Canadian Imperial Bank of Commerce (CM) 2006 Q3 法說會逐字稿

Good after the ladies and gentlemen. Welcome to the CIBC third-quarter conference call.

Please be advised that this call is being recorded. To reduce audio interference, please turn off your BlackBerry for the duration of the call.

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 thank you for joining us today. As usual, our conference call this afternoon is being audio webcast and will be archived later this evening on CIBC.com.

This afternoon's review of CIBC's third-quarter results will be provided by Gerry McCaughey, CIBC's President and Chief Executive Officer, Tom Woods, our Chief Financial Officer, and Steve McGirr, our Chief Risk Officer. Our business leaders are also here in New York with us today and available to take your questions following the presentation.

Before we begin, let me remind you, as usual, that anyone speaking on behalf of CIBC on today's call is likely to make forward-looking statements that are subject to a variety of risks and uncertainties. Certain material factors or assumptions may be applied which could cause CIBC's actual results in future periods to differ materially from the conclusions, forecasts or projections in these forward-looking statements. 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 CIBC.com.

With that, let me now turn the meeting over to our CEO, Gerry McCaughey.

Good afternoon and thank you for joining us.

Before I begin, let me say and remind you that my remarks may include forward-looking information -- that our actual results could differ materially from what is discussed here this afternoon.

Today, we're going to review our third-quarter results and our progress towards our priorities. Our Chief Financial Officer, Tom Woods, and our Chief Risk Officer, Steve McGirr, will then provide financial and risk review details.

This morning, CIBC reported net income for the third quarter of $662 million, an increase from $585 million last quarter and a loss of $1.9 billion for the same period a year ago. Earnings per Share were $1.86 compared with $1.63 per share last quarter and a loss of $5.77 per share a year ago. Return on Equity for the quarter was 27.2%.

Our results this quarter are strong and underline the continued progress that we're making towards our priorities. Let me comment briefly on each priority, beginning with maintaining and enhancing our business strength. Retail Markets revenue was $2.042 billion for the quarter, an increase from both last quarter, which had three fewer days, and from the same period a year ago. Net income for the third quarter was $487 million, up $83 million or 21% from a year ago.

As we stated previously, our primary challenge in our Retail business has been improving the credit quality of our retail portfolio, where we have taken steps to increase new originations of secured loans. During the first three quarters of 2006, originations of new secured lines and loans were up 59% from the comparable nine months in 2005. Secured loans now represent about 55% of our personal loan portfolio, up from 45% a year ago. We are encouraged by signs of progress in the unsecured portfolio, as we are seeing a shift to higher quality in newly acquired accounts. While we remain cautious as older vintages continue to mature through the portfolio, we are confident that the actions we are taking will achieve the desired results.

Our actions to manage risk have had a trade-off in terms of the impact on revenue growth in retail lending. This is consistent with our strategy to reduce volatility and position CIBC for consistent, sustainable performance over the long-term. Over time, we expect this impact will be reduced, as a higher-quality loan portfolio grows from a stronger base. Steve McGirr will provide more details in this area during his risk review.

In World Markets, revenue of $677 million was up from $607 million for the second quarter but down from $929 million for the same period last year, which included higher merchant banking gains. Net income for the quarter was $190 million, up $80 million from the previous quarter and a loss in the same quarter a year ago. Investment banking revenues were up significantly from Q2 on higher levels of M&A activity. Merchant banking revenue was also higher, while capital markets revenue was down slightly on lower levels of new issue activity.

Our second priority is to improve productivity. We continue to make progress during this quarter. Overall, our stated productivity objective is to generate $250 million of annual cost reductions by the end of 2006. Our expense level this quarter is ahead of our fourth-quarter target of $1.892 billion. We remain confident we will achieve our target in the fourth quarter. At that time, we will review our progress in this area and establish the parameters for our productivity strategy in 2007. Tom Woods will expand further on our productivity initiative during his remarks.

Our third priority is balance sheet strength and capital usage. Our Tier 1 Capital Ratio is now 9.6%, well above our target of 8.5% and up from 9.2% at the end of the second quarter. As I've stated in the past, CIBC's first priority in the area of capital usage is to invest in our core business to sustain their strengths and market position.

After funding our internal needs, we will balance other capital-deployment opportunities. Currently, we are building our capital to fund our FirstCaribbean acquisition. During this quarter, we announced the conclusion of the definitive agreement with Barclays, and we remain on track to close this transaction by the end of the year, as expected.

FirstCaribbean continues to perform well, reporting net income of US$86 million for the first six months ended April 30, 2006. These results are consistent with management's expectations for 2006 earnings growth. As I've discussed previously, since we are building capital in support of our FirstCaribbean acquisition, we will not be buying back shares during the course of 2006. This topic will be reviewed with our Board of Directors early in 2007.

We will also be reviewing our dividend in light of our objective to pay out 40 to 50% of our earnings in dividends. Based on our year-to-date earnings, our quarterly dividend of $0.70 remains at the lower end of our target range.

In closing, I want to thank all employees for their continued focus on behalf of our clients and our shareholders. As a result of their efforts, CIBC has delivered solid results through the first three quarters of 2006. We have made important progress in the areas of productivity, our retail credit portfolio, and building our capital in preparation for our FirstCaribbean transaction. The steps we have taken are laying the foundation for us to deliver consistent, sustainable performance over the long-term.

Thank you. I will now turn it over to our Chief Financial Officer, Tom Woods. Tom?

Thanks, Gerry, and good afternoon, everyone.

I, too, will be making some forward-looking statements, so I'd provide the same caution that actual results could differ materially from these comments.

Slide number 5 provides a summary of the quarter, as Gerry said $1.86 reported EPS or $1.87 cash EPS. That includes $0.14 of tax-related adjustments and $0.03 of AcG-13 credit derivative markets.

Tier 1 ratio, as Gerry said, is 9.6% and we're well and track to close the FCIB investment for cash in December and keep our Tier 1 ratio at or above 8.5%, which we described to you a few quarters back.

Return on Equity, as Gerry said, 27.2% -- I just highlight that on an adjusted basis for the tax and AcG-13 adjustments, that ROE is 24.8%, and even normalizing that for our capital structure, relative to the other banks, that is the highest ROE of the Group this quarter.

Go to Slide 11. Revenue in Retail Markets in Q3 was $2.04 billion, up 1% from a year ago or 2% up if the impact of securitization is excluded. Year-to-date revenue growth, excluding asset sales and securitization in Retail Markets, was 2.4%. Now, as we discussed last quarter, revenue growth this year in retail has been affected by our greater focus on secured rather than unsecured lending, which will ultimately reduce loan losses, and a shift in consumer preference towards fixed-rate rather than variable-rate mortgages. We expect higher Retail revenue growth rates in the future, as the two shifts I just referred to stabilize.

Slide 13 -- In Personal and Small-Business Banking, revenue was $533 million. As I said last quarter, this number is not comparable to the Q3 2005 number because of internal transfer pricing changes. Adjusting for this, revenue was down 1% versus Q3 last year. Deposit balances were up 3% versus Q2 and 5% from a year ago. Revenue was up 9% versus Q2, due to strong deposit growth, better spreads, higher sales commissions and the longer quarter. The outlook for Q4 in personal and small-business banking revenue is for the same or marginally lower revenue.

Slide 14 -- Imperial Service is the group covering the mass affluent customers of our branch banking network. Revenue here was $241 million, and here, too, was not comparable to a year ago for the same reason. On an adjusted basis revenue was up 4% versus Q4 of last year -- Q3, last year -- and deposit balances were up 2%. Q4 revenue should be about the same as in Q3.

Slide 15 -- Retail Brokerage revenue was $270 million, and that was down as expected from the record quarter in Q2. Lower commission revenue accounted for most of the drop due to the seasonally low July and the average TSX level being off 3% versus Q2. New issue volumes were also down from Q2. Assets under Administration were up 4.5% from a year ago, which includes annuitized asset growth of 12%. August volumes have been a little higher than in July, and the new issue calendar looks better, so we expect higher Retail Brokerage revenue in Q4.

Slide 16 -- In Cards, revenue was $340 million, down from a year ago on a reported basis but up 2% adjusted for securitization. Card loan balances were up 9% from a year ago and 4.6% versus Q2, our best quarterly loan growth in the past five years. This is the first significant evidence of the success of some of our new Card initiatives, including limit increase offers to selected customers and combining Aerogold offers with GIC and Bonus Savings Account products.

Card purchase volumes are running 7% ahead of last year-to-date. Spreads declined in the quarter due to a seasonal decline in the revolve rate, and versus last year, mainly due to increased costs of funding. Revenue should be higher in the fourth quarter because of further balance growth and a higher revolve rate.

Slide 17 -- Mortgages and Personal Lending revenue on an adjusted basis for the transfer pricing changes I noted earlier was down 4% from a year ago with Mortgage revenue up and personal lending revenue down because of the change in our strategy to emphasize secured loans. Mortgage balances were up 7% from a year ago. The trend from variable rate to fixed rate continued for the fourth consecutive quarter. Mortgage revenue this quarter benefited from higher prepayment fees, which more than offset tighter spreads. 43% of our mortgage portfolio is now fixed-rate compared with 33% a year ago.

As Gerry said, 55% of our personal loans are now secured, versus 45% a year ago. Personal loan balances were up 3% from last year. Secured balances were up 26%, but unsecured balances were down 16%.

The outlook for revenue in Q4 is about the same as this quarter.

Slide 18 -- the Other revenue, which includes Insurance, Treasury and President's Choice, was up considerably this year -- this quarter and all those items were up.

Slide 19, Retail Markets net income was $487 million, up $55 million from Q2. Revenue was up $78 million, as I've just reviewed. Loan losses were down $21 million, as Steve McGirr will review in a moment. Expenses were up $29 million from Q2, due mainly to the longer quarter and higher litigation and incentive compensation accruals. The outlook is for marginally lower expenses in Q4. Taxes were lower, due to a $35 million recovery in the quarter.

Turning now to World Markets on Slide 20, revenue was $677 million, up 12% from Q2 but down from the high levels of late 2005 when we had large Merchant Banking gains.

Slide 22 -- Capital Markets revenue was $325 million, down 8% from Q2. Debt, which represents about 45% of Capital Markets, was up marginally from Q2, as each business performed essentially in-line. Equities had lower revenue this quarter because Q2 included a gain on the NYSE-Archipelago transaction. Q3 had lower new issue activity. Though it's difficult to predict this early in the quarter, we expect slightly higher Capital markets Revenue in Q4.

Slide 23 -- Investment Banking and Credit Products revenue of $231 million was well up, as expected, from Q2. Even though new equity issuance activity was light, M&A, U.S. Real Estate Finance and Credit Fees were all higher than in Q2, which was an abnormally low quarter due to write-offs and credit derivative markdowns. The outlook is for higher revenue in Q4, as we have booked fees and good pipelines in most of the businesses, particularly in M&A.

Slide 24 -- Merchant Banking had revenue of $90 million versus $69 million in Q2. We had gains and distributions of $109 million, offset in part by write-downs and funding costs of $19 million. Approximately two-thirds of the $109 million were distributions from fund investments, which had very high levels of divestiture this quarter.

We have reasonably good visibility for Q4 activity and expect revenue to be strong, although probably a little lower than our year-to-date quarterly run-rate of $57 million. Our Q4 run-rate, or close to it, could carry over throughout 2007 if current market conditions continue.

Slide 26 -- World Markets net income was $190 million, well up from Q2, mainly due to the strong revenue. Loan losses were in a small recovery position. Expenses were up marginally due to higher incentive compensation accruals, and taxes were down, mainly because of recoveries booked in the quarter.

Slide 9 -- If you just go back to Slide 9 -- looks at our consolidated expenses. We had total expenses in Q3 of $1.887 billion. This is higher than our Q2 expenses for four main reasons. First, the longer quarter results in higher salary and benefits costs. Second, incentive compensation was up in Q3. Third, we negotiated a new creditor life reinsurance contract, which has higher expected revenue but also higher expenses. Fourth, we had higher litigation in Retail Markets this quarter. Despite this increase, we're still running better than the target we set last year to take an annualized amount of $250 million from our expense base by the fourth quarter this year. We expect Q4 expenses to be lower than the Q3 level and therefore remain confident we will achieve our goal.

Finally, on Slide 56, we had a reported tax rate of 15.8% this quarter. Adjusted for the recoveries I referred to earlier, our tax rate would have been 23.6%, and on a tax-equivalent basis -- that's adjusting for dividend income -- it would be 28.9%. As we indicated in our press release, we currently expect our tax rate to decline over time, and we have quoted ranges in the Management Discussion and Analysis document with this quarter's adjusted tax rare at the upper and those ranges.

I will now hand it over to Steve McGirr.

Thanks, Tom, and good afternoon.

I will start at Slide 62. As Tom has highlighted, the third-quarter specific loan loss provision was $152 million in the quarter, an $11 million improvement over the prior quarter.

Let me review the portfolio performance highlights for the quarter. The World Markets loan portfolio continues to perform well in a relatively favorable credit environment. Retail Markets loan loss provisions overall reflected better performance in the quarter. Credit cards and residential mortgages continued their strong performance, and small-business loan losses were down quarter-over-quarter.

We've been very direct with you in the past about actions we have taken to reduce the risk profile of the retail loan portfolios. The quality of new originations has improved. Our mix of new business is shifting toward secured lending as both Gerry and Tom have noted. We're confident that the actions taken are yielding the desired results. However, we do remain cautious as older vintages continue to mature through the unsecured portfolios.

Moving onto impaired loan coverage, net impaired loans are down $48 million in the quarter and $190 million or 62% year-over-year.

In terms of our outlook for loan losses for the balance of the year, we expect fourth-quarter specific provisions to be in the lower half of our 50 to 65 basis point medium-term target range. Therefore, full-year specific provisions are expected to be below our target range.

A recap of our specific provisions as a percentage of net loans and acceptances is presented on Slide 63. Third-quarter specific provisions was 40 basis points of net loans and acceptances. This is down from 46 basis points in the prior quarter and below our medium-term target range of 50 to 65 basis points. World Markets recorded net recoveries and reversals totaling $7 million in the current quarter, compared to $16 million in net recoveries in the prior quarter. And Retail Markets loan losses were $159 million in the quarter, down $21 million from Q2. This primarily reflects better performance in the small-business and in the unsecured loan portfolios.

On Slide 64, we take a closer look at the selected retail portfolios. Credit card loan losses increased quarter-over-quarter. This increase was due, in part to volume growth, as outstandings increased by $390 million quarter-over-quarter. On a managed basis, the portfolio is up $1.1 billion year-over-year.

The Cards portfolio continues to perform at or better than targeted levels with stable and predictable loss rates. While loss rates in the personal loan portfolio have been trending down for the past three quarters, unsecured personal loan loss provisions are still at elevated levels. Personal loan balances increased by $350 million over the quarter with secured loan growth more than offsetting declines in the unsecured portfolio. We are pleased with the overall performance of the credit portfolio.

I will also quickly note that our Business and Government portfolio continues to be reasonably diversified. We have $9.6 billion of credit protection, which lowers our exposure to both sectoral and single-name risks.

You'll notice this quarter we've moved certain credit slides to the Appendix, and please refer to the Appendix for additional detail on impaired loans, on the diversification of the portfolio, and on credit protection.

Turning to market risk on Slide 65, we display our Q3 daily trading revenue against Value-at-Risk in our trading portfolios. Risk levels averaged $10.3 million during Q3, slightly above the levels of Q2.

Now, let me address our capital strength on Slide 66. Our Tier 1 ratio, as mentioned earlier, is now 9.6%, above our target rate 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 and as you can see from the chart, this was due to internal capital generation with earnings, net of dividends, also allowing for the return to Tier 1 status of $151 million of preferred shares.

Now, looking at Slide 67, we continue to exercise discipline with respect to the balance sheet. There was controlled growth in both retail and wholesale risk-weighted assets in the quarter. Initiatives that reduced our risk-weighted assets this quarter included purchase of residential mortgage insurance and a commercial mortgage securitization. Our focus on effective management of risk-weighted assets and discipline and capital deployment will not change. Given our current capital and RWA position, we expect to maintain a minimum 8.5% Tier 1 Capital Ratio following the purchase of Barclays' stake in FirstCaribbean.

I will turn back to Gerry now.

Thank you, and I'd like to now take questions.

Thank you. We will now take questions from the telephone lines. (OPERATOR INSTRUCTIONS). Steve Cawley, TD Securities.

Our first question is in regards to market share. Gerry, both you and Tom referred to the push for secured lending versus unsecured lending as the rationale for market share losses. But if I look, you've also lost about 50 basis points in the last year in mortgages, which are secured, and you've also lost share in consumer deposits, which has nothing to do with secured versus unsecured. So my question is do you think that part of this market share loss or losses are a result of the expense cuts that you've done? Because that's not so easy to turn around.

No, I don't believe that the expense cuts have hurt market share. Our measures to reduce expenses have taken place mainly away from the areas that influence revenues. In fact, we believe that measures such as reducing layers in the organization and increasing [spans of] control are designed to improve the effectiveness of the organization which we think will be helpful in the future in improving our revenue growth.

However, what we do believe has had an overwhelming impact on our revenue growth and our market share is our risk posture, which has been very restrictive, particularly in the area of unsecured lending. We are being successful in improving our secured lending share significantly, and we do believe that things are stabilizing in our unsecured portfolio, although as I said in my remarks, there are still some older vintages that have to work their way through. Once they do, we believe we will be able to grow in that portfolio from a stronger foundation.

So are you saying that the mortgage market share loss and the consumer deposits market share loss -- is that as a result of pricing? That there's aggressiveness in the market? You mentioned risk, but everything has a price.

Well, in terms of our secured and unsecured portfolio in lending, it is a direct impact of our risk posture and changes in the strategy in terms of our marketing at the front end.

I will turn it over to Sonia in a minute to discuss mortgages and deposits, but the first thing I would say is that there are strong signs and data that shows that we are stabilizing in our share, both in deposits and mortgages. But you did ask some questions as to pricing and I will turn it over to Sonia to discuss both the share stabilization as well as the pricing initiatives and marketing initiatives that are going on in the business. Sonia?

A couple of comments I would make -- in the area of mortgages, as we have talked about, we were impacted by the market shift from variable rate mortgages to fixed. We were extremely strong in the variable part of the market and when that shifted, that transition did have an impact on us and had an impact on our overall share. I would also say that pricing has been extremely competitive and in certain situations, we have needed to make trade-offs. So pricing has also had an impact there.

Having said that, although we have -- you are correct that our share has declined over the years. The decline has been decreasing and it was the lowest in the third quarter. In fact, our June numbers, June market share numbers that we just received -- as you know, these are the numbers we report are of course somewhat lagged. We just received, this week, June numbers, and our market share in mortgages is flat. So, certainly our intent is to grow share in mortgages. At this point, I would say we are stabilized and current pricing is a challenge there, but we would expect to be flat to slightly up in the mortgage area going forward.

In the case of deposits and GICs, our market share is up in GICs. If you look at Q3 versus Q2, we are up 21 basis points in our GIC share and in deposits were on a spot basis. We are actually flat. It's still slightly down on a three-month rolling average, but certainly on deposits and GICs, I would say that we are at a minimum stabilized, possibly more on an uptrend and we do have increased marketing and sales activities planned there. That began in the summer with some initiatives that we put in place such as the summer campaign, where I think Tom did reference it in his comments where, through our branch distribution, the promotion of our savings, chequing and Aerogold products together, we saw substantial lifts in all of those products during that period. So, we would expect to see some moderate increases across the board there.

Okay. On Slide 37, Imperial Service, you're down 100 or so in the last -- in three quarters, four quarters, you're down 100, and I was wondering what was happening there. I would suspect you are still recruiting people, so you've probably lost more than 100 people. I'm wondering if this was regarding the real strength of the bank and I was wondering what the strategy was.

What that numbers shows is our IDA licensed, and as you know, in not all markets are advisors IDA licensed. So if you look at our total group of advisors, it would be about flat. It's been a number of factors that have impacted that. We've had a number of promotions into other roles, so a lot of that has really been timing. So I would say that, while there's been a small decrease in the total number of advisors, it's more been changing of roles, promotions, lateral moves and there are individuals that have been hired to replace those but until they are fully IDA licensed, they don't get counted in those numbers.

Okay. One last one for Tom -- does the new life reinsurance arrangement on the credit side result in a reserve release in the quarter?

No.

So the reason for the insurance bump-up in revenues? It was a big jump of -- I think it is about $30 million in the quarter.

It's a technical accounting issue because we signed the contract late in the year and we end up recognizing -- bringing revenue in. So if that's what you mean by reserve release, then in fact we did have I think it's about a $17 million uptick in revenue and about a $14 million uptick in expenses in Q3 that could only be recognized in Q3 until we signed that contract, but some of that technically was in respect of insurance coverage earlier in the year.

Michael Goldberg, Desjardins Securities.

I have a couple of questions. First of all, how much will FirstCaribbean add to risk-weighted assets?

What's your second one, Michael? We will get that for you.

Okay. I guess there will also be the elimination of the equity item that you have there. So what is that amount? To what extent does the drop in residential mortgage market share reflect the shift to HELOC? I also want to just get some further elaboration on the question about stronger insurance revenue and that uptick in revenue that you talked about.

Okay, that's it? Okay, did you find the RWA?

For your first question on the FirstCaribbean, it will add about 5 to $6 billion of risk-weighted assets to our balance sheet.

Michael, as we told you I guess three quarters ago, the impact on Tier 1, when you go from 44% to 88%, is quite punitive, because you have to consolidate that 5 to 6 billion RWAs and also deduct in the numerator the goodwill, which you don't have to deduct when you are only at 44%. Hence the drop from what will probably be around a 10% Tier 1 in December down to the 8.5%. Michael, your second question, what was that again?

Well, also related here the -- I guess that in a sense part of the offset is that you won't have the equity item in FirstCaribbean.

You mean on the income statement?

No, you won't have -- (multiple speakers) -- in a sense common equity specifically dedicated to support your equity investment in FirstCaribbean.

Yes, we will be consolidating it and taking the minority interest of roughly 12% out.

Okay. Actually one other question -- what are you doing that results in the lower tax rate?

Tax rates are going to go down, and I think you heard that message from most if not all the banks, for couple of reasons, Michael. The statutory tax rate is going to decline over the next five or six years. Today, it's 34.84%. It will go down to 31.7% in five years. So that's one. Now, that's sort of back-end loaded. That's not going to change much next year.

Second, you saw we released some reserves, and that's a reflection of changing views of ultimate audit results to come, or in one case, the result of an audit we had done which was favorable. In one of those situations in particular, that will result in us not having to reserve as much for this particular business structure going forward. I think there are other banks that have similar situations there. So, it's a more positive outlook in terms of tax results in one structure we have.

Third, just business mix -- as we forecast over the next two years in particular the shift of our business mix to lower-tax jurisdictions, that's an important factor as well.

Thanks.

Was there one -- oh yes, there was one on home equity. Sonia?

Sure. Okay, so on how much of the shift was to home equity lines, while I would say that there was probably a small amount, I would not say that that is the majority of it, given the market sentiment shift away from variable to fixed. I think that's the primary part and highly competitive pricing. So, I would say the shift to home equity lines would be third on that list in terms of what the dynamics were there.

Okay. Just so that I'm clear on the earlier answer that you gave in terms of the insurance revenue, are you saying that there's a portion of the insurance revenue that should be considered in a sense irregular, but it was largely offset by an expense item?

Yes. I mean Michael, if you wanted to get really precise, probably 10 million of each was in respect of earlier in the year, but it's an offset, so we don't consider it material.

Okay, that's great. Thanks.

Mario Mendonca, Genuity Capital Markets.

Good afternoon. First, just a couple of small nit-picky things. For consumer PCLs, it's normally provided in the presentation. If it's there, you'll have to forgive me because I don't see it this quarter. Am I mistaken? Is it there?

We've reported it as Retail Markets and World Markets this quarter.

So what's the analogous number? Last quarter, consumer PCLs were 150 million. What is the analogous number this quarter?

Mario, I will take that. It's Brian O'Donnell talking. The consumer last quarter would have been primarily the mortgage and personal loan and cards portfolios. To analogize that to Retail Markets, you would have to include the agriculture and small-business portfolios as well, which brings us to the Retail Markets portfolio, our Strategic Business Unit.

I'm not sure I follow. Last quarter was 150 for consumer PCLs. I'm just trying to understand what that number is this quarter.

Oh, sorry; I don't have that at hand here. I can get the answer for you and provide it as a follow-up.

Was it up or down?

It would have been down similar magnitude to the direction we provided you on Retail Markets.

Mario, it's Tom. I've got a number. Brian should confirm this because it comes out of another report, but it looks like if your number for Q2 for consumer, Mario, was 180 -- is that what you have?

No, it was 150.

Okay, we will come back to you then.

Okay, but that was -- the 150 number is in your presentation. That's all I'm suggesting.

Okay. We will come back to it.

I had a sort of minor question. Are we getting sort of new guidance then on the tax rate? That slide this quarter where you are helpful in showing us how the tax rate builds up are we effectively getting new guidance, then, for the tax rate?

Yes. We've never given disclosed guidance. There's one other bank that has done that. We've had questions in webcasts from time to time, and generally, we've talked about TEB in and around 30, 31. We felt, with the -- particular audit we had done, that caused -- plus the tax rates coming down, plus the shift in strategy and business mix -- that the answer we have given in the past webcast no longer was accurate. So yes, this is slightly revised guidance.

What sort of changed from Q1, '06? The tax rate then, not including anything to do with TEB, was about 29%, and now the guidance is about 24 at the high end, so that's about a 500 basis point move from Q1 '06, which was a fairly normal quarter. That 500 basis points -- is that accounted for by all the things you just sort of went through?

No, Q1 was a little higher than normal, Mario, so we're talking not big differences I guess, but --.

But not 500 basis point then -- (multiple speakers) -- so I picked the wrong quarter to compare it to?

Yes, Q1 was a little high. Q2 was 28, for example, so typically 28 reported would be about right, but the three factors I mentioned -- mainly business mix shift plus a change in outlook on reserves for one or two structures is the main reason going forward. That's not to say that Q4 will necessarily be in the middle of those ranges, but as we look ahead four to nine quarters, that's where we see it being, in round numbers.

Just to make it perfectly clear, at least for me, non TEB, non TEB we're talking about 21 to 24?

Correct.

I got it. Just on the PCLs, your outlook for Q4 sort of surprised me a little bit. We had 40 basis points this quarter rounded to about -- I guess that was $159 million or so. You are now saying somewhere between 50 and 65 basis points for Q4, '06. I mean, we are in the middle of Q4 '06, and that seems to me like you're talking about almost a 50% increase in the PCLs, one quarter to the next, and we are in it. So I'm surprised at that sort of -- is that just real caution again, or --? That was a big increase you are implying.

We deliberately haven't changed our targets. We set those targets over the cycle, and it's clear that we've had a very benign corporate environment. It's also clear that we still have the older vintages of loans working through the systems, so we've decided to keep that number as a good number over the cycle, and we will review it periodically in the future.

To be very clear again for me, you're telling us that Q4 '06 -- this is simply the company, the bank being consistent in the guidance? You're not telling us that something has gone horribly wrong -- (multiple speakers)?

We are being consistent.

Got it, okay. Then one final question -- the goal was always to get -- or was to get to 55%, secured. Gerry, you've told us we were there. What's next? Do you push that further, or --?

Well, I will turn it over to Sonia Baxendale in a minute to discuss where the 55% secured might even out, but at the moment, given the trends that we have, we have a very strong trend in terms of formation of secureds and probably we will end up at a higher level than the 55%, but the objective here, over the long period of time, is to be closer to the industry level, which is about 55/45, and we're there now. But the sales program in secured is going very well, and our unsecured portfolio has not yet run its course in terms of the old vintages. And so you probably would see this go somewhat further over time. I'm going to leave it to Sonia to outline in detail what she would expect, in terms of when we revive the marketing on the unsecured side. Sonia?

Okay, so I would expect the trend, in terms of the increase in secured, to continue into at least the next few quarters. Beyond that, we will be in a better position to evaluate our activities on the unsecured front. So, I would certainly expect, over the medium-term, for that to continue.

Just Gerry, one other thing -- very early on in your tenure as CEO, you talked about expense initiatives. In your opening remarks today, you referred to it as productivity initiatives. Is this a sort of change in philosophy we are seeing, or --?

Well, in fact, I think that the origin of the discussion was as a productivity initiative. What we outlined was that we had a productivity goal, and strategically, our productivity goal was to get to the median NIX of the industry. Given -- and of course, as you know, that involves a both revenue and expense component. Given our risk posture, where we were going to be very restrictive on the risk aside, closing the gap between ourselves and the industry in terms of overall NIX ratio as a measure of productivity, the first step, particularly when you are restricted on the revenue side and you have had historically a poor position on the expense side, was to address the expense side of the cost/income ratio.

We have further work to do on the expense side, but when we look forward, our overall targets, in terms of productivity, will involve both revenue improvement and expense improvement. So I'm not sure if that answers your question but I would be happy to give you more details if you have a follow-up.

Well, is that maybe more on timing? Is that a sort of '07 initiative -- Q1 '07 initiative? If so, what do you figure more specifically, or what would be the single most important revenue line you think you want to focus on growing?

Well, rather than talk about an individual revenue line, I'd like to talk about the outcome of a moderation of our situation that we had in terms of where we had to restrict risk and where we had to bring risk down. An example of when that runs its course is although our risk was always within plan in the card portfolio, recently the performance of the card portfolio on the risk side has been exemplary. And at the same time, we have been able to ignite growth in terms of particularly our outstandings, and this quarter was one of our best quarters in many years. That combination of growth in outstandings from which revenue will follow as well as a good risk posture is an example of where you can get some tremendous productivity improvement, because we have a stable expense base within the cards portfolio.

We would expect, over time, that, in the retail business, as our issues in unsecured lending run their course, that we would see improvements in revenue from a growing portfolio in unsecured lending. Our posture there has been very restrictive, and in fact, the portfolio in unsecured lending has not been growing. We have been growing the portfolio in secured lending, but as you've pointed out to us in the past, margins in secured lending are significantly lower than in unsecured.

When we start growing again in our unsecured portfolio at the lower risk levels, we should have improvements in revenue as well as the benefit of the continued improvements in the cost base from the programs that we have in place. That should lead to continued improvements in our productivity levels and allow us to achieve our strategic goal.

This is all -- not all, but 2007, we see a little of this, I suppose. Is that fair?

Well, as always, I will give the reminder about forward-looking statements and the fact that results could differ materially, but the trends that we see that are in place would be supportive of the conclusion that those improvements should be seen in 2007.

Thank you so much for your help.

Mario, back to your first question in terms of the equivalent number for the consumer portfolio that (indiscernible) the number, equivalent to 150 would be 147. So, the trend there I believe is 164 in Q1 to 150 in Q2 to 147 in Q3.

Thanks again.

There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Ferren.

Thank you, everyone, for joining us today. If you have any further questions, please call the Investor Relations group or send us an e-mail. Thank you and good afternoon.