Canadian Imperial Bank of Commerce (CM) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the CIBC fourth-quarter and year-end results conference call. Please be advised that this call is being recorded. To reduce the audio interference within the boardroom and over the conference call line, 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.

Thank you. 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.

In addition to the usual quarterly materials, CIBC's 2006 consolidated financial statements and MD&A are also now available on our website. This afternoon CIBC's management team will review CIBC's fourth quarter and fiscal 2006 results. Opening remarks will be made by Gerry McCaughey, CIBC's President and Chief Executive Officer; Tom Woods, our Chief Financial Officer, and Steve McGirr, our Chief Risk Officer. Gerry, Tom, Steve and our business leaders will be available to take your questions following the presentations.

Before we begin, I will remind you 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 notice of forward-looking statements in today's press release.

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

Good afternoon and thank you for joining us.

Before I begin, let me say again that my remarks may include forward-looking information, and our actual results could differ materially from what is discussed here this afternoon. Today I will review our fourth-quarter and year-end results, as well as CIBC's progress towards our priorities. Then our Chief Financial Officer Tom Woods and our Chief Risk Officer Steve McGirr will provide the financial and risk review.

This morning CIBC reported record net income for the fourth quarter of $819 million, up from $662 million last quarter and $728 million for the same period a year ago. Earnings per share were $2.32 compared with $1.86 last quarter and $2.06 a year ago. Return on equity for the quarter was 32.5%.

For 2006 net income was a record $2.6 billion. Earnings per share were $7.43 and return on equity was 27.9%. Total shareholder return was 25.6%, highest amongst the major Canadian banks. Our results this quarter and in 2006 were in line with our goal to deliver consistent and sustainable performance.

Let me comment on our progress against our priorities, beginning with our business performance. Retail Markets continues to perform well overall. Net income for the fourth quarter was $501 million, up 43% from the fourth quarter of 2005. Volume growth, as well as improvements in expenses, loan losses and taxes, all contributed to this result.

Our major priority in retail for 2006 was to improve the quality of our credit portfolio. We have made progress in this area. Our retail loan losses were $132 million this quarter, down $92 million from the fourth quarter of 2005, and we continue to see a shift to higher quality in newly acquired accounts.

As I have stated previously, our actions to manage risk have had a short-term impact on our revenue; however, this is consistent with our strategy to reduce volatility and position CIBC for consistent and sustainable performance over the long-term. Our retail business continues to be well-positioned for further growth.

Our market share overall is stable, and we have had increases in the fourth quarter in key areas such as deposits and GICs. With our risk profile now closer to where it needs to be, we anticipate our revenue growth will begin to converge to industry levels as we progress through 2007.

World Markets reported net income of $218 million, up from the prior quarter but down from the fourth quarter of 2005, which included $391 million of merchant banking revenue. Capital Markets and investment banking revenue were up from the prior quarter, while merchant banking gains were lower. World Markets delivered solid performance in 2006, reflecting the focus of our wholesale business.

Our second priority is to improve productivity. In this area, we have exceeded our annual objective, which was to generate $250 million of annual cost reductions by the end of 2006. While our progress is encouraging, further improvement is required.

In 2007 our goal is to further reduce our NIX ratio. To date, the primary area of improvement has been expense reduction. Typically our expenses would increase on a year-over-year basis due to volume and inflation by somewhere between $150 to $200 million. We intend to absorb these increases through our continued productivity efforts. In other words, in 2007 we expect our expenses on an absolute basis will be flat based on Q4 levels, excluding our FirstCaribbean acquisition. The productivity impact of our expected improvements in revenue and flat expenses is the most balanced way to pursue our cost to income ratio target. Over the longer term, successful execution of this phase of our productivity plans will enable us to exceed our NIX target.

Our third priority is balance sheet strength and capital usage. With our strong fourth-quarter earnings, our Tier 1 capital ratio has increased to 10.4% and remains above our target of 8.5%. Our dividend payout ratio for 2006 was 36.8% below our target range of 40 to 50%. Over the past year, we did not buy back shares and were not aggressive with our dividend increases as we built capital in anticipation of our FirstCaribbean acquisition later this month.

Based on our fourth quarter Tier 1 capital ratio, we will close this transaction by paying cash. Upon completion of our acquisition, we expect our Tier 1 ratio will remain well above our target of 8.5%. After the FirstCaribbean acquisition is concluded, we will be discussing dividend increases with our Board early in 2007.

In closing, I want to thank all our employees for their commitment and hard work in 2006. Their efforts on behalf of our clients and our shareholders have improved CIBC's performance. In 2007, we will build on the progress we have made. Our focus will be on growing our business while continuing the advancements we have made in productivity and risk.

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

Thank you, Gerry, and good afternoon, everybody. My presentation as well contains forward-looking statements, so I would direct your attention to the slide in our presentation to that effect as well. I'm going to address about a dozen slides, starting off with slide number five. It summarizes the quarter. As Gerry said, accrual EPS of $2.32, cash EPS for us is just $0.02 higher, $2.34 on a cash basis. Three items of note are shown aggregating $0.32, so accrual EPS excluding these items was $2.00.

The bulk of the $0.32 was two large tax recoveries. Apart from these items, the four main drivers of the very strong performance were: first, lower loan losses; second, higher Investment Banking and Capital Markets revenue; third, higher cards revenue and fourth, an adjusted tax rate after those two recoveries that was slightly lower than our guidance.

Slide 11, Retail Markets revenue, relatively unchanged compared with Q3 at $2.04 billion, and if the impact of securitization is excluded is up marginally from Q4 of last year.

Slide 13 in Personal and Small Business Banking revenue was $522 million for the quarter, down 2% versus Q3, mainly due to a seasonal decrease in new loan and mortgage sales. Q4 revenue was not comparable to the revenue in Q4 a year ago because of internal transfer pricing changes, but adjusting for this, revenue this quarter was essentially the same as Q4 last year in this business. Deposit balances grew by over 0.5% versus Q3 and are up almost 5% versus Q4 last year. The outlook for Q1 in this business is for marginally higher revenue as the benefits of higher deposit volumes and investment sales should more than offset continued seasonal declines in lending and mortgages.

Slide 14, Imperial Service and Private Wealth Management. Imperial Service is the group covering the mass affluent customers of our branch banking network. Revenue for this business line was $229 million, down 5% versus Q3, again due primarily to a seasonal decrease in new loan and mortgage sales. Here too revenue was not comparable to last year because of the internal transfer pricing changes, but on an adjusted basis, revenue here was up 2.5% versus Q4 a year ago, and deposit balances were up almost 5%. Q1 revenue for this business line should be higher than in Q4.

Slide 15. Retail Brokerage had a strong quarter with revenue of $286 million up 6% from Q3. New issue activity picked up, secondary market volumes were higher and solicitation fees were up as well. Assets under Administration were up 9% from a year ago. Q1 has started off very well in this business with TSX volumes in November up almost 25% from the strong Q4 pace. But December and January are typically slower, so revenue here will likely be a little lower than in Q4.

Slide 16. Cards also had a very strong quarter with revenue of $380 million, up $40 million from Q3. Adjusting for securitization, revenue was up $32 million, mainly due to seasonal increases in outstandings, higher fees and revolve rates. Card balances were up 10% from a year ago and almost 3% versus Q3. Purchase volumes were up 7% on the year and 1% versus Q3. Although we expect the upward trend in Cards revenues to continue in 2007, it is unlikely Q1 will match the strong revenue reported in Q4.

Slide 17, Mortgages and Personal Lending. Revenue of $354 million was down $5 million from Q3 due to lower securitization revenue and prepayment fees. This is partly offset by higher balances in improvements in spreads. Versus Q4 last year, and adjusted for the transfer pricing changes I noted earlier, revenue was down 8% due to the change in our strategy emphasizing secured loans over unsecured. Residential mortgage balances were up 7% from last year. New mortgages are still more heavily weighted in fixed-rate, but the representation of new variable-rate mortgages, which have higher spreads, has increased this quarter.

Personal loan balances were up 2% from a year ago. Secured balances were up 26%, and unsecured balances were down 18%. We expect somewhat higher revenue in mortgages and personal lending in Q1.

Slide 18. Retail Markets net income in Q4 was $501 million, up $14 million from Q3. Revenue was unchanged from Q3 as I have just reviewed. Loan losses were down $27 million, as Steve McGirr will review in a moment. Expenses were $3 million lower and taxes were up $17 million, although both quarters benefited from significant tax recoveries -- $35 million in Q3 and $27 million in Q4.

Turning now to World Markets, slide 19. Revenue was $697 million, up 3% from Q3 and down from Q4 last year when we had unusually large merchant banking gains.

Slide 21. In Capital Markets, revenue was $351 million, up 8% from Q3. The debt part of this business, which represents about 40% of Capital Markets, was down marginally from Q3 as each business performed essentially in line. Equities had higher revenue this quarter due to strong structured products and proprietary trading results. Agency business in Canada and the US was essentially flat versus Q3. Though it is difficult to predict this early, current conditions point to slightly higher Capital Markets revenue in Q1.

Slide 22, Investment Banking and Credit Products. Revenue of $254 million was up 10% from Q3. Revenue was higher mainly because of strong M&A in Canada and strong credit business in Europe, partly offset by negative mark-to-market on credit hedges as spreads narrowed or improved in the quarter.

As you can tell from the industry data, November volumes in new issues have kept pace with Q4, but the new issued calendar pipeline is relatively low. Our M&A pipeline, however, is better, but how much will close in Q1 is unclear.

Slide 23, Merchant Banking revenue $61 million, down as expected from the unusually high Q3 revenue of $90 million. This quarter we had gains and distributions of $82 million, offset in part by write-downs in funding cost of $22 million. Approximately three-quarters of the $82 million were distributions from fund investments, which had very high levels of divestiture again this quarter. We expect another good year in merchant banking revenue in 2007, although the quarterly run-rate is expected to be below that reported in Q4.

Slide 24, World Markets net income, $218 million up 15% from Q3. Revenue was up $20 million as I have just reviewed. Expenses were well down, loan losses were still in recovery and taxes were in recovery as well due to tax reversals and a higher than normal amount of tax-exempt dividend income.

Turning now to consolidated expenses on page nine -- on slide nine, we had total expenses in Q4 of $1.889 billion, up $2 million from Q3. You will recall that back in 2005 we set a goal of reducing expenses by $250 million on an annualized basis by Q4 2006, the quarter we are now reporting. As Gerry said, we achieved that objective with Q4 annualized costs running $272 million below the Q2/05 run-rate, which was our baseline, or $22 million better than our objective.

As Gerry also said, our goal for 2007 is to keep expenses flat with our Q4 '06 run-rate, excluding the effect of the FirstCaribbean acquisition. We plan to offset salary increase and other inflation-driven costs with further efficiencies, mainly in the technology and communications line items. Our efficiency ratio for 2006 adjusted for unusual items was 64.1%, the lowest it has been since 1997. In 2006 we narrowed the gap with our competitors on this measure, and we expect to reduce the ratio further in 2007.

Slide 52, we had a reported tax rate of 9.6% this quarter. Adjusted for the two recoveries I referred to earlier, our tax rate would have been 19.5%, and on a tax equivalent basis, that is adjusting dividends up to the interest rate equivalent, it would have been 25.8%.

You will recall last quarter we provided guidance for the first time on our tax rate, which is shown again here on this slide in the footnotes, 21-24% on a reported basis and 25-28% on a TEB basis. We continue to believe that this guidance is appropriate, although actual results will vary from quarter to quarter.

Steve?

Thanks, Tom, and good afternoon, everybody. My remarks may also include forward-looking information, and our actual results could differ materially from what is discussed today.

During the next few minutes, I am going to review the current situation with respect to risk and capital for Q4. I will start by reviewing overall loan losses, impaired loans and our general allowance. Then I will discuss our specific provision for credit losses, spend some time on specific provisions in our Retail and World Markets businesses and then provide a brief overview on Value-at-Risk in our trading portfolios. And finally, I will address our capital strength and Tier 1 ratio.

We believe our credit performance in this quarter has been solid. There are a number of factors that converged during the quarter to contribute to this performance. We experienced lower write-offs and continued recoveries in the quarter. However, it is realistic to expect that these recoveries will moderate through 2007.

Overall we are pleased with the positive momentum we saw in our credit portfolio in Q4 and through 2006, and we are encouraged by the prospects for 2007.

Now turning to slide 58, for credit highlights in the quarter, specific loan loss provisions totaled $131 million in the fourth quarter, a $21 million improvement over Q3. In a moment I will speak to this in some detail.

Net impaired loans stand at $88 million. This represents an improvement of $29 million in the quarter and $200 million or 69% year-over-year. Finally, in the quarter we reduced the general allowance by $50 million. This consists of a $39 million release of an allowance due to continued improving trends in the portfolio and an $11 million transfer from general to the specific allowance for our student loan portfolio as this discontinued portfolio matures as expected.

Now moving to the trend and specific provisions on slide 59, fourth-quarter specific provisions were 34 basis points of net loans and acceptances. For the full year, the loan loss provision ratio is 40 basis points, which of course is below our target of 50 to 65 basis points. That target is a medium-term or through the cycle target.

Retail Markets loan loss expense was $132 million in the quarter, down $27 million from Q3. The strong performance in Q4 is primarily the result of first, an improving trend in write-offs in our personal loan portfolios, and second, net recoveries in our agriculture and small-business portfolios. The World Markets loan portfolio continues to perform well in a relatively favorable credit environment. Net recoveries and reversals in this portfolio totaled $1 million in the current quarter compared to $7 million in net recoveries in the prior quarter.

In terms of our outlook for total bank losses for 2007, we expect the improved trend in personal loan write-offs to continue. However, we do not plan for continued net recoveries in our business portfolios, and we, therefore, anticipate annual loan losses close to the bottom end of the target range.

Turning now to slide 60 to focus on selected retail portfolios. Credit card loan losses declined quarter-over-quarter. This decrease was due to lower write-offs driven by reduced bankruptcies. These lower loan loss provisions combined with volume growth produced an improved loan loss ratio quarter-over-quarter. On a managed basis, the portfolio was up $1 billion or 9% year-over-year. Overall the cards portfolio continues to perform at or better than targeted levels with stable and predictable loss rates.

With respect to the personal loans portfolio, as you can see in the chart, specific provision, dollars and loss ratios have been trending down throughout the year, and we saw particularly strong improvement this quarter due to the improved write-off trends. So overall we are pleased with the results of the actions taken and the performance of the credit portfolio.

Turning to market risk on slide 61, we display the Q4 daily trading revenue against the Value-at-Risk in our trading portfolios. Risk levels were stable during Q4 and averaged $9.4 million lower than the levels of Q3.

So let me now address our capital strength on slide 62. As stated earlier, our Tier 1 capital ratio is now 10.4%, well above our target of 8.5% and well up from the 8.5% we reported at this time last year. In Q4 the Tier 1 ratio increased 80 basis points. As you can see from the chart, this was due to both internal capital generation, as well as reduced risk-weighted assets. Capital increased due to the strong earnings in the quarter, which brought with it the return to Tier 1 status of $183 million of preferred shares.

Now moving to slide 63, we continue to exercise discipline with respect to the balance sheet. In Q4, the risk-weighted asset relief provided by balance sheet initiatives more than offset growth in our retail portfolios. In the wholesale business, risk-weighted assets were basically flat quarter-over-quarter.

Over the course of the year, we have been able to deploy capital to our core franchise while at the same time building our capital ratios in anticipation of the closing of the FirstCaribbean acquisition. Given our current capital and RWA position, we expect to remain above our 8.5% Tier 1 target ratio on closing.

I will now turn the call back to Gerry.

So we will now take questions.

(OPERATOR INSTRUCTIONS). Steve Cawley, TD Newcrest.

Just firstly for John Ferren, there must be somebody in the room there who has got their RIM working because we can hear quite a bit of static on our end. To the questions.

First question, with the income trust market, that seems to have been suffocated somewhat, I would guess that CIBC would be most impacted considering how involved it was in conversions, and I would have taken a guess that it may have represented as much as 5% of the bank's total profitability this year. Can you comment on how important this has been to your business? Brian, I guess.

Well, it is Gerry here first. First of all, the income trusts have represented less than 1% of CIBC's overall revenue, and that includes from all sources. The other thing is that I wanted to say that this is an area that we continue to do business in, and we expect to continue to do business in because the market capitalization of the income trusts that are still in the marketplace is very robust. There is $200 million of market cap here, and we have many very important clients who are part of the organizations that are in the income trust marketplace today, and we do expect to continue to do a significant amount of business in this area.

I will turn it over to Brian Shaw who will now provide specific details.

Steve, I will make a few comments on income trusts. When we think of income trusts, we think of typically the new issue or the financing business. So I would start off by noting that the financing business in Canada in the last year I would say is driven by two primary factors. One of those is financing by commodity-focused clients to fund their exploration and development programs. The other was to I would say create product that would be of interest to yield buyers. So yield-oriented securities for you know a fairly wide range of investors, and that would include products like income trust, retail structured products, convertibles press.

So I would say when we think of income trusts and the impacts, I would, first of all, make the observation that the yield-driven demand for product and the commodity-driven demand will be the two drivers in the next year. Secondly, I would say that income trusts were not as important in '06 as in prior years. '06 was really the year of M&A, and it is a much more important phenomena from a revenue point of view.

Gerry referenced given the position we have had in income trusts, we have got lots of clients in both the issuing slide and the buy side, and we expect and will endeavor to do lots of business with these clients going forward. I guess one observation would be that I view one of the World Markets' competencies as being specialists in yield securities, and we have worked pretty hard to build that competency over several years. Income trust is only one part of that competency.

I could make a number of comments on income trusts, including the fact that they were substitutes for some common equity issuance that would have happened had they not been in such demand. They have supplanted a high-yield market in Canada in a variety of other impacts. So it is a complex impact, and I think I would refer back to what Gerry said. Revenue max I guess a little less than 1% of the bank's revenues, and it is a pretty manageable impact.

Okay. Second question, Steve McGirr, you made some reference to some guidance for the PCL rate. You said on the retail side that you expected the PCL rate to continue to improve, but on the corporate side, you said that annual loan losses should get to the bottom end of the target range and I was just wondering where that target range is or I cannot remember it?

Actually what I think I said or what I meant to say is that our loan losses annually will be at the bottom end of the 50 to 65 basis point range bank-wide. We are extremely happy with the progress we have made on the retail portfolios, and I would expect the trend to continue to be positive there. I guess my comment on the corporate really was that it is just unrealistic for us to expect that recoveries will continue on indefinitely, and we just have to be mindful of the fact that we have had a very benign favorable credit cycle up to now. And I think realistically we would expect that we will start to see more normal loss rates in the corporate portfolio.

So 41 basis points was the retail side this quarter if my math is right? Your target is still to get to the midpoint or let's say an average range amongst the Canadian banks, and you continue to believe that that is achievable?

Well, the range is 50 to 65 basis points. Our portfolio mix would be different than other banks. And I guess what we are saying is that we expect the trend on retail to be favorable, but there are a lot of unknowns out there in terms of corporate. And I think it would be unwise to expect that recoveries will continue on indefinitely.

Maybe just one quick last one. Maybe it is just a slide that I had not paid attention to in the past. It is -- if I can find it, I will say it, but I cannot seem to find it. It is on the -- I think it's small-business loans. It's not a market. It's right before or around the market share slides. Maybe I just have not paid attention to this before, but your small-business loan levels seem to have fallen quite a bit. So I would suspect that your market share there has fallen quite a bit as well. It is slide 29. Can you just tell me what your strategy is on small-business loans right now, and is this an area where you are hoping revenue growth to return to industry levels in 2007?

Steve, it's Sonia Baxendale here. On the small-business loan front, we have had some problems with credit quality, and so we have been addressing those. We are working actively on a number of segments of our small-business portfolio to, in fact, increase our small-business coverage. So we have had a number of initiatives across the system over the last number of months. It has also been contained to a couple of particular areas earlier in the year as well.

So are you looking to grow this again in 2007?

Yes, we are.

Jamie Keating, RBC Capital Markets.

Great quarter, everyone. Maybe follow up with Sonia if I may. Quite impressive growth on the card side the way I'm reading it at least, and I just wondered if you could give us a bit of an update? I think we heard that the strategy had been morphing a little bit perhaps to some more branch origination. I don't know of that is a factor yet or not or perhaps you can just add some color there? I was also hoping to come back a little bit on the new cost plan with Gerry, so maybe I will just put that out in front.

I just want to confirm I guess perhaps for Tom that variable comp is not a factor in this new cost target I assume. And I'm also hoping to get confirmation that we can see transparency on the FirstCaribbean through the currency and so on. Will that be laid out front for us? I think that is a great measure if we can measure it. I just want to confirm that that will be available during the year.

It is Gerry. There are three questions in there I think?

The main question is the current question. I also just wanted Tom to follow up and confirm that we are going to be able to see the underlying costs. It won't be buried under the FirstCaribbean or the variable comp.

Okay. So Sonia will start off with talking about the progress in the cards business and the favorable outlook there.

So yes, on the cards business, as I have talked about the last couple of quarters, we have had good momentum here. A number of factors- we have been working much more closely with our branch system. I talked about our summer campaign in the past where we had some very substantial positive results in terms of new card acquisition through our branch system. We are starting to see spend showing up there. We have also had a number of programs to increase balances with our existing clients where we have good information and we have got good adjudication ability. So we have been increasing balances there.

We have a number of initiatives still in the works. As you know, we have just enhanced our Aerogold card, and we expect to see some good growth continue there. Our new card acquisition is very positive right now. We launched a no fee new platinum card at the end of October, so we will see more activity on that front. So a number of initiatives. Also, an initiative across all of our card products, our CreditSmart feature, which are a number of features that we have put in place to help our clients manage their overall credit portfolio in a number of ways, and we are receiving again very positive response from that.

So we do have good momentum. We have got on number of initiatives that have just got into place in the latter part of the fourth quarter, and we would expect to see some continued strong performance in this area.

It is Tom. On your other two questions, yes, we will -- well, we already give transparency on brokerage commissions and incentive comp, which are the two items in variable comps. So you will be able to see that.

On FirstCaribbean we will be showing cost both ways because, as Gerry said, our objective is to keep expenses flat, ex-FirstCaribbean, so you will be able to see that.

Rob Wessel, National Bank Financial.

Just I have a couple of questions surrounding guidance. The first one is for Gerry. Gerry, as you know, a lot of the other banks have provided EPS guidance for the year, and unless I missed it, and I apologize if I did, there is nothing in the package nor was there mention of it. Do you have an EPS guidance or range that you could offer for the year fiscal 2007?

We have in the front part of our annual report scorecard which is on page -- the earlier pages of our annual report for a number of years, including the upcoming year -- provided our target for earnings per share growth per annum over the medium-term, and that target has been consistent for several years, and it has been a three to five-year target of 10%. And there are a number of other objectives that we lay out in that scorecard.

In regards to this year, we have not provided a specific guidance in terms of earnings per share growth for 2007. However, in all years in order to achieve our target, we always seek to balance our revenue growth, productivity improvements, improvements in risk management and capital reinvestments so that we are on a consistent path to meet the overall long-term guidance.

Okay. Let me ask a different question. So do you feel good for 2007?

As you may have seen from our fourth-quarter results, the results of that have gradually been coming in, and the trends that have emerged through 2006 have been consistent with the program that we laid out in 2005. We have been step by step proceeding on the path that was consistent with the program we talked to you about, as well as consistent with our scorecard. We continue to proceed with that plan and program, and we believe that 2007 will be a year of consistent delivery step by step against the various objectives that we have laid out for you in the past and today.

Okay. And sorry two more sub-questions I guess within that is, you had mentioned in your opening remarks that you expected revenue growth at CIBC to be -- to approximate or converge to industry levels. Do you want to give us an idea as to what you think revenue growth for the industry would be?

We're not trying to project industry growth for 2007. We are basing ourselves on the trends that are in place for the industry that we have seen throughout 2006, and I want to emphasize once again that the most important element to us in terms of our earnings per share targets and our overall long-term objective to deliver consistent and sustainable results, is the balance between revenue growth, productivity, our risk management and our capital reinvestments. It is very important in 2007 to consider our overall plans that we have laid out to you on the trends that you have seen in our earnings, as well as our outlook is helped by the fact that we will be entering 2007 in a better capital position than we entered 2006.

In addition, we will be entering 2007 with an improved risk picture and risk trend compared to 2006, and we will be entering 2007 in addition with an improved revenue outlook because of where we are at in terms of our risk picture. So I think when you add all of that up, it should allow us to start to converge on the industry trendline in terms of growth that you have seen in the marketplace over the last several quarters.

Okay and I had a question regarding slide 59 and slide 60 on the provisions. You know, unless I am mistaken, I think the expected total bank rates for provisions has been 50 basis points to 65 for some time now, and the bank has I guess as it has discussed many times reduced its risk profile a fair bit. I guess I really have two questions.

One is, is this still an appropriate target range in light of some of the changes in the bank's risk profile, or are you just keeping it this way because it is extra conservative? Or are there other offsetting factors we should think about?

It is Gerry here. I'm going to turn it over to Steve in a second. I think that one of the important elements that Steve has mentioned in the past in terms of the range that we are looking at, is that this is an appropriate range when one thinks about the entirety of the economic cycle and the credit cycle that exists in the marketplace. Steve, I will leave you to expand on that further.

Well, I guess the basis for the question is that we are at 34 basis points for fourth quarter, and we are at 40 basis points for the full year. So is 50 to 65 credible.

Sorry, not to be rude but just hold that thought. In light of the changes in the risk profile of the bank, is it still appropriate?

So I'm not going to answer the question of whether we are being overly conservative, but what I will say is this. We like the trend on the retail portfolios and the fact that we have taken a lot of risk out of those portfolios. But having said that, we have been in net recoveries in this industry for a number of quarters on the corporate and -- the corporate portfolios basically. And when we set the 50 to 65 basis point target, we set it through the cycle, i.e. through a credit cycle. And the credit environment in the last year or so or even beyond that has been extremely favorable. So we have to be mindful of the fact that those conditions in the credit markets might change.

Now if they don't and we get a very -- the favorable credit environment continues, I may be answering the same question next quarter and the quarter after. But we have to be mindful of the fact that we won't get continued recoveries necessarily on forever. The arithmetic would tell you that. So that is why when we look at this we say, through the cycle until we get lots more information about how the economy is going to unfold, etc., we are going to stick to the 50 to 65.

Okay. And then I'm sorry, Steve, just there was a question earlier by Steve Cawley and I think I got confused. I thought I understood it, but maybe I did not. Were you suggesting that in terms of your comments on the conference call or earlier in the presentation that you expected the corporate portfolio to begin to revert to what would be normal industry provision ratios, or were you suggesting that the entire bank will move up to 50 to 60 basis points -- 50 to 65, excuse me.

I was saying that for the entire bank. But my comment on normal was that recoveries will not continue forever.

But if credit cards are stable and we are seeing big declines in personal and student and corporate zero, we don't have -- like in order for you to get up that high, doesn't there have to be some regression in personal and student loans and/or a significant increase in corporate? Like well beyond what you would expect in order to get like that is a huge number to get to 50 to 65 for the whole bank if it's just being driven by corporate.

Yes.

Mathematically.

Yes. It is --

Sorry. Not to put you on the spot.

I guess you have to overlay your feeling on economic and credit cycle, and I guess I would repeat my comment, that the credit conditions have been extremely favorable. And so if we were to get some general losses in our corporate portfolio, you could find that those numbers increase.

Now I don't think it is productive to change the 50 to 65 basis points on a quarterly basis. So at some point in time when we have a lot more information we will revisit that. But all that I am really saying is I don't really see a necessity to change that in view of the fact that we are in a long in the tooth favorable credit cycle. So you can draw your own conclusions as to how conservative that is or is not, but that basically is the thinking.

That is great. Thanks a lot.

It is Gerry here. I would return to the remarks I made in introduction to Steve's comments because given the context of your continued inquiry, I think I need to emphasize that the 50 to 65 is a through the cycle number. At this time what we are seeing internally would lead us to expect a continued improving trend in terms of our non-corporate proportion of the portfolio.

In terms of the corporate portion of the portfolio, if you want to say that there is some caution in there because of the potential for the credit cycle to show up, I think that that is a fair observation to make.

However, one of the things that I want to mention at this moment is that that is an observation that is based on a through the cycle history that we are looking back at, and it is also based on a view that would be industry-wide. We do not have any particular information at CIBC that would lead us to be able to give you any reflection on the corporate credit cycle at this time. Our experience today is consistent with what we have had in the recent past.

So this is very much a range that is a through the cycle range based on a view that at some point the credit cycle on the corporate side will show up again and approach what was more of a historic standard. Does that help answer your question?

That is -- no, but that is fine. I have already used up enough time. Thanks.

Brad Smith, Blackmont Capital.

I had just two quick questions. I just was curious I noted that there was a reclassification in the deposits on the balance sheet between the business and the personal. I think it was about $3 billion moved up from business to personal. I was just curious about what had prompted that.

And my other question related to the employee count and looking at things like compensation and revenues on an average employee basis. It looked like in this quarter the comp went down on an average employee basis by about 2.3%, and the revenues went up by about 2.4. Is that a trend that we can expect to continue to see do you think?

Sonia Baxendale here. On your first question on the deposits, that was -- we had previously been reporting our structured notes under business. We moved them to personal, which was just the place where they belonged. They are sold through our retail distribution channel to our retail customers.

Okay, thank you.

It is Tom. Just on the cost per employee, I mean you really have to look at it on an annual basis. As we have talked about in previous webcasts, the comp exercise per quarter tries to target to where we think we will need to be by the end of the year. As it happened when we -- in Q4 every year sometimes it is up, sometimes it is down because you have the final true-up. This quarter, although we had a very good revenue quarter and good performance on cost and loan losses, you will note the incentive comp number was lower than it was in Q3. And that is because the final determination of performance assessment, market pressures, etc. drove that. So there is nothing to read into that on a comp per person basis quarterly.

Okay and I am sorry. So the true-up was a reduction in the fourth quarter? Is that what you are saying?

The total amount of incentive compensation in Q4 was lower than it was in Q3 because that is the final determination to bring the annual number to where we need it to be. The Q3 number was the right number at the time, but it was based on information that was not complete because the year was not over.

I see. Okay. Terrific. Thanks so much.

Ian de Verteuil, BMO Capital Markets.

Tom, a question for you on the tax slide, 52 that you present. When I first looked at this, I thought to myself the tax rate was a bit lower in the quarter after adjusting for the $90 million. So the adjusted tax rate was 19.5, and I think you said the range was 21 to 24. But it looks as if on a TEB basis you sort of came in at a normal range. Isn't it more appropriate to think about a bank on a TEB basis as opposed to adjusted?

Yes, it is. You are absolutely right. I mean 25.8 is within our range. The only reason I highlighted adjusted this quarter before TEB is that I knew attention would be drawn to that 19.5, and whether you look at TEB or whether you don't, we had a few other smaller items as you do every quarter that worked in our favor. And I wanted to be transparent to say that even after the 90 million, our tax rate was lower. But you're absolutely right. The TEB number is the fairest way to look at it, and we were within our range but towards the low end of the range.

Okay. The second question is to ensure Steve McGirr does not get a second offer here. Steve, in the $132 million which was retail, you have previously provided some breakdown between consumer and business. And I know there has been a fair amount of volatility on the business, which presumably is the small business like. Can you provide that breakdown this quarter?

I don't think we provided that in the package.

In Q3 you said there was $147 million -- or the 159, 147 was consumer business, the previous quarter 138 was business, 150 was consumer.

I'm sorry, so consumer is 124.

Consumer is 124. So I guess the issue is this is the first quarter that we really see the true consumer book coming down. And for most of the year, it has been a fair amount of volatility on the business side. But this truly is the consumer portfolio kicking in here, and I remember there was a debate or a point made in previous quarters that as the book -- as you work through the problems, as you high graded and shifted from unsecured to secured, there was an issue of getting a problem and giving them off. Is there some swing here where you actually swing very low on the consumer side at this stage and then it comes back up, Steve, or is it really just one of these things that you sort of guide down now to a level that is sustainable? Obviously outside of material changes in economic and unemployment levels in Canada?

Well, we did have to work older vintages of loans through the system. But we are now at a point where we still have some of those, which could generate write-offs. But that amount is getting lower. And so we would expect that we would be more stable and also that the trend would continue to be relatively favorable.

So it could decline further?

It could decline further in the future. I caution you quarter over quarter, but certainly on annual basis I think the trend is very favourable.

Mario Mendonca, Genuity Capital Markets.

I want to pick up on what Ian was describing there or, Steve, you suggested it could improve on an annual basis going forward. Just an observation-at 41 basis points this quarter in retail, CIBC's PCL ratio is now just marginally ahead of Royal's. (technical difficulty)-- sorry about that. It is just marginally ahead of Royal's. How do you think of that? If the two banks in terms of their mix are not terribly dissimilar, does 36 -- and again I know this is probably difficult for you to comment on another back -- but is 36 sort of a goal for CIBC? Is that when you sort of declare victory?

Well, the loss rate targets will be set in relation to the economics of the product, but we don't target against another bank's product mix necessarily on that. But I guess what we are saying is that we told you we had a plan to increase the credit quality in the portfolio. We have taken the actions. It takes awhile for the older vintages to work off. That is starting to happen, and we would see that our credit quality in the portfolio is getting better. We are optimistic that it would be improving and certainly more stable than it has been.

And maybe just to finish that one up. The decline sequentially 50 basis points to 41 basis points, you referred to agricultural recoveries in there. What I'm curious about is whether that change, any material amount of that change relates to the agricultural recoveries, or if that is sort of in addition to everything else you have talked about?

It is a relatively small amount.

Okay. A final question that is more a sort of nitpicky question. On credit fees, $104 million this quarter, they have been trending up, and I think you refer to growth on the wholesale business, the wholesale lending. On the wholesale side, you don't quite see that kind of growth because year over year that is a big number or maybe not so much year over year; more sequentially it is a big number. Is there anything you can offer in that respect?

In fact, the syndicated loan business has been very strong. Several of these deals are multi-tier deals where the advisory fee component is quite attractive. So, in fact, the biggest part of it is that, not all of it. But 104 versus 74 this quarter, the international secured loan syndication business we have done, and I might say syndicated down to reasonably attractive low levels, has been very strong for us.

Is there any seasonality in that business?

Not so much calendar seasonality. It is more a question of market tone. The tone, as you may know at the moment, with the liquidity in the system internationally is very strong, so it is not a quarter by quarter thing as much as just a tone thing.

Jim Bantis, Credit Suisse.

Two questions, one to Tom in terms of FirstCaribbean coming on board in 2007. If you could just remind us what the contribution for FirstCaribbean has been in 2006 and from your previous guidance on what the incremental earnings will be for 2007 in terms of the ownership change?

And my second question is to Gerry. Just looking at revenue growth and trying to tie it into risk-weighted asset growth. I know this was perceived or is being portrayed as a strong revenue quarter, but risk-weighted assets were down again quarter over quarter and down year over year. And should we be thinking of risk-weighted asset growth to lag revenue growth in 2007 because of the change in business mix?

I don't have the '06 contribution at hand. I could estimate under $0.10 a share. The guidance we gave for -- well, we technically did not give guidance for the year '07. We gave it on an annualized basis for the guidance that was provided for the $170 million US NIAT number for '06 at around $0.15 to $0.20. So to the extent you believe the business is going to grow, it might be at the high-end of that range or maybe even a little higher than $0.20 a share relative to where it came in in '06 on an EPS basis.

I do have a number now for NIAT for '06. This is year-to-date for nine months. They have not released their quarterly number, $36 million, so it was about $0.10 a share roughly for this quarter or for the nine months today.

Next -- sorry? Yes, next year the goodwill will be a little higher. So I think $0.20 a share is a pretty good number for next year without factoring in any growth.

You had a second question?

Could you just repeat your second question, please?

Sure. It is specifically looking at risk-weighted asset growth, and it obviously contracted year over year and quarter over quarter, but I know the bank perceives this quarter to be a strong revenue quarter. So I just want to be able to tie the relationship to revenue growth into 2007 relative to risk-weighted asset growth. I mean given the change in business mix, should risk-weighted asset growth lag revenue growth?

First of all, the risk-weighted assets growth I think when one looks out into 2007 will reassume, and I think that will be in lockstep with revenue growth. As we go forward here given our better capital position and the fact that the FirstCaribbean acquisition will be paid for, there are a number of areas that we have been holding back in terms of their ability to generate revenue, particularly on the wholesale side, and I think that although one never knows the impact of markets, I think that all other things being equal that our posture on risk-weighted asset growth should be favorable in terms of its impact on revenue growth.

Just to kind of follow-up on that, could you chat about or Brian as well talk about the areas that you have been holding back on in terms of wholesale that -- now I want to find out to what extent there will be growth in these two areas that you -- or these areas you are referring to into 2007?

Well, it is Gerry, and I will turn it over to Brian in a minute. But we have always had through CIBC a rationing mechanism for our risk-weighted assets throughout all areas of the bank. In general, it is fairly impractical to be too restrictive in that sense in areas where the activities are client-driven such as the retail bank. And so the areas where the rationing has had the greatest restriction and, therefore, these areas might be operating a little bit below capacity would be more so in the trading room. And I think that we have a number of areas where our trading rooms are as they say operating a bit below their natural capacity given the operating platform that they have. And, therefore, this is an area where we could see a pickup in productivity through greater application of financial resources both putting funding and capital and the growth in risk-weighted assets that goes with that. I think there is some room to be constructive in terms of revenue growth. I will turn it over to Brian.

Just a couple of other thoughts. If you look across the World Markets' set of businesses, Capital Markets is the largest business today, and in that business, we have got quite a wide range of activity from very client-centric, low margin to structured activities. It is the case that as you go into more structured areas and some of the proprietary areas, you can make fairly discrete decisions about size of positions and hurdle rates and just by setting fixed amounts of resource usage calibrate the hurdle rates.

So we have for some time had the view that there is a natural rate of financial resource -- incremental financial resources to put into some of these businesses. And I guess on balance we have tended to do a little less of that more recently. So there is an opportunity to add a little bit and get a little better returns or a little better revenue growth out of them.

So, as Gerry said, our plan calls for us to do that to a moderate extent this year, and that all things being equal will result in some incremental revenue growth. All things are never equal. It depends how markets are. It depends where we choose to add some based on the opportunities, but that is what we are getting at.

Darko Mihelic, CIBC World Markets.

I would just like to follow-up along those lines of questioning as well with respect to risk-weighted assets. With regards to page 16 of the supplemental, it deals with asset securitizations. It looks as though your asset securitization program has actually cost you about $34 million this year, and that is down from 39 positive last year. Pretax looks like about a $73 million swing. I wonder is that something that was brought about by managing your balance sheet lower because of preparation for FirstCaribbean. I'm wondering if that could swing back to a positive for next year?

It is Tom. I will start, and if Brian O'Donnell or anybody else wants to chip in, feel free. The big thing in 2005's Q4 was we did the large roughly $2 billion credit card securitization. And when we did that, as always happens, you get to release reserves. So that number of $35 million profit in '05 was because of the release.

Typically the securitization business will result in a slight negative just because of the cost of funds. But that is the big swing, '05 to 06.

Okay. Fair enough. Thank you. And another question I guess getting back to the expense I suppose target for next year keeping it flat excluding FirstCaribbean, I would imagine that is a pretty hard target to set without having some idea of what you're looking for in revenue growth. I don't want to pin you down too much, but I know you are suggesting it should sort of converge towards the revenue growth of the industry. I'm just -- is 5, 10% range too much? Any sort of help on that side would be appreciated because I find it hard to believe that you would not have some idea of the kind of revenue growth you are shooting for?

So in terms of productivity, in fact, we have been striving to engineer productivity improvements that were related to our fixed cost platform as much as possible and, therefore, would not be subject to any volatility in revenue growth. And to that end, we have been investing in a number of infrastructure productivity initiatives during the last few years and through 2006 as well. And some of these investments are going to come to fruition and pay off in 2007.

For example, in the area of technology, we have several large projects that are in the productivity area, and I will touch on two significant productivity improvement initiatives. We have a network optimization project that we have been investing in, and that consolidates all of our voice and data networks on one platform with both improvements in effectiveness, as well as cost performance.

In addition, our desktop environment across the entire organization has been subject to a repatriation and optimization project, which consolidates control over all of our desktops, which creates a more effective control of this environment at a lower cost. Both of those are slated to be significant productivity contributors coming on-stream during 2007 and paying off both in '07 and '08.

In addition, we expect to realize savings from the continued runoff of a number of expenditures that we have been investing in in the projects area in 2007. And an example of this -- in 2006 -- an example of this would be for instance our Basel II spend is now trending downwards as we move closer to the implementation date.

In addition, there are many other initiatives in productivity that again are going to be paying off in 2007 that were started in 2006. For instance, we have been consolidating vendors across CIBC and, as a result, expect to realize savings on a year-over-year basis in this area. And in addition to that, we have a variety of other investments that we are making that should also pay off in 2007 regardless of the revenue picture.

So that is why we are confident that we will be able to have the $150 to $200 million of savings that we laid out achieved without any negative impact from a viewpoint of revenue growth.

The primary area that we expect to be receiving a boost from in terms of revenue growth is the investment that we have made in terms of growth throughout all of our platforms, and in addition, the fact that our credit issues are running their course, and as they do so, we find that there is a high probability of a pickup in revenue again trending towards industry growth levels.

Thank you very much. I would now like to turn the meeting back over to Mr. Ferren.

Thanks, everyone, for joining us today. I hope everyone has a safe and happy holiday. If you do have any further questions, you can always call the Investor Relations group. Thank you.