Deposit balances were up 2% versus Q4 and 6% versus Q1 last year. Deposit spreads held firm, despite evidence of escalating competition. Revenue for Q2 in this line should be about the same, as we would anticipate volume growth to more or less offset the effect of the shorter quarter.

Slide 15 -- Imperial Service is the front-line group covering the mass-affluent customers of our branch banking network. Revenue here was 229 million, and here, too, is not comparable to last year for the same reason I mentioned. On an adjusted basis, revenue was essentially flat versus Q4. Deposit balances are up only marginally, likely due to money flowing to the equity market. Q2 revenue here should be about the same.

Slide 16 -- retail brokerage revenue of 292 million was down slightly from the record Q4 level, mainly due to lower new issue revenue because of the hiatus in income trust market. Q2 revenue should increase as TSX volumes to date in February are higher, the new issue calendar looks better, and the start of the RSP season is upon us.

Slide 17 -- in cards, Q1 revenue was 347 million, down 17 million from Q4. This was entirely due to the effect of securitization. Revenue apart from this was up 7 million versus Q4, but purchase volumes, loan balances, and [fees up] -- offset in part by slightly lower spreads. Versus Q1 a year ago, average balances are up 5.6%, and purchase volumes 8.3%. Revenue in Q2 will likely be down due to seasonality.

Slide 18, mortgages and personal lending -- revenue on an adjusted basis for the transfer pricing change, as I mentioned earlier, was up 15% from Q4 because new loan volumes, on which commissions are paid to the front-line groups, were lower this quarter.

Mortgage balances were up 8.4% from Q1 a year ago. The trend to fixed and away from variable mortgagees continued for the second straight quarter in a market that appears to be getting even more competitive.

In Q1, 69% of our new personal loan balances were secured, bringing our secured mix overall to 49%, up from 47% in Q4. Personal lending balances were flat versus Q4, and up 8.4% versus Q1 a year ago. The outlook for mortgages and personal lending revenue in Q2 is for lower than Q1 because of the shorter quarter and somewhat lower spreads.

Slide 19 -- net income for this business line, retail markets, was up 88 million versus Q4. Loan losses were well down, as Q4 was abnormally high due to model and accounting changes. Expenses also were well down this quarter, mainly due to Q4 having high severance, but also because Q1 had lower project spend and seasonally lower advertising.

Turning now to the other main business line, World Markets, on slide 20 -- revenue was well down from Q3 and Q4, each of which had very high merchant banking revenue.

Slide 22 -- in capital markets, revenue was 371 million, up 24 million from Q4. Both equities and debt were higher this quarter. Equities, which represents about 60% of the $371 million figure, were higher in the U.S. and lower in Canada. Debt, which for us, is predominantly a Canadian business, was higher in credit trading and new issues, but lower in interest rate derivatives. Though it's difficult to predict this early, the outlook for Q2 is for slightly lower revenue in equities, as higher agency revenue may not offset lower structured product activity, while debt revenue may be somewhat higher.

Slide 23, investment banking and credit products -- revenue was 250 million, up from Q4 mainly because we had a large U.S. real estate finance transaction in the quarter -- that's Q1 -- as well as higher M&A fees. This more than offset lower credit origination fees in Europe, Q4 being a very big quarter there, and credit protection markdowns. As spreads narrow, the value of insurance goes down, so credit derivatives markdowns occurred.

The outlook for Q2 is for lower revenue. The new issue pipeline is reasonably strong in Canada, but less so in the U.S. M&A as well is reasonably strong, although not likely to match the strong Q1 level.

Slide 24 -- merchant banking had revenue of just 12 million this quarter. We had gains and distributions of 55 million, offset in part by write-downs and funding costs of 43 million. We expect Q2 revenue to be well up from Q1, and still believe the range we referred to last quarter of 100 to 175 million for the full year is reasonable.

Slide 25 -- World Markets net income was 128 million, significantly down from Q4 because of the large merchant banking revenue that I mentioned in that quarter. We had loan loss recoveries again in Q1, and expenses were well down from Q4, which had high severance and sublease losses.

I will now turn it over to Steve McGirr.

Thank you, Tom, and good afternoon. As Tom has highlighted, the first quarter's specific loss provision decreased to 166 million. This is a 54 million decline versus the prior quarter. You will recall that the prior quarter included a 23 million net adjustment to retail loan losses that we discussed in detail on the last webcast.

The remaining 31 million decline is attributable to two things -- a 20 million decline in business and government provisions, resulting from higher reversals in Q1, and the ongoing impacts of the card securitization that we completed in Q4.

In terms of portfolio performance highlights for the quarter, the business and government portfolio is doing well. In consumer, the mortgage and cards portfolios continued their strong performance in the quarter. But unsecured personal loans continue to be an area of intense focus. We've taken a number of actions to change the risk profile of this portfolio, and in particular, we continue to optimize the credit origination criteria. And we've put in place new procedures to target the highest-risk segments of this portfolio.

We are experiencing elevated losses in loan vintages booked in earlier years. The loss rates on the current vintages are projected to be lower, but we don't expect to realize these benefits in 2006. And as for the balance of the year in aggregate, we expect our fiscal 2006 specific provisions to be in the lower half of our 50 to 65 basis points medium-term target range. And our current view is that approximately 80% of the fiscal '06 credit provisions will be in the consumer sector, with the balance applicable to business and government loans.

A recap of our specific provisions as a percentage of the net loans and acceptances is presented on the next slide. The first quarter's specific provisions declined to 45 basis points of net loans and acceptances, which of course is below our medium-term target range of 50 to 65 basis points. Our business and government credit provisions totaled 2 million for the quarter, on the back of the continued strong reversals.

As I noted, this is a decrease of 20 million over last quarter, and down 7 million from the same period year ago. The business and government portfolio loss rate was thereby reduced to 2 basis points, down 22 basis points from Q4 '05. The consumer portfolio loss was 59 basis points, a decrease of 12 basis points from Q4 '05 but closer to the Q4 levels excluding the Q4 net adjustment to retail loan losses that we've talked about earlier.

On the next slide, we break out the consumer portfolio into its subcomponents. The Q1-specific provision for consumer loans was 164 million, down 34 million from Q4 2005. But to reiterate, this decline is a result of the 23 million net adjustment to Q4 retail loan losses. Loss rates are more in line with Q3 2005, with unsecured personal loans still at elevated levels.

Otherwise, we continue to be very comfortable with the credit performance on the mortgage portfolio, and we continue to maintain loss rates in the cards portfolios at targeted levels.

Our gross impaired loans, shown on the next slide, reduced 70 million during the first quarter, and were down 180 million over the same period last year. As at January 31st, net impaired loans were 234 million, down 54 million on both a quarter-over-quarter and year-over-year basis. The reduction was driven primarily by declines in the net impaired business and government portfolio. In the quarter, business and government classifications totaled 89 million.

Looking at this from an industry perspective, the largest levels of our new corporate credit classifications were in the agriculture sector at 28%, the real estate sector at 23%, and the service and retail sector at 16%. And on a geographic basis, the credit classifications were all in Canada.

So let's now look at the total portfolio. Net loans and acceptances totaled 144.8 billion at the quarter end, down 2.1 billion from October 31, 2005. Residential mortgages are up 549 million, quarter over quarter, and up just over 3.2 billion year over year. Adding back the securitized mortgages on a managed basis, year-over-year growth was 9%.

Personal loans decreased by 480 million over the quarter, but are up 1.3 billion from the same quarter last year for a 5.4% increase. And credit card outstandings reduced quarter over quarter by 183 million, and were down almost 2 billion or 24% year over year. But this was in large part due to the 2.6 billion of net securitizations that have occurred over the last 4 quarters. On a managed basis, outstandings are up 6.5% year over year.

The business and government loans decreased by 835 million in the quarter, and 881 million year over year. We continue to see corporate credit diversification as an important objective. Our business and government portfolio continues to be reasonably diversified from an industry perspective, and of course, is supplemented by our credit protection activities. We have approximately 10 billion of credit protection purchased against our large corporate loan portfolio in order to reduce both sectoral and single-name concentrations. And this is shown in the appendix.

Turning to market risk, this slide displays the Q1 daily trading revenue against the value-at-risk in our trading portfolios. Risk levels rose during Q1, and averaged 8.2 million, slightly above the levels of Q4. This increase was in part due to the inclusion of risks from our U.S. real estate finance business, which was previously classified as non-trading. On no occasion did losses exceed the value-at-risk, and 91% of the trading days provided us with positive revenue.

Let me now address our capital strength. The tier one ratio is now 9%, above our minimum objective of 8.5%, and well up from the 7.5% we reported at the end of the third quarter last year. The tier one ratio increased this quarter due to both internal capital generation as well as reduced risk-weighted assets. Capital increased due to strong earnings in the quarter, which brought with it the return to tier one status of 85 million of preferred shares.

We continue to exercise discipline with respect to the balance sheet. Initiatives in this quarter included the purchase of residential mortgage insurance, credit card securitizations, and the ongoing effect of management of the balance sheet in our wholesale businesses. And these efforts combined to reduce our risk-weighted assets by 2.1 billion in the quarter.

Management of the balance sheet, including the risk-weighted assets, continues to be a key focus for the bank. We remained committed to maintaining a strong balance sheet and discipline in capital deployment, and our focus on effective management of risk-weighted assets will not change.

I will now turn the call back to Gerry.

Thank you, Steve. We will now take questions.

(OPERATOR INSTRUCTIONS) Jim Bantis, Credit Suisse First Boston.

I've got 2 questions, please, one regarding the retail bank, and then the other one following in the wholesale bank.

On the retail side, Tom, you talked about the change in commission approach with respect to mortgage volumes and moving from a sales perspective and going to more of a customer wallet balances perspective. Can you describe how the profitability change emerges with that change in commission structure to offset the decline in volumes?

I will start, Jim, and if Sonia, you want to add to it, please jump in.

One thing I want to stress just in case I wasn't clear -- this is strictly an internal transfer pricing change. So this is not about changing our relationship pricing approach to the customer. So it's neither better nor worse in terms of the exterior market.

We found as part of our review of our personal loan situation over the last six months in particular that Steve and Sonia have led, that we would be better off from a performance measurement point of view if we did not transfer as much of the personal loan business -- and to some extent, the mortgage revenue, to the front line. They are now under Sonia's leadership. Their performance measurement is changing.

So although we hate to do that -- because we know it makes it tough for you to compare, although we have tried to be fairly transparent in terms of what the difference is -- the Q1 numbers for the front lines, namely personal and small-business banking -- because that's where the bulk of the loans are, the Imperial Service business is largely a wealth business -- the number that you see there of 510 -- what we've told you is, had we not changed the commission structure, that number would have been $77 million higher to 587.

So now, you look at the 587 and you say, well, that's well below the 618 -- like, what's going on? The other dimension to that is, because the commissions are a little lower, and because their whole focus, particularly on the unsecured personal loan side, has been downplayed, not only are the commissions that business is getting lower on a per-dollar loan basis, the volume of new loans is being reduced.

So that 587, theoretically, had we not done anything, would be much higher than 587. I don't have that number handy, but my guess is it would have been higher than the 618.

Similarly, down on the mortgage product line, the reverse happens. The 413 number you see, which is way up from the 286 -- what we've told you on the slide is that you have to take off 85 million to be apples-to-apples with the 286. But that only accounts for the commission change. It doesn't account for the fact that there are fewer new loans being done. And it's kind of like the insurance business -- the more sales you make, the lower your revenue is in this particular line, because they're paying out fewer commissions. So that 328 number, while it may look like -- and it is up a lot versus 286, it's up a lot because the amount of new loan business, and hence, the commissions coming out of that line, are lower.

I mean, a good way to look at it is actually to sum up the PSBB and the mortgage numbers together. And you get 904 in Q4 and 915 in Q1. That's somewhat simplistic, but it shows you about a 1.2% or about a 5% annualized growth rate in those two combined. Sonia, did you want to make a comment on the strategy?

This is really in line with the strategy that we talked about on previous calls, in terms of changing the weighting of compensation to the front line on the basis of where we [had won] effort and the value of the business and where we'd like them to spend their emphasis. So we have down-weighted how they are paid on unsecured lending, and increased it in secured, for example, and changed the overall mix -- again, as we've talked about in the past, rebalancing the whole model so that they get credit for renewals and those kinds of things. So that's how the mix has changed.

Got it. And this is planning out with respect to the decline in small-business loans shown on slide 30 from 11 to 9.2 billion, and the decline in consumer loans in terms of market share shown in slide 31?

Jim, it's Tom. Could you repeat that? You were breaking up right at the very beginning.

So, the change in the sales behavior is showing that the small-business loans are tumbling from 11 billion to 9.2, which is on slide 30, and that the consumer loans ex-cards, market share continues to climb?

(technical difficulty) happened, there are 2 areas that we had particular concern. One is in our unsecured portfolio, and one was in a subset of our small-business loans. And so we have changed our adjudication criteria in those areas, and we have changed our commission structure, both of which would depress our business in those areas. That has been offset by better performance in secured lending, for example.

Got it. Thank you. And the question with respect to CIBC World Markets, and looking at slide 25, you know, obviously, 2005 is not a good benchmark year. A number of volatility -- tons of volatility with respect to revenue side and obviously on charges.

But when I look at the 128 million in terms of net income this quarter, it does seem like a soft quarter, and you've obviously highlighted the merchant banking gains. But I'm wondering if, Brian, that you can talk to us with respect to the earnings power that can come out of CIBC World Markets in 2006 on an annualized basis?

I can't give a forecast. (inaudible question - microphone inaccessible)

Sorry, just to let you know, it's really difficult to pick up the voices.

You are absolutely right, Jim, to reference '05 as being a difficult year for comparison purposes, given a number of things that happened. You know, I would only respond in a very general way by saying that our World Markets strategy is unchanged. Our results typically are a function of markets, both volumes and volatility that's available to us, and then how we perform in the context vis-à-vis others.

All indicators from our first quarter are that our market share and placement on a relative basis to others seems to be positive and as we would anticipate it. So really, the question over the remainder of the year is how are the capital markets?

You know, I would argue we're quite pleased with the first quarter performance and the results. With perhaps referencing, as Tom did, that merchant banking results were below what they have been in prior quarters and in fact where we might anticipate them to be over the remainder of the year.

Great. Thanks very much and I will re-queue.

Jamie Keating, RBC Capital Markets.

Good afternoon, all, and congratulations. Good quarter here. I have a couple of quick ones. One, forgive us; we're buried in stuff today, so I hope I'm not asking redundant questions. But Gerry, you'd mentioned in the beginning capital has hit the target range. And I think the nuance was that it's trying to balance the capital deployment. Does that mean dividends and share repurchases -- the handcuffs are off this quarter specifically?

(technical difficulty) No, it does not.

So as we are another quarter (technical difficulty) perhaps (technical difficulty) [away]?

We are continuing to examine our capital deployment opportunities, and that's a discussion that continues amongst management and the Board.

Our first priority was to restore our capital levels above the 8.5 and strengthen the balance sheet. Our second level of priority would be to make sure that all of our internal opportunities for capital investment are being fully exploited, and that our mainline businesses are operating at capacity. And then once we have done that, we are also continuing to examine other capital deployment opportunities, including share buyback. But that's an ongoing discussion.

Okay, that's very helpful; thanks, Gerry. And then for Sonia, while you are recalibrating a couple of the businesses that are less desirable or [you're] going back down to earth, I'm just wondering if you have any guesstimates or you can guide us as to what the underlying revenue growth might be. I suspect it's probably a little higher than what we're seeing, perhaps the insinuation being that if you cut back on two little specific areas, that it's masking otherwise some better revenue growth.

Is there any way you can help us understand if there is a point or two of revenue growth being mitigated by this discipline in two areas?

I would reiterate that our view for the year is that we would be in the low to mid single digit range. We still think that that's in line with how we'll perform over the remainder of this year.

One last one, if I may, just for Tom -- slide 49, or maybe it's for Sonia, too, actually -- I'm just trying to interpret what I think are the retail NIMs -- and hopefully I'm looking at the right slide on 49, Tom. But I just want to understand a little bit about deposit versus loan spread. And I apologize if you already mentioned it in your work up; I may have missed it, but can you just talk briefly about the year-on-year, quarter-on-quarter influence of deposit loan spreads in the retail segment?

Maybe I’ll start and Sonia, you want to chip in. Jamie, as we talk every quarter, NIMs are the results of at least half a dozen moving parts here. Spreads for us were surprisingly strong. Now, they were still off 3 points when you take out the fixed assets and adjust for securitization and trading assets.

Deposit spreads were up, generally, notwithstanding the fact that our new accounts that continue to grow have lower spreads than the older accounts that decline or stay flat. And that's really just a function of the math that the funding that these deposits raise gets reinvested in assets that are repricing upwards. So that repricing upwards has more than offset the fact that the mix continues to hurt us and, I suspect, all the other banks. So that has been a positive.

On the personal loan front, I think you've heard enough to infer, and you knew this already from last quarter, that we've got two things working against us from the standpoint of spreads here. One is the overall volume of loans on the personal side because our rate of growth there is intentionally transitioning down, and the mix as between secured and unsecured is hurting our NIMs, but we believe we will help on the LLP line. So those two have worked against each other.

Cards for us on NIM continues to hurt us, because as interest rates go up, we are pretty well capped at the APR rate. Mix continues to hurt us -- people moving from premium to the more standard cards. So that was a depressant in the quarter.

Mortgages actually were a little bit up, but that was more a function of some anomalies in the Q4 numbers -- so Sonia?

The only thing I would add to that, Jamie, is that we continue to see very heavy competitive pressures out there. So that could have an impact as we move forward -- very aggressive pricing in the marketplace right now.

Great input. Thank you, everyone. And just for your information, Sonia, we're not quite picking all of you up because I don't think -- the mike is not getting all your words, just for future reference. Thank you.

Susan Cohen, Dundee Securities.

Thank you. You have mentioned that you've reduced your risk-weighted assets by about $1.2 billion this quarter. Going forward, is there additional room to bring this down further and if so, how?

(technical difficulty) the further -- that there is limited further opportunity to reduce our risk-weighted assets?

Yes.

The opportunity -- you asked whether or not there was a great deal of further opportunity to reduce our risk-weighted assets. And I'm saying I do not believe that there is.

Michael Goldberg, Desjardins Securities.

Thank you. First of all, about the $24 million expense variance, would you expect that to normalize most likely in the fourth quarter, which is your usual high expense quarter or before then? And is this what you mean about the seasonality of noninterest expenses?

And also, can you give us any update on further productivity objectives beyond the 250 million?

I will start with the second part of the question first, and then I'll pass it over to Tom Woods for the addition that you wanted done.

We originally set a productivity target, and we continue to have a productivity target that is strategically oriented. And that target is to achieve the median level of mix against the Canadian marketplace.

To put more definition on that, because a number of people have said, well, could we have further numbers? We measure the distance between our mix ratio in Q2 of 2005 and the median in the marketplace. And it turned out that we would require $250 million of cost reduction in order to achieve the median mix in the market.

After examining our opportunities for cost reduction and the timing thereof, we therefore set the target of $250 million of cost reductions to be achieved by the fourth quarter of 2006.

However, the $250 million that we committed to is only one part of the strategic objective. When we get to the fourth quarter of 2006, we will have to measure whether or not that $250 million reduction has us at a median or better level of mix against the industry. If we're not at the mix for the industry that time, we are fully committed to continue on with the cost-cutting exercise until we get there.

However, the one thing that I want to emphasize is there are two components to mix, and they are both the revenue and the expenses. And the reason why we used the median mix was because the revenue part of the equation is also going to be very important in terms of our productivity going forward.

Does that answer the second part of your question, Michael?

I think so.

Okay, I will turn it over to Tom Woods for the first part.

Yes, Michael. I don't know that I want to try and lay out targets for Q2 and Q3. I think we're kind of unique in actually setting out a target for any quarter.

What I will say is that I don't see a lot of variance as between Q2, Q3 and Q4. I mean, I would be surprised if we run at the kind of cost in Q2 that we ran in Q1. That message should be pretty clear.

But I would also remind you -- and most of you probably know this, but just as a bit of a refresher here -- when any company sets out a hard number target for a particular quarter, particularly one that's four or five quarters in advance, which it was when we did it -- I mean, there are four or five items here that could go either way. Currency, as it happens, is helping us a bit -- not a lot, but it's helping us a bit. Our stock appreciation rights -- if our shares are strong, that hurts us on the expense line. It happens to be hedged on the revenue line, but that could be a positive or negative. Obviously, brokerage commission payouts and incentive compensation -- the scenario in which those costs are high hurts your cost number, but that reflects a good revenue environment, so you kind of hope that that transpires. And then project spending, which is discretionary, enters into it as well.

Having said that, we've taken a pretty simple approach. And we've settled on 250 million, regardless of what happens in these four or five areas. We've got what we think are reasonable assumptions -- not heroic revenue assumptions underlying this.

But Michael, I don't know that there's going to be a lot of variation. It's not going to be a steady creep up or a peak in Q2 and then a downtick. It really depends on how these four or five items trend. But we feel quite confident that the Q4 number is still solid.

(OPERATOR INSTRUCTIONS) Ian de Verteuil, BMO Nesbitt Burns.

The questions relate to slide 66 of the slide deck, so I presume Steve -- targeted at Steve.

When I look at the trading revenue, it looked as if there was a very large spike in November. And I presume that has to do with the real estate securitizations. Have you always included those in trading revenues, or is that a new treatment?

We recently adjusted the risk, the value at risk, to reflect the fact that we had the inventory of the real estate securitizations. So this chart is a new chart which shows that revenue against the value at risk. And of course what happens there is that inventory is accumulated and then securitized for a onetime fee. So that spike happens because we have now aligned the revenue treatment with the value-at-risk treatment. And as we do real estate securitizations in the future, you will see those kind of spikes come up.

That leads me to the second question -- so the trading revenue as you disclose it in page 9 of the supplemental -- it says your [trade revenues] of 246. Does that now include the real estate securitization revenue, whereas before it didn't?

I'm sorry, that's right.

So really, when I look at 246 of trading revenue this quarter, relative to these historical other numbers, there's 40 million which is really a reclass from somewhere else?

I will ask Brian O'Donnell to answer that question.

Thank you, Steve. The real estate securitization revenue has been included in the other line on the trading revenue page, Ian, for at least the last four or five quarters. So it has been characterized as trading revenue in each of those quarters. So it's not an adjustment you need worry about.

Mario Mendonca, Genuity Capital Markets.

A quick question about retail PCLs. Coming in at about -- I guess it was 180 or so, let me just -- would you characterize that -- and just comparing it to Q4 '05, down on an adjusted basis 20, $21 million -- would you characterize this as a particularly strong quarter, like a quarter that demonstrates improvement? Or more just a coincidence that it would just happen to be down this quarter for other reasons altogether?

(inaudible)

Sure; I'm sorry -- I know that sounded little funny. Would you characterize this quarter, the 180 million in PCLs, in the retail side -- how would you characterize this quarter? Unusually good, or this is the sort of trend we should see going forward?

We set in place a plan on retail that goes back about six months, but really was intensified around that time. We are on that -- we're sticking to that plan. I think things are generally on track, and I would say that we don't expect things to get a whole lot better this year. But we see lots of evidence that the plan is working. We're quite confident that we are on track.

Maybe you can talk little bit -- Tom, you referred to vintages -- vintages are the years when perhaps loans were put on the books that you don't particularly like right now. Could you maybe run through the timing -- when did that improve, or when did your change the loan adjudication process?

(inaudible) in the loan adjudication process over the last year or so. But it's really in the last four to five months that we've tailored our credit standards to look at our risk/rewards and so on and so forth. And so we took a number of actions aimed at improving the credit quality of the new loans that we put on.

So that's why I say that we've got some vintages of loans on the books that we will still continue to see some elevated credit losses. But we are quite comfortable that the actions we have taken will accomplish our objective of getting those loan losses down over a short period of time. We are not confident enough right now that we would say that is going to be this year, but we are confident that the plan is getting traction, and that the loan losses will come down in those portfolios.

And then finally, also on credit -- I don't imagine you disclose this, or I haven't seen this disclosed anywhere. But your actual reversals and recoveries in the quarter, particularly in agriculture?

Mario, it's Tom. We don't disclose it specifically by sector. But the total recoveries are on page 19 of the supplementary package, and those recoveries were 23 million. (multiple speakers) I stand [corrected]; those are recoveries from a balance sheet point of view. I guess (multiple speakers) do we disclose it from an income of point of view?

Brian O’Donnell: Sorry, Tom; no, we don't disclose the recoveries from an income statement perspective.

(technical difficulty) not massive. In other words, that net LLP number you see, you shouldn't -- I mean, you should walk away with that saying we had good recoveries, but they were not massive. So that doesn't mask a very high LLP number offset by a very large recovery number.

And it's fair to say that it's not all the different from what it was, say, on a run-rate basis last year?

We'd have to go back and check. You know, it may even be lower, Mario.

Quentin Broad, CIBC World Markets.

I guess for Gerry, just to follow up on your commentary with respect to the cost initiative and kind of looking at it again in Q4 of 2006, and if you haven't hit median -- so just from a philosophically point of view, if you're at median, or even arguably a [snick] below, it sounds like you have conviction that if you were above, you would simply still drive towards cutting more costs out and/or raising revenue. But there, you have less direct capability to do that, so driving costs out to get you to median.

So why would you necessarily stop if you were at median rather than to continue to push that through the organization, to be quite focused on costs and reduce costs? Or am I just reading too much into that comment, that only if you are above median will you continue to drive on towards reducing costs?

Well, actually, that's not what I said -- I did not say only if we were above median. What I said is that if we were above median, that we would cut costs to get to median.

What we will do is in the fourth quarter of 2006 -- our first test will be are we at median or not? If we are not at median, we will work backwards from the number that is required to get there. And then we will implement that in the organization in as diligent a fashion as we can. But we will tack to that number as a minimum objective.

However, let's say that we are at median or we are better than median -- we will also continue to look at our organization, both top-down and bottoms-up, for further opportunities for cost efficiencies and for further opportunities for productivity increases. And if they are there, we will avail ourselves of them.

However, one of the things I want to stress is that from a mix improvement level, once we are at median, we believe that we should also be looking very carefully at the capacity utilization within the organization, the revenue implications of that, because that can also be something that can help to improve the mix from a revenue viewpoint.

So I think that you can take the commitment to get to the median as being something that's asymmetric. We will definitely continue to cut if we do not achieve that by the fourth quarter with the 250 million. And we may go further if it's the logical course of action from a cost reduction viewpoint versus revenue production. Does that answer your question?

Yes, and it segues, I guess, to Sonia in terms of retail markets. And obviously, you've been a heavy lifter in terms of pulling cost out, certainly, it seems to me, on a headcount or comp basis, ultimately. So from your perspective, when you looked at some of the growth opportunities you talked about, I think last quarter, which is wealth management, grabbing more share, consolidation of share of wallet -- improving on the Imperial Service side, cards -- perhaps under a little competitive pressure.

But you know, as you try and pull expenses out and yet still compete in this marketplace, are there specific challenges that you would note with respect to revenue growth that you are fighting hard, given the expense challenge of driving this -- because given the size of the organization, that's a key component of the bank getting to median?

Quentin, I would say that our current revenue target should be achievable with our expense targets as planned for this year. So we have assumed the reductions in this plan to get to the overall bank target when we have planned our revenue numbers. And we still believe that that's achievable.

Okay. Finally, Tom, just as a point of reference for my own forecasting, the non-controlling interest line obviously turned to a credit this quarter. I understand part of that might be INTRIA -- obviously VIE. Is there a particular notion of what that number should look like?

Quentin, we really look at that as not a relevant issue, because all of that -- now that we've bought out the minority in INTRIA, I think I'm safe in saying all that -- certainly virtually all of it, 99% -- represents minority interest in consolidated VIEs. And you may recall three or four quarters ago we had a very big minority interest there, because the minority interest in these VIEs is like 95 to 99%. So any time you have got a big positive or a big negative, you can be sure that there's offsetting entry up in revenue.

This now concludes the question-and-answer session. I would like to turn the meeting back over to Mr. Gerry McCaughey. Please go ahead, sir.

I'd like to thank everybody for signing on and attending today. Once again, it was a pleasure to discuss CIBC's results. And we look forward to the next meeting. And many of you we'll see before then, and we look forward to those conversations. So thank you very much for attending.

The conference is now ended. Please disconnect your lines at this time. Thanks for your participation, and have a great day.