Canadian Imperial Bank of Commerce (CM) 2006 Q2 法說會逐字稿

Good afternoon ladies and gentlemen. Welcome to the CIBC second-quarter conference call. Please be advised that this call is being recorded. To reduce audio interference over the conference call lines please turn your BlackBerry off for the duration of the meeting. I would now like to turn the meeting over to Mr. John Ferren, Vice President, Investor Relations. Please go ahead, Mr. Ferren.

Good afternoon and welcome everyone. Let me remind you first that our conference call this afternoon is being audio webcast and will be archived later this evening on CIBC.com. Here to speak to you today 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 that may have been applied in drawing any conclusions or in making any forecast 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.

I would now like to turn the meeting over to Gerry McCaughey.

Good afternoon. Thank you for joining us. Today I will review our second-quarter results and our progress towards our stated priorities. Our Chief Financial Officer, Tom Woods, and our Chief Risk Officer, Steve McGirr, will then provide a more detailed financial and risk review.

This morning CIBC reported net income for the second quarter of $585 million, up $145 million or 33% from the same quarter in 2005. Earnings per share were $1.63 compared to $1.20 per share for the same period last year. Return on equity for the quarter was 25.7%, up from 16.2% a year ago. Our Tier 1 capital ratio it is now 9.2%.

Our second-quarter results continue a solid start to the year. We are making progress against all of our key priorities. Let me comment briefly on each priority beginning with maintaining and enhancing our business strength. Retail markets revenue was $1.96 billion for the quarter comparable to the same period a year ago. Net income for the second quarter was up $91 million or 27%, including a tax recovery in the current quarter and a provision for the hedge fund settlement a year ago.

Although the domestic retail environment remains competitive, CIBC's retail businesses continue to be well positioned in the market place. Our primary challenge is in the area of retail credit. As we have said previously, consumer loan losses remain higher than we would like. We've implemented a number of initiatives to increase new origination of secured loans to improve the overall asset quality of our portfolio. These actions are yielding the desired new loan origination quality. During the second quarter, the number of new secured loans and lines were up 53% from the second quarter of 2005. Secured loans now represent over 50% of our personal loan portfolio.

In World Markets, revenue was down from a strong second-quarter a year ago primarily due to lower investment banking and credit products revenue. CIBC World Market's core franchise in Canada remains strong. Through the first half of 2006, the business has sustained its position as a leader in equity underwriting. In the U.S., we remained focused on niche areas of the market where we have expertise and the strongest potential for profitability. We are continuing to invest in our core client franchise particularly in the areas of talent, credit, product innovation and financial resources to ensure that growth in our wholesale business is both supported and focused.

Our second priority is to improve productivity. Last year we set an objective of $250 million of annual cost reductions by the end of 2006. As we reported in our second-quarter results today, we continue to make progress in this area.

Our third priority is our balance sheet and capital usage. Our Tier 1 capital ratio is now 9.2% above our target of 8.5%. As we stated previously, CIBC's first priority in the area of capital usage is to invest in our core businesses to sustain their strength and market position. After funding our internal needs we will balance other capital deployment opportunities. Currently we are building our capital to fund our FirstCarribean opportunity. We anticipate concluding a definitive agreement in the third quarter and closing the transaction by the end of the year.

As I stated on our March 13th webcast, given that we are deploying capital in support of our FirstCarribean acquisition, we will not be buying back shares during the course of 2006. However, we remain committed to our objective of paying out 40% to 50% of our earnings in dividends. This morning we announced an increase to our dividend to $0.70 per share for the third quarter. Based on our Q2 earnings, this payout remains at the low-end of our target range.

In closing, I want to thank all employees for their efforts on behalf of our clients and our shareholders. Our results through the first half of 2006 support our objective to position CIBC for consistent, sustainable performance over the long term.

I would like to now turn the meeting over to our Chief Financial Officer, Tom Woods. Tom?

Thank you, Gerry. Good afternoon everyone. I'm going to start on slide five with a summary of the quarter. As Gerry said we reported $1.63 fully diluted earnings per share or $1.65 on a cash EPS basis. There are four items highlighted on slide five aggregating $0.10 a share net. In other words reported EPS was helped by about $0.10 a share from these items. As always there are other items that could have been put on this list of unusual items and I will refer to some of them in my review. But suffice to say, these all offset each other.

Apart from these items, performance this quarter was enhanced by lower expenses, continued corporate loan loss recoveries and strong retail brokerage revenue. Performance was hurt by lower investment banking and credit product revenue and tighter retail margins.

Slide seven is a high-level overview of revenue presented on a consolidated basis. Revenue of $2.77 billion was helped by $28 million of consolidated VIE revenue and $47 million of revenue generated by capital repatriation from international subsidiaries. Both of these are offset on the minority interest and tax lines respectively so they had no effect on net income.

Slide nine is a summary of our expenses. The main reason for the reduction in expenses versus Q1 were three fewer days in the quarter and lower litigation accruals. The strong Canadian dollar helped as well in the translation of our U.S. costs. Although we expect somewhat higher expenses than this in Q3 and Q4, we are confident we will deliver in excess of our $250 million Q4 run rate target even allowing for the savings due to the strong Canadian dollar.

I will now provide a brief business line review. Slide 11. Revenue in Retail Markets was $1.96 billion, down marginally from Q2 a year ago on a reported basis but up if adjustments are made for securitization. Slide 13. In Personal and small-business banking, revenue was $490 million but as I said last quarter this is not comparable to the 2005 numbers because we changed our internal transfer pricing arrangements between the retail front-line groups and the mortgages and personal lending product group. Adjusting for the transfer pricing change revenue this quarter was down 2% versus last year because new loan originations were lower. Deposit balances were up 1% versus Q1 and up 6% versus a year ago. Deposit spreads showed a small decline from Q1 because of tighter GIC pricing. The outlook for Q3 is for good growth in deposit balances and mortgage and loan originations.

Slide 14. Imperial Service is the group covering the mass affluent customers of our branch banking network. Revenue was $227 million and here too is not comparable to last year for the same reason. On an adjusted basis, revenue was up 4% versus Q2 last year. Deposit balances were up 2% from a year ago. Q3 revenue here should be up as well.

Slide 15. Retail brokerage had record revenue of $313 million with good growth in trading, new issues and investment management revenue. Assets under administration were up 13% from a year ago and 2% versus Q1. TSX volumes so far in May are running slightly lower than in Q2 and June and July are typically slower months, so Q3 will likely have lower retail brokerage revenue than Q2.

Slide 16. In Cards, revenue was $337 million up 1.5% from a year ago. But adjusted for securitization, revenue was up 6%. Card loan balances and purchase volumes both grew 7% versus a year ago. Spreads improved marginally versus Q1 and as Steve McGirr will comment on, the loan loss rate in cards continued to improve which was a further boost to profitability in this business. Revenues should be higher in the third quarter.

Slide 17. Mortgages and personal lending revenue on an adjusted basis for the transfer pricing changes I mentioned earlier was up 4% versus Q2 last year because new loan originations on which commissions are paid to the front-line groups were lower this quarter. Mortgage balances were up 8% from a year ago. The trend from variable rate mortgages to fixed rate continued for the third consecutive quarter in a market that continued to get more competitive. 42% of our mortgage portfolio is now fixed rate compared with 35% a year ago. Spreads in both fixed and variable rate mortgages fell in the quarter and the shift in mix towards the lower spread fixed rate business hurt spreads in this business overall.

As Gerry said, 51% of our personal loans are now secured versus 47% six months ago. In Q2 78% of our newly originated loans were secured. Personal loan balances were up 4% from a year ago. Spreads were down versus Q1 and the mix shift from unsecured to secured had a further negative affect in spreads in this business overall. The outlook is for moderately higher revenue in this business in Q3.

So to summarize Retail Markets, net income on slide 19 was $432 million, down marginally from our strong Q1. Net income this quarter was helped by a $35 million tax recovery. Adjusting for this, and adjusting for the hedge fund litigation provision in Q2 last year, net income in Q2 was up 5% in Retail Markets versus a year ago.

Turning now to World Markets, slide 20. Revenue was $607 million down 11% from Q1 and also down from the high levels of late 2005 when we had large merchant banking gains.

Slide 22. Capital markets revenue was $354 million, down 5% from Q1. Debt, which represents about 40% of this capital markets number, had the same revenue as in Q1. Equities had lower revenue this quarter due to fewer arbitrage opportunities in a market that had less volatility. Agency revenue was up marginally from Q1 and we had a $19 million pre-tax gain on the NYSE merger with Archipelago. Though it is difficult to predict this early, we expect slightly higher capital market revenues in Q3.

Slide 23. Investment banking and credit products revenue was down from Q1, partly due to an $18 million write-down on a preferred share holding as well as a $14 million markdown on our corporate loan credit derivative portfolio as credit spreads narrowed. We treated the $14 million AcG-13 markdown as an unusual item but the preferred share markdown offset the NYSE gain so we did not treat either as unusual.

In Canada, new issue equity was up but M&A was down largely because of revenue recognition timing. In the U.S., revenues in all of our major business lines were down versus Q1. Our U.S. real estate finance business continued to perform well although revenue was marginally lower in Q2.

Although the outlook for investment banking and credit products for the rest of the year will as always be market dependent, we are optimistic that revenue should be well up from this Q2 level.

Merchant banking on slide 24, had revenue of $69 million, well up as expected from Q1. We had gains in distributions of $96 million offset in part by write-downs and funding costs of $27 million. We expect revenue in the second half of the year to be about the same as in the first half.

On slide 25, World Markets net income was $110 million, down 14% from Q1 mainly due to lower revenue offset in part by lower cost and a lower tax rate.

I will now turn it over to Steve McGirr.

Thanks, Tom, and good afternoon. I'm going to start with slide 61. As Tom has highlighted, the second quarter specific loan loss provision decreased marginally to $163 million. In terms of portfolio performance, highlights for the quarter in the business and government portfolio, commercial and small-business banking provisions increased while the large corporate portfolio continues to meet or exceed expectations.

Consumer provisions overall reflected better performance in the quarter with Cards and Unsecured Loan portfolios performing better than expected. As we've told you in the past, we have taken a number of actions to change the risk profile of the unsecured loan portfolio. The second quarter results are encouraging in this regard. Actions taken to reduce the risk profile and shift the business mix are gaining traction and yielding the desired new originations quality in these portfolios. However, we do remain cautious for the balance of the year and do not expect to realize significant reductions to loan losses in 2006.

Moving onto impaired loan coverage, net impaired loans are down $69 million in the quarter and $183 million, or 53%, year-over-year. With respect to the general provision, in the quarter we released $25 million of our allowance. This is primarily due to improvements in the loss rate in the cards portfolio.

In terms of our outlook for loan losses for the balance of the year, we expect our fiscal '06 specific provisions to be in the lower half of our 50 to 65 basis point medium-term target range. Our current view is that approximately 80% of our fiscal '06 credit provisions will be in the consumer sector with the balance applicable to the business and government loans.

Turning to slide 62, I will recap our specific provisions as a percentage of net loans and acceptances. Second quarter specific provisions were 46 basis points of net loans and acceptances. This is in line with our first quarter and below our medium-term target range of 50 to 65 basis points. Our business and government credit provisions totaled $13 million for the quarter. This is an $11 million increase over the first quarter reflecting higher provisions in commercial and small business banking. The consumer portfolio loss rate was 55 basis points, a decrease of 4 basis points from Q1 '06.

On slide 63 we break out the consumer portfolio into its subcomponents. The Q2 specific provision for consumer loans was $150 million, down $14 million from Q1 '06. This is primarily a result of lower loan losses in a personal loan and card portfolios. While loss rates in the personal loan portfolio are down from Q1, unsecured personal loans are still at elevated levels. We continue to be comfortable with credit performance of the mortgage portfolio and with continued improvement in the card's loss rate this quarter, the portfolio is performing at or better than targeted levels.

Our growth's impaired loans shown on slide 64 reduced $62 million it during the second-quarter and were down $208 million over the same period last year. As at April 30th, net impaired loans were $165 million. The 29% quarter-over-quarter and 53% year-over-year reduction was driven primarily by declines in the net impaired business and government portfolios.

In the quarter, business and government classifications totaled $89 million. From an industry perspective, the largest levels of new corporate credit classifications were in the service and retail sector at 40% and the manufacturing sector at 36%. On a geographic basis these credit classifications were primarily in Canada.

And we will now look at the total portfolio on slide 65. Net loans and acceptances totaled $145.8 billion at the quarter end, up $1 billion from January 31st, '06. Residential mortgages are up $1.1 billion quarter-over-quarter and up just over $3.2 billion year-over-year. Adding back the securitized mortgages as Tom said on a managed basis, year-over-year growth was 8.2%.

Personal loans increased by $187 million over the quarter and are up $894 million from the same quarter last year for a 3.6% increase. Credit card outstandings increased by $158 million quarter-over-quarter but were down $1.3 billion or 17% year over year. This was in large part due to the $2.2 billion of net securitizations that have occurred in the last four quarters. On a managed basis outstandings are up 8% year-over-year.

Business and government loans decreased by $306 million in the quarter and by $1.4 billion year-over-year. This reduced portfolio level combined with $9.7 billion of credit protection has lowered our exposure to sectoral and single name risks. You can refer to the Appendix for additional detail on credit protection.

Turning to market risk, on slide 66. We displayed the Q2 daily trading revenue against the value at risk in our trading portfolios. Risk levels were stable during Q2 and averaged $9.6 million slightly above the levels in Q1. On no occasions did losses exceed the value at risk and 71% of trading days provided us with positive revenue.

Not let me now address our capital strength which is shown on slide 67. Our Tier 1 ratio is now 9.2%. This is above our target of 8.5% and well up from the 7.5% we reported at the end of the third quarter last year. The Tier 1 capital ratio increased this quarter due to internal capital generation with earnings net of dividends also allowing for the return to Tier 1 status of 91 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 and credit card securitizations but in smaller volumes than in previous quarters. These initiatives were more than offset by controlled growth and retail risk-weighted assets in the quarter.

Turning to slide 68, management of the balance sheet including risk-weighted assets has been a key focus for the bank. We are still committed to maintaining a solid balance sheet and discipline in capital deployment. A focus on effective management of risk-weighted assets will not change.

I will now turn the floor back to Gerry.

Thank you. We will now open to questions.

Thank you. (OPERATOR INSTRUCTIONS) Jamie Keating from RBC Capital Markets.

Thank you and good afternoon everyone. I have a couple of housekeepers which I'd then like to follow up with a more general. Just on the housekeepers, I wondered, I'm not quite clear on slide 23 cost of credit hedging and $14 million. Are those the same numbers or just sort me out on that one, Tom?

Also looking over to slide 13 to sort of deposit growth. I wonder if you could just get a little more granular on the nature of the deposit growth? What categories grew and which were flattish, if you could?

Okay, Jamie. What was that first slide number?

Slide 23, I was going to ask what the cost of credit hedging were. And then I got a feeling you answered my question. I don't think I kept up with you.

Yes, the cost of credit hedging was -- the cost was $16 million and that is the premiums we paid on the insurance. The mark-to-market was $14 million. So in some places you see a consolidated number of 30 but it is made up of those two numbers.

Got you. While we are on that slide actually maybe a little more of an advertisement as to why we should exclude or consider the preferred shareholding as an offset to the other write-down?

Well, Jamie, as you and probably half the people on the line have discussed through the years it's a bit of an art in terms of what you treat as an unusual item. Those two numbers more or less offset. The NYSE gain is as some people know was the result of a markup on the NYSE merger. Some people will view that separately. The preferred share write-down we think is a very unusual situation. We've got a relatively low portfolio of prefs in the investment banking business. Those prefs have emanated from a loan recapitalizations or in some cases relationship investments we made years ago. So I don't want people to think that there is a concern or an issue around that.

We actually this quarter, for what it is worth, Jamie, had a number of other be they accounting changes, rule changes, reconciliation true-ups which if we put on the page would have helped adjusted EPS. I feel very comfortable treating those two as than offset. And I think if you talk to any CFO of a big company they would acknowledge that in any quarter there are probably 10 to 20 unusual items and the question is, what do you highlight? So we certainly view the two as an offset and view $1.53 as a very representative number for the quarter.

Thank you, Tom. I guess I can believe you on that one. That's a help. And then maybe for Gerry or Tom, just a little update here on the cost of revenue program, looking to try and meet the median level of the banks and give us your color on how the revenue picture is fitting with that target? I for one look at the revenue number and I'm a bit worried, it could become problematic in your quest to match the median. I just wanted to get your views on that if I could, Gerry or Tom?

Certainly, Jamie. Just to remind everyone of the topic that Jamie is referring to. We set the strategic goal of achieving the median in cost income ratio of the Canadian industry of our major competitors. And as of Q2 of last year, we measured the difference between our cost level and the median and the difference was if you were to achieve that strictly through cost reduction without impacting revenue, the difference was a $250 million cost reduction. We therefore set a $250 million goal for Q4 of this year as our improvement on the cost side.

The stated strategic objective was as of Q4 we would then again measure how we were doing against the median and take further action as it was required in order to get to that median and that would probably represent an ongoing initiative. The tactical stake that we put in the ground so everybody could measure us and understand the activities of the bank was the $250 million reduction.

I do feel that given that we were at the first phase of a quest for the median and that the most obvious area where we were offside was on the cost side that that was the logical place to start. I think that as we look forward, we anticipate in achieving the median cost income ratio over the longer-term as well as in achieving our longer-term earnings per share goal growth for growth of 10% that revenue will represent an important part of the mix and it is our view that we will be able to perform adequately on the revenue side to assist us in getting to that goal of the median of a cost to income ratio, median cost to income ratio in the industry.

And also we believe that we will be able to perform adequately on the revenue side to achieve our targeted 10% earnings per share growth that we've put in our annual report scorecard. Does that answer your question, Jamie?

I think it does to a degree. The only thing I'm curious about is whether you feel like you are on track? I guess what the message is you feel like you are on track to meet that goal by some point. But I'm not sure you are willing to -- it doesn't give me the sense you know whether it feels like it's on track to meet it by the end of this year?

I believe -- I feel very strongly that we are on track in the program as we laid it out which is to achieve the $250 million cost reduction by Q4. We have always said that we would then measure again in Q4 against where the cost income ratio was for the industry. And that that may require further target setting. The main reason for that is because we always anticipated that the industry would move in the direction of greater productivity and therefore we would have to do a check at the end of Q4 of next year to see whether or not we were keeping up from a competitive viewpoint. I'm very confident we will achieve the $250 million. And as Tom said, there are strong signs that we will exceed it.

But the industry is improving from a productivity viewpoint and it is very much our intention, as of Q4, to measure where the industry is and to set further targets. I think that the bank's performance from both a cost and a revenue viewpoint will be facilitated in terms of achieving that median.

Thank you, Gerry.

Susan Cohen from Dundee Securities.

Thank you. On slide 31 you show some market share statistics. And in some cases there has been some erosion over the quarter. I understand that you are focusing on profitable growth. But at what point do you say I don't want my market share to fall any further?

I'm going to turn this over to -- this is the Retail Markets area. So in a minute I'm going to turn it over to Sonia Baxendale. We are very focused on profit growth. We believe over the long-term and we wish to be consistent in that regard, that market share is an important factor in terms of sustainable profit growth and sustainable profit growth that is competitive. And so I wanted to make it clear that market share is an important part of our overall plans. And that we believe that the bank's performance in this area will be consistent with all of our goals that we set for ourselves over the medium term.

Sonia Baxendale will now give a little bit more color to that in terms of current activities that are underway both from a viewpoint of market share in retail markets and also obviously commensurate with that revenue growth. Sonia?

Thank you, Gerry. Susan, as the details of our market share performance vary by product category, it is probably most useful if I touch on our three key areas of focus. I think that would add the most flavour to this starting with lending. If you look at our lending portfolio, our share decline is entirely driven by our strategy to reduce growth in our unsecured lending portfolio in favour of strong growth in our secured lending particularly while we get our risk activities to a point that we are more comfortable. And that is progressing well.

Our estimates, in fact, would indicate that we are growing share in secured lending and to that end, year-over-year we've increased our balances on the secured side by almost $2 billion. You might also recall that we exited the student loans business a few years ago and the runoff in that portfolio would impact our year-over-year share in this portfolio by 32 basis points. So going forward we would expect to see continued slow growth in our unsecured lending portfolio and strong momentums continued in our secured portfolio.

Secondary I should touch on is credit cards. In the area of credit cards, we continue to maintain our number one position and our outstandings have now grown to just about 11 billion. Our market share decline here has been a direct result of the uncertainty that was created as a result of the Air Canada difficulties. In addition to our choosing to take a more conservative approach vis-à-vis loss rates given some of the challenges in our other portfolios, we've now stabilized in our card portfolio, I believe, as far as share is concerned, in fact you can't see it on this chart but February is actually up 10 basis points from January. So a month doesn't tell the whole story but we do believe we've stabilized and we would expect to see good growth in our core card portfolio going forward. We have a number of initiatives planned both independently as well as with our Aerogold partner as we move forward.

The third area I should touch on is mortgages and I think Tom did make some reference to this in his comments. But we have certainly been impacted by the shift in customer preference from variable to fixed mortgages. That has taken us a little bit of time in our front line to keep pace but we certainly see positive momentum in this area. We have a good pipeline and would expect to see some improvements on the mortgage front. As was already noted there has also been some very aggressive competition in the mortgage space across the board. So I think that probably captures the three big areas that we are focused on from a market share prospective.

That has been very helpful, thank you.

Mario Mendonca from Genuity Capital Markets.

Just very quickly, Jamie asked about some colour on the deposit growth and I was interested in that as well. Just the nature of it where core or term -- what have you?

Okay, Sonia Baxendale will also be answering that question on deposit growth. Sonia?

It is pretty consistent across the various deposit portfolios. But consumer deposits in all of our -- both in our core distribution groups as well as our Imperial Service have seen year-over-year growth in line with what Tom talked about the 6%. It was a little flat Q1 to Q2. And here again we have some in the area of deposits we do have some activities planned through the summer and through the rest of the year. So we would expect some pickup there. There it is also, if you look back historically, there is also a little cyclicality in our deposit numbers. And we tend to be a little softer in the second quarter.

Where would you say most of the growth is coming from though? Would you say it was more on the term deposit front or --?

Sorry, Bonus Savings Account would be our biggest growth area.

Okay --

Is that what you are getting at?

That was what I was getting at.

Okay.

And when you say you have some programs for the summer is that what you are referring to as well?

Yes.

Maybe a question for Tom on the expense side. If you look at where you came in this quarter expenses and you compare it to what you talk about for Q4 '06, and you recall Q4 '06 you were kind enough to show us sort of an itemized list. And that is helpful. On the employee costs, down about $20 million, so you are doing better there, doing better on the computer side or technology. Where you are really blowing it away though is in other, like $64 million, lower by $64 million this quarter than what you contemplated in Q4 '06. And if you were to annualize that, as you did last quarter, when you're talking about this, you are well over the $250 million. Is there anything you can help us on that front?

And we didn't put that slide in because we are well through the 250 and the numbers are all in the supplemental. Let me just remind some of the others, in Q2 of last year we had costs of $1.96 billion, and that was the baseline. Costs were actually higher but we took out a litigation provision just to have a fair baseline. $1,825 this quarter is down 132 million on a 12-month basis. And both of those quarters are comparable in terms of number of days. Now the Canadian dollar helped us probably 20, $25 million, so even if you take $100 million saving, ex the dollar, we're running around 400 million. I would caution, however, that as I said in my comments, our costs in Q3, Q4 will go up a little bit. Some of the project spend we thought might happen this quarter is going to be in Q3 and project spend always in Q3, Q4 is a little higher.

So even ex the dollar we, as I said, will be well through the 250. It's really coming in a number of areas, the litigation accruals and the operational losses in that other line are probably the biggest reason for the other line to be down as much as it is. Other expenses, as we've said from the beginning, the amount of technology spending has returned to more historic levels after being quite high over the last two years. And I can say that the realignment of some of our management groups, that is coming through not only in the salary level but in some of the other costs that tend to go along with staff costs. So it really is across the board, Mario.

But when you that you will do better than the 250, it sounds like you'll do -- 50, 60% better than the 250. This isn't just a minor beat, this is a material --

Yes, and I don't want to undersell it. But similarly I don't want to declare victory too early. The discipline we are showing internally is very pronounced. As I say we are helped by the dollar, we are helped by a few other things. But I will just leave that as my comments. We expect to be through the 250 even adjusting for the Canadian dollar strength.

If we could just flip over to securitizations for a moment. The pace of securitizations slowed, you can see that. And I think you guided us to that last quarter, you suggested that would slow. What surprised me though is the level of earnings being driven from the securitizations specifically because your peers all highlighted this quarter that with rates moving a little higher the gains or the earnings from securitizations had come in rather substantially. Why are we not seeing something similar in CIBC's case?

This is slide -- this is page 16 in the supplemental. Securitization is a very complex subject. Let me make two or three points. If you are on page 16 of the supplemental, the number, Mario, I believe you are referring to is the second number down which is the 135?

Right.

And that is a big number simply because, as you said, we have done incremental securitizations over the last three quarters. But I would, and Mario, I know you know this, and perhaps most people do on the line, the very bottom line number, the 2 million, is the net effect of that securitization. And it is only in quarters when there are securitization gains because of interest rate movements or when you do a big credit card securitization you recapture some of the loan losses that you actually book a net profit. So, while you are right the revenue that comes in at the bottom of the waterfall in the securitizations line is 135. That is essentially -- well it is completely offset by reduced NII and reduced card service fees. So we don't view that as a profit. It just changes on the location of the income statement.

I guess what I was getting at is for several of your peers that number is becoming more multisidedly negative. Then if it's --

The bottom line number?

Pardon me?

The bottom line number?

Yes, the 2 million.

Yes, it is negative to -- for us and for every bank, the weighting of card versus mortgage securitizations will drive that number with the exception of one-off gains or losses, as I just said on a mark-to-market basis each quarter. Credit card securitizations generally are a little more expensive. Mortgage securitizations are a little bit more beneficial. So while I can't -- I'm not -- I don't know the specifics of the other cases you are looking at but I would suggest you may want to pursue the weighting of credit cards. And the odds are they have had more card securitizations than mortgages that would drop that.

I think you are exactly right. That actually does make sense. Let me move onto something very quick then. CIBC NIMs very resilient over the last little while, maybe with the exception of this quarter. It has been a bit surprising given this shift to secured from unsecured and this quarter you seemed to -- you expressed that the shift from unsecured to secured may have had an effect on the NIM. And I always got the feeling that was something that the bank downplayed as not being all that important from a NIM perspective. Or perhaps maybe if you could just describe was that important this quarter and do I have it wrong that you downplayed that in the past?

I know one of the other banks, I've forgotten which, made this point in their call. I have to say that with every passing quarter the NIM statistic, which is just net interest income and the numerator divided by assets as defined in the denominator, I believe is becoming less and less relevant in terms of integrity of a metric. And that is because the impact and presence of total return swaps and for FX forwards hedging northbound funding really skew that NIM. And while we try and adjust for that in the back and NIMs did go down 5 basis points when you adjust all that out. Certainly a reported NIM for most banks I would say has very little meaning because a lot of what in the old days would have been in the NII line is now in the non-interest income line because of the accounting rules on how to treat those hedges.

So what we do and what you may want to do is just push us on what is actually happening product by product. And as you heard me say and I think Sonia allude, competition in mortgages, consumer preference there has put pressure there. Not so much competition in personal loans but clearly our own strategy has put pressure there. The cards business actually has been pretty resilient so that is offset somewhat what otherwise might be pressure on NIMs if you actually look through some of the hedging accounting anomalies.

That was helpful, Tom, thank you.

Michael Goldberg from Desjardins Securities.

Thanks very much, I have a couple of questions. First of all, I wonder if you can reconcile the $11 million of investment securities losses in this quarter with what you had to say about the merchant banking revenues, $69 million, including $74 million of gains net of $8 million of write-downs or maybe that is lower write-downs? So that is the first one.

Michael, why don't we start. Well let's do them one at a time. And I know the bank CFOs have talked about we have to do a better job. We are somewhat bound by the accounting formalities here. But this is actually a somewhat complex answer but fairly straightforward. Where you start is on the management reporting that I talked about we had the gains and private equity funds and gains and direct investments of $73 million and that is a number that I quoted. Two-thirds of that was in gains in private equity funds. Technically because those are limited partnerships, those have to be booked under other income. So you will see a large number in other income which perhaps off-line I can show you exactly where that is.

The 23 million does go into the investment securities line item. But that number 23 is dwarfed by other both write-downs to securities and actually mark-to-markets on some treasury debt financing which is a little bit of an anomaly. Bottom line is the $73 million of gains, most of that goes to other income and that is why the investment securities gain is a negative.

Okay. All right, so it's a comprehensive number the 73, $74 million. The other question that I have is you mentioned that you'd done some residential mortgage insurance during the quarter. How much did you buy? And how much more room is there to buy insurance on res mortgages? What impact would that have on your risk-weighted assets?

Michael, why don't you phone us off-line. We haven't disclosed that I'm aware the specifics of the mortgage insurance. So why don't you give me a call after and we can go through and see how we can help you on that.

Ian de Verteuil from BMO Nesbitt Burns.

Yes, page seven of the supplemental pack, the investment banking and credit products revenues $133 million this quarter if I add back the two items of note, Tom, the $18 million preferred share and the (indiscernible), 13, it is still 165 million. I would have thought in a quarter where capital markets were robust and where some banks had mind-boggling results that you would have done a number that was higher than the last two-year average not quite a bit lower than the last two-year average. Can you talk to what happened this quarter?

Yes, Ian, I alluded to maybe in two general terms in my comments. But just working through some of the major groups the Canadian new issue equity business was actually pretty good. It was up from Q1. Q1 was a relatively low quarter given the income trust hiatus. But Q2, we were neck and neck with one other firm and delivered higher revenue.

The M&A line in Canada in Q1 was very high. We had a couple of very large fees and we've got an excellent pipeline, and Q3 and Q4 could well -- at least one of those quarters -- exceed Q1 depending -- and this is all -- the deals are all in the public domain. So the timing of the revenue in M&A in Q2 in Canada was very low compared to Q1, and that accounted for a pretty substantial proportion of that remaining gap that you referred to.

As I said, all the U.S. businesses were down in Q2, particularly the new issue credit business where loan syndications in Q1 for us were quite strong. They were not as strong in Q2. New issue equity was down, M&A was down. Real estate finance was almost what it was in Q1, but it was down a little bit as well, and Europe was down. So we had a case where of the six or seven main businesses -- all business lines -- all but one was down in the quarter, and that was compounded by the credit derivative mark and the preferred share mark.

I guess the issue I'm grappling with is, I understand some of those issues, but give me some reasons why the Q1 numbers were unusually high. Maybe -- I know it is always tough calling investment banking, almost as tough as calling equity prices. But has there been some structural change -- the cost reductions, the pressure to get the cost down? Is that having a lasting impact on the investment banking and credit revenues?

Ian, it is Brian Shaw. Tom I think did a nice job of breaking down the categories of performance. It isn't -- first of all, there hasn't been any reorganization or structural change that would account for it. And it wouldn't be our assessment that the productivity initiatives in those areas have impacted materially in the second quarter. I think the reality is that we did have a very good first quarter, particularly in the M&A line, and that would be the case certainly in Canada and also in the U.S. And I think it would be fair to say that in Canada in the second quarter, as Tom said, effectively it's an M&A question and deal completion timing.

We are very busy in our M&A group. When we can actually complete assignments, time will tell. It would be the case also in the U.S. it was disappointing. After quite a good first quarter, we had a less active second quarter. I would say the good news there is in the U.S., the visibility around M&A in the latter part of the year is quite encouraging. And there is also some deals in the equity issuance side that we have visibility around in the pipeline. So if we get reasonable markets, which have been unfortunately a little choppy as of late, we would expect that we would have a better back-half of the year in the U.S. So I think I will just leave it there.

Thanks.

Darko Mihelic from CIBC World Markets.

Great, thank you. This is a question I guess for Tom. Referring to the slide 13 when you spoke about personal business banking revenues, $490 million. You mentioned two things very interesting. First is that you said that year-over-year, it looks like it would be down about 2%, adjusting for securitizations. But given the discussion we just had on securitizations and given that it's a very small impact, I'm wondering if you can help me rectify whether or not you meant that securitizations were beneficial or not beneficial this quarter to that particular line item?

Darko, I may have misspoke, but if I said adjusted for securitizations, I didn't mean that. What I meant was the Q2, Q3, Q4 numbers last year on slide 14 you can see are quite a bit higher than that 490 in Q2 this year. What I was trying to say was we changed our transfer pricing. The personal and small business banking group, which is the front-line branch marketing group, in 2005 got a greater share of the revenue because we revenue share all dollars; we don't double-count it in the management reporting. They got a greater share last year than they got this year. And the reason for that was we are -- as Sonia has said in the past, we are changing the approach to a much more relationship-based as opposed to product-driven scorecard.

So the 490 compared with the same number last year was that 612 was adjusted down. And what was taken out of the 612 on an apples-to-apples basis largely went back into the mortgages and personal lending line. So the 490 adjustment comment was adjusting for that not for securitization because there is no securitization impact in that line.

Okay, thanks. That is very helpful and I guess a question for Sonia. If we off the back of Tom's comments with regards to some of the noise or remove some of the noise year over year Retail Markets essentially had net income that would be up about 5% year-over-year. And that would be of all the banks reported so far the worst year-over-year. And obviously there is a lot of moving parts. But I guess my question for Sonia is, is, on a go-forward basis clearly you want to outperform and maybe you can help us out with I guess which area do you think you can outperform in? Is it going to be strictly a loan loss repair job or do you think that somewhere along the lines you are going to get better margins or better revenue growth on a go-forward basis?

Well, if we start with the lending portfolio, clearly the unsecured lending area is not where we either will outperform or want to outperform strategically. So you should expect that on a go-forward basis to continue -- see our growth continue to be on the low end relative to the market on that front.

In the area of secured lending, as I mentioned, it doesn't get reported separately but when we analyze those numbers, our view would be that we are growing faster than the market in secured lending and we would expect to continue to do that. We have a lot of momentum and we have quite a bit of business in the pipeline. And so we think that we can continue to perform quite strongly in that area.

In the cards area, we have a number of initiatives in place and we are feeling some positive changes happening there. And we would expect the cards area to be an area that we would see some improvement over the medium term. And mortgages we would see a little bit of a turnaround on that front.

So it sounds like you are suggesting that you are going to get some revenue performance in the future? Or I guess what I'm driving at is what is the big driver to the bottom-line for you on a go-forward basis? Do you think it will be the loan loss provision or do you think you will actually start to get some revenue growth?

I would suggest that over the medium term we should see some improvement in revenues in the areas that I have mentioned in combination with improvement in the loan loss scenario.

Okay, great. That is helpful, thanks.

Jim Bantis from Credit Suisse.

Thank you. Two quick questions. Maybe Sonia, could you looking at the slide that Tom refers to the NIMs, but I wonder with respect to the retail bank if you could quantify the number of the amount of NIM compression in the quarter for the retail bank?

Well, if we look at it on a product by product basis, in the area of secured lending we've seen compression there both from a competitive pressures in the market pushing that down as well as on the unsecured, the unsecured I would say is pretty close to flat. There isn't a decline there. Cards, Tom referred to, was we've seen some that has been stable. Slight improvement in our deposit, a little better in Q2 versus Q1. And residential mortgages down both from a product mix perspective as well as market pressures.

Thanks for the description of the moving parts. Do you think that the NIM compression is greater than the 5 or six basis points that is highlighted for the aggregate bank?

No, it is not.

Great, thank you. And the second question is going back to the investment banking. I know Ian kind of highlighted before but I just wanted to look at the market share slides on 45 and 46 showing the declines. And, Brian, maybe it is from a business mix perspective, i.e., when I think of the market in terms of midcap energy names, midcap mining names, is it just that where the market is going right now is perhaps what is leading to some of the new issue market share declines or some of the market share equity trading declines?

Well, in the new issue front, I think you understand the issue from your comments pretty well. If you think about it in Canada year to date we're at the top of the league tables and if I remember the numbers correctly that translated into the first quarter in about 15-ish% market share going to about 12.5% in Q2. And Q2 was a function of -- that was still very good market share relative to our competitors all of the big bank dealers came down and it is simply the resurgence or the activity in junior resource, financing and the relatively better positioning that some of the non-bank owned dealers have in that. So I don't think there is anything to say about our market share in Canada based on what you've seen today. It is really just how the market is evolving.

Got it. Thanks very much. That confirms that, great.

Andre Hardy from Merrill Lynch.

I expect about 130 bps of Tier 1 impact when FirstCaribbean closes? And secondly for Tom, I guess they are both for Tom but on the Enron tax deductibility when do you expect closure on that? Is it a matter of quarters or years?

The last question is both the easiest one to answer and the hardest one. We just don't know. Every big company is in continual discussions with the tax authorities clearly this is a very big issue for us by far the biggest. So it is hard to know what impact that will have. The disclosure we have provided in the past, as you know, says that we have provided tax at what we believe and you'll recall it's about a 30% level. In other words we have reserved 70%, and we believe that is the minimum. But trying to predict that with precision is very difficult.

You don't even know on timing, Tom, when that will --?

No, I mean if you said to me are the odds more one year versus say three years, I would say probably three years. But you just don't know. It is really a question of two sides continuing discussions and ultimately getting to a resolution. And a lot of that timing is not within our control. I do not expect it to be next year but that could change. What was your first question?

The capital impact of FirstCaribbean.

Yes, when we had our webcast on FirstCaribbean you'll recall and this is what you were referring to, we predicted that our Tier 1 using street estimates for earnings would go up to 9.9% on December 31 and that the way the Tier 1 math works as many of you know, when you fully consolidate you have to deduct the goodwill. So it is quite punitive from a Tier 1 point of view just going from 44% to 88%. And that would push down our Tier 1 pro forma the deal December 31 to 8.5%. We don't see any change again -- I'm only using street estimates. But the impact of this quarter's earnings has had no material impact certainly not more than 0.1 -- in fact, it is not even 0.1%. or 0.1 Tier 1 points. We still predict 9.9 and 8.5.

Got it, thank you.

Jamie Keating from RBC Capital Markets.

For Sonia or if Victor is around. I'm curious getting an update on retail adviser count stands and maybe some comments around productivity and maybe an update on the fund strategy, how mutual fund positioning is going and whether you've got a good outlook there? And just while we're working on that, I wonder if I might get a comment on President's Choice Financial? I haven't heard much about that recently. I just wondered if I could get an update on that?

Jamie, it is Gerry here. Why don't we take the questions one by one. Why don't you just -- we couldn't really hear you there. Why don't you just restate the first question, please.

Sure. Number of retail advisers these days and how their productivity is going?

Okay. Victor, Do you want to take that one?

Sure, Jamie, we have a stable number of retail advisers in the 1370 range. We hit AUA per adviser of $85 million, that would put us at the top end in terms of productivity and assets under management. We've been able to retain our advisers particularly our top producers just given the investment and the robust platform that we have in the business. So the brokerage business is doing well and I think you can see that from our numbers.

In terms of your mutual fund question. A couple of things there. On a year-to-date basis we have generated positive net flows into our long-term funds and our revenue has been steady. Our redemptions have been into money market area. Going forward to grow our market share and mutual fund we are focused on two areas. The first will be distribution and the second will be investment performance. So in terms of distribution, we've increased and refocused our wholesaling resources particularly against our CIBC channels where we see a lot of opportunity.

And with respect to investment performance, we’ve been really focused on enhancing our processes with a particular focus on research and portfolio construction. We've also made a number of sub-adviser changes on several key funds.

So, Jamie, we are confident in the fund business that we are making the right changes to benefit the business over the longer term. Although it will take some time for these actions to reflect in our results on the fund side.

Very helpful, Victor, thanks.

Jamie, what was your next question?

I was hoping you might talk a bit about President's Choice Financial. It seems if some numbers are coming in from there, I'm just curious if any lost in the rounding or how the progress is going there from a --?

Certainly, Jamie. Sonia Baxendale will answer the question on the President's Choice. Sonia?

Jamie, President's Choice I think you hit a nail on the head, while it is an important part of our portfolio it is a very small part of our business. Having said that it is performing well and performing to expectations. Just in terms of I guess a few headline numbers year-over-year balances are growing at about 18%; customer growth is in the 12% range; so that is well aligned with what we would look for in this particular part of our business. Key focus that we have had in the last six months and will have going forward is continually realigning our pavilions and ensuring that we have those located in the most productive stores. And so we continue to do to work with our partners to enhance that offer as well.

Okay, guys.

Jamie, did you have anything else?

That is it for me, thanks Gerry.

Michael Goldberg from Desjardins Securities.

Thank you. A question is for Tom Woods and Tom I appreciate your comments about the impact of which lines hedge type items go into on a logical basis rather than on a strict GAAP basis. And trying to take these things into account, number one, in net interest revenue. And secondly, excluding trading revenue and third adjusting to tax equivalent and putting this numerator on an average risk-weighted asset to denominator, I actually come up with a wider consolidated net interest margin year-over-year and quarter-over-quarter. In thinking a bit in those terms, where do you think about improvement is coming from product margin, mix or treasury?

I'm not sure I followed all of that. Are you saying on slide 49 when you try to compute it, Michael, that you are getting a bigger gap then 5 points when you work your way down to the bottom?

I don't have slide 49 right in front of me. But what I am saying is when I make the adjustments for things like the hedge items that get included in other revenue rather than net interest revenue and taking out trading related net interest revenue and adjusting to a tax equivalent basis and then putting that on an average risk-weighted assets basis it actually shows up to me that there is some widening of consolidated margin.

Yes, we are not seeing a widening. I think the difference in your numbers and our numbers I would estimate is probably in the treasury side which is a (indiscernible). I mean it's a very complex area. Again when we connect on the other point let me show how we do it and then they can talk about the difference in treasury assumptions.

Sure. Thank you.

Thank you.

Thank you.

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

Thank you very much everyone for joining us for this conference call. We look forward to seeing you over the quarter and next time for those of you who we don't see next time we discuss our results. Thank you.

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