Canadian Imperial Bank of Commerce (CM) 2007 Q1 法說會逐字稿

Good afternoon ladies and gentlemen. Welcome to the CIBC first quarter conference call. Please 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. This afternoon, we are speaking to you from Calgary where we held or annual general meeting this morning. As usual, this conference call this afternoon is being audio web cast and will be archived later this evening on CIBC.com.

This afternoon, CIBC's management team will review CIBC's first quarter 2007 results. Opening remarks will be made by Gerry McCaughey, CIBC's President and Chief Executive Officer; Tom Woods, our Chief Financial Officer; Steve McGirr, our Chief Risk Officer.

Our management are here in Calgary and will be available to take your questions following the presentations. Before we begin, let me 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 note about forward-looking statements in today's press release or within our 2006 annual accountability report available on CIBC.com.

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

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

Today, I will review our first quarter results we announced this morning, as well as CIBC's progress against our priorities. Our Chief Financial Officer, Tom Woods, and our Chief Risk Officer, Steve McGirr, will then provide the financial and risk overview.

CIBC reported net income for the first-quarter of $770 million, up from $580 million for the same period a year ago. Cash earnings per share were $2.12, a 30% increase from $1.63 a year ago. Return on equity for the quarter was 27.1%.

Our results this quarter were in line with our goal to deliver consistent and sustainable performance. Let me update you on our progress, beginning with our business results.

Retail Markets reported net income for the first quarter of $530 million, up 21% from the same quarter last year. Volume growth, as well as improvements in loan losses and taxes, contributed to this result. The first quarter of 2007 also included the earnings of FirstCaribbean International Bank consolidated from December 22, 2006.

Our Retail business continued to perform well overall. Retail brokerage had a strong quarter with revenue of $314 million. CIBC Wood Gundy's assets grew to $117.6 billion. Our credit card portfolio continues to grow in line with our expectations. Card balances are 10.6% over the prior year. Card revenues were $371 million, up 7% from a year ago. We also had market share increases during the first quarter in key areas, such as deposits and GICs.

In the area of Personal Lending our focus on credit quality has improved our loan loss performance, but it has resulted in lower revenue growth than the marketplace. We expect that as the actions we have taken to improve our risk profile run their course, we will see revenue growth in our retail business begin to converge with industry levels.

World Markets reported net income of $210 million, up 64% from the first quarter of 2006. Capital Markets and Merchant Banking revenues were higher, while investment banking revenue was lower.

World Markets delivered another solid performance in the first quarter, reflecting the strength of our client relationships, combined with continued discipline in the area of risk.

Our second priority is to improve productivity. Our strategic objective is to have a median efficiency ratio among the major Canadian banks. We believe that the impact of improved revenue through consistent investment in our core businesses as well as continued expense discipline is the most balanced way to achieve further productivity improvements. We have made progress in the first quarter towards the balance we're seeking through productivity and revenue growth with our cash efficiency ratio improving to 61.5% from 64.4% in the same period a year ago.

Our third priority is balance sheet and capital usage. Giving effect to CIBC's first quarter results, our Tier 1 capital ratio is 9.6%, well above our target of 8.5%. Our first priority is to invest in our core businesses, to sustain their strength and market position. After funding our internal needs, we will balance other capital deployment opportunities. During the quarter, we completed our acquisition of a controlling interest in FirstCaribbean International Bank. CIBC's interest today stands at 91.5% of FirstCaribbean.

Dividends are also an important part of our capital management plan. Our dividend payout ratio for the first quarter was 32.9%, below our target range of 40% to 50%. This morning, we announced a 10% increase in our quarterly dividend to $0.77 from $0.70 a share. We will continue to review dividend increases throughout the year.

With our first quarter results, we have made a solid start to the year. Our objective is to deliver consistent and sustainable performance over the long-term. We remain focused on our business priorities and we intend to build on the progress we have made throughout the rest of 2007.

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

Thanks, Gerry, and good afternoon everybody. My comments as well will include forward-looking statements. Actual results could differ materially. I will go through about a dozen sides. Slide number 5 will start, summarizes the quarter.

As Gerry said, fully diluted accrual EPS of $2.11, cash EPS of $2.12 cents. Cash EPS excluding the two items indicated on the right would aggregate $0.06 higher. Results were helped by higher than normal securities gains and good performance in particular across our capital markets businesses. As Gerry also said, in Q1, we consolidated FirstCaribbean for one month as we moved from 44% to 83% at the end of December. In early February, we acquired an additional 8.5%, so next quarter, we will consolidate it for the full three months at the 91.5% ownership level.

As you know, we implemented the new financial instruments accounting policy, as did all the banks as of the start of our Q1. This had a beneficial effect on opening shareholders equity of $73 million on the transition and a further impact positive on shareholders equity, but not P&L of $28 million in Q1. The P&L impact actually was de minimus, negative $1 million on the Q1 earnings.

Starting with Retail Markets, slide 11, Retail Markets revenue $2.15 billion, up over $100 million or 5% from Q4.

Slide 13 -- Personal and Small-business Banking revenue was down marginally from Q4 due to seasonally lower new loan and mortgage sales. Deposit balances were up almost 8% from a year ago and up 2% from Q4. Spreads were about the same versus Q4. The outlook for Q2 is for slightly lower revenue in this business as the effect of three fewer days will likely offset an expected increase in loan and mortgage balances.

Slide 14 -- Imperial Service is the group covering the mass affluent customers of our branch banking network. Revenue was $237 million, up 3% from Q4, mainly due to higher sales of wealth management products. Revenue in Q2 should be about the same or slightly higher.

Slide 15 -- Retail Brokerage had another strong quarter with revenue of $314 million as the TSX was up 6% from Q4 and TSX volumes were up 13% on the quarter. New issues, especially flowthrough shares, were also well up from Q4 and we continue to grow the annuitized fee component of our mix which will help dampen revenue volatility going forward. TSX volumes are running 14% higher in February than in Q1, so we're off to a good start in Q2 as the RSP season begins.

Slide 16 -- Cards had revenue of $371 million, down marginally as expected from the very strong Q4. Balances were up 2.5% from Q4 and almost 9.5% from a year ago. Spreads held flat from last quarter as a higher revolve rate offset a slightly higher cost of funds and adverse mix shift. Points cost were somewhat higher with the introduction of our very successful Mileage Multiplier feature.

Although Q2 revenue will likely be lower as it normally is in the shorter quarter, the Cards business continues to be well positioned for future growth. Performance across several key metrics, including new account signups and cancellation rates, was very strong in the quarter.

Slide 17 -- Mortgages and Personal Lending was well up in Q1 due mainly to higher securitization revenue. Residential mortgage balances were up nearly 8% from a year ago. Personal loan balances were up 2% from a year ago. Secured balances were up 26%, but unsecured loan balances were down 19%. Revenue in this business as well will likely be lower in Q2 because of three less days.

Slide 18 -- the Other line includes FirstCaribbean, which is equity accounted for two months and consolidated for the third month following the acquisition, as I said, of the additional interest in late December.

Slide 19 -- Retail Markets net income $530 million, up almost 6% from Q4 and 21% from a year ago. Revenue was up over $100 million from Q4, as I've just reviewed. Expenses were up $33 million, but were down if you adjust for the FirstCaribbean consolidation, this despite the fact that we had higher performance-driven compensation expenses. Loan losses were up $21 million from the unusually low Q1 number as Steve McGirr will comment in a moment and the tax rate was marginally higher this quarter.

Turning now to our other business group, CIBC World Markets. Revenue on slide 20, $784 million, up over 12% from Q4.

Slide 22, the First Business Capital Markets -- revenue well up $449 million as all of our main businesses reported strong performance. The debt businesses, which represent just over one-third of this number, had higher revenue in most business lines, especially in new issues in Canada where the market was very active. Equities, the other two-thirds, had significantly higher revenue, helped by a gain of $26 million in shares in TSX in strong new issues, agency and proprietary trading activity, both in Canada and the U.S. One month into Q2, it appears unlikely we will come close to matching Q1's revenue number.

Slide 23 -- Investment Banking and Credit Products, revenue of $204 million, down $38 million from Q4, which had very high M&A fees. New issues of equity were up in both Canada and the U.S., but M&A and loan credit fees were down. U.S. real estate had another strong quarter, reporting the same revenue as in Q4. Pipelines and new issues are reasonably good and in M&A are quite good. Real estate revenue should be well up from Q1. As a result, the outlook for this business in Q2 is for slightly better revenue than Q1 and will likely be driven mainly by how much of our M&A pipeline closes in the quarter.

Slide 24 -- Merchant Banking had revenue of $77 million versus $61 million in Q4. We had gains and distributions of $115 million, offset in part by write-downs and funding costs of $41 million. Approximately 40% of the $115 million were distributions from fund investments which had high levels of divestiture again this quarter. As I said last quarter, we expect another good year in Merchant Banking, but the quarterly run rate will likely be less than what we have seen in Q4 and Q1.

Slide 25 -- World Markets net income, $210 million, down from Q4, which had large tax reversals. Revenue was up over $70 million as I've just reviewed in World Markets, expenses were up over $65 million due mainly to higher performance-related compensation and slightly higher litigation provisions. Loan losses are still in recovery and our taxes were back to a normal level.

Just concluding now on consolidated expense, let's go back to slide 9. We had total expenses in Q1 of $1.943 billion, up $51 million from Q4. This was due to higher performance-related compensation and one month of the FirstCaribbean consolidation, and all of this offset lower technology and advertising costs.

Thanks. I will now out turn it over to Steve McGirr, our Chief Risk Officer.

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

I will provide an overview of risk and capital for Q1 with a focus on credit provisions, impaired loans, CIBC's general allowance, as well as value at risk in our trading portfolios. And finally, I will close out with some comments on CIBC's capital strength and the Tier 1 capital ratio.

Before I begin that, I would like to note that, for the first time, the results I outline will consolidate full balance sheet figures from FirstCaribbean International Bank. As you know, CIBC completed its acquisition of FirstCaribbean in the first quarter. In the first instance, we have isolated the CIBC results excluding the impacts of FirstCaribbean on our balance sheet so you can see the trend in our base business before the acquisition, and I will then explicitly identify the FirstCaribbean figures and how they have been consolidated onto our balance sheet.

Overall, we're pleased with the performance of our credit portfolio in the quarter. At 36 basis points of net loans and acceptances, our loss ratio remains below our through-the-cycle target, and as you will see in a moment, loan losses in our personal loan portfolio remain stable. The loan loss increases quarter-over-quarter were driven by two items. First, we had increased losses in our Credit Card portfolio which were largely due to volume growth. And second, as we have been projecting, lower recoveries and reversals in our Small Business and Agricultural Portfolio occurred. Overall though, it was a very positive quarter.

Now turning to slide 52 for credit highlights in the quarter, specific loan loss provisions totaled $143 million, up $12 million from Q4. In a moment, I will speak to that in some detail. At $130 million, net impaired loans are down $104 million from the first quarter of last year, but up $42 million versus the historical low in the previous quarter. The higher balance in the quarter was due to normal increases distributed across multiple industries and products. The general allowance decreased $3 million in the first quarter, and this decrease was the result of a transfer from general to specific allowance for our student loan portfolio as this discontinued portfolio matures as had been planned and expected. Note that these balances exclude the impact of FirstCaribbean balances consolidated in Q1, and in a few minutes, I will describe the impacts of the FirstCaribbean transaction on our loan portfolio.

In terms of our outlook for loan losses, as we have consistently communicated, our through-the-cycle target is 50 to 65 basis points and we expect loan losses to trend up towards the bottom end of that range over the coming quarters.

Now moving onto the trend in specific provisions on slide 53, first-quarter-specific provisions were 36 basis points of net loans and acceptances. Our Retail loan loss expense was $153 million in the quarter, up $21 million from Q4 '06, but down $27 million from Q1 '06. The higher provision in Q1 is primarily a result of the following. First, the Cards portfolio is growing, which leads to higher losses, and as you heard in Tom's presentation, volume growth is also driving higher revenue. Additionally, Cards write-offs increased from the traditional seasonal lows in Q4.

Second, again, very much in line with expectations, Small Business and Agricultural loan losses increased approximately $12 million in the quarter as recoveries and reversals came in below the levels of the prior quarter. But otherwise, our Personal Loan portfolio maintained its improved performance. The World Markets loans portfolio continues to perform well, albeit in a relatively favorable credit environment. Net recoveries and reversals in this portfolio totaled $10 million in the current portfolio compared to $1 million in net recoveries in the prior quarter.

Turning now to slide 54 to focusing on selected retail portfolios. As I noted, Credit Card loan losses increased quarter-over-quarter due to volume growth and higher write-offs. These were largely versus the seasonal lows in the prior quarter. On a managed basis, the Cards portfolio was up $1 billion, or almost 10% year-over-year, and overall the portfolio continues to perform at targeted levels with stable and predictable loss rates.

With respect to the Personal Loans portfolio, the trend is stabilizing as provisions were relatively flat in the prior quarter with losses down almost $40 million, or 35%, from the first quarter of 2006.

So moving to slide 55 we provided a high-level overview of FirstCaribbean's impact on our balance sheet this quarter. The total loan portfolio at quarter end was just under $7 billion and the consolidation of FirstCaribbean onto our balance sheet added $227 million of net impaired loans. So to provide you with some context, last quarter before our acquisition was completed, FirstCaribbean net impaired loans stood at $214 million. We are comfortable with the reserve levels of the impaired portfolio. The FirstCaribbean portfolios are extensively asset-backed primarily by real estate. As you know, this is a portfolio that we're very familiar with, given our ownership stake in FirstCaribbean and our history in the region. And overall, growth and performance in this portfolio is quite consistent with our expectations.

Turning to market risk, looking at slide 56, we display our Q1 daily trading revenue against the value at risk in our trading portfolios. Risk levels averaged $9 million, slightly below the levels of Q4. This fall was due largely to the reclassification of risks from our U.S. real estate finance business and with a change in financial instrument accounting standards that Tom referred to earlier, we no longer classify revenues generated by real estate securitizations as trading.

So moving to slide 57 on capital strength, as you heard earlier, our Tier 1 capital ratio is 9.6%, well above our target of 8.5%. In Q1, the Tier 1 ratio decreased 80 basis points. This was due primarily to FirstCaribbean transaction, partially offset by internal capital generation. As a reminder, the 137-basis-points impact of the transaction is a result of two things -- goodwill, which must be deducted from our capital balance; and of course, the consolidation of FirstCaribbean's assets onto our balance sheet. In February, we acquired an additional 8.5% interest in FirstCaribbean pursuant our tender offer, and as a result of that, we would expect a further impact on Tier 1 capital ratio of about 15 basis points.

So that concludes my presentation, and I will turn the microphone back to Gerry.

Alright. We would be pleased to take questions. Operator?

(OPERATOR INSTRUCTIONS). Steve Cawley, TD Securities.

Hi there. First one, I guess great quarter for CIBC World... Retail Markets. $530 million is a big increase. The difficulty I guess I am having is there's so much included in this division right now -- wealth management, you're now going to get 90%-plus of FirstCaribbean. When I look at the numbers, revenues that you provide, it helps a little bit in terms of trying to get a sense of what percentage of your revenues would be wealth, but I know mutual funds now is included in other, so that is hard to extract as well. So if I just make some assumptions in terms of your revenues, would it be right to say that about 40% of your revenues are coming from wealth management? Or is there a slide somewhere that can help me figure that out?

I'm going to pass it over to Tom Woods and I'm going to ask him to address this in two ways; first of all, to just talk a little bit about why we prepare the numbers these ways as opposed to breaking it out in a more granular fashion. There are some restrictions that we have in terms of our ability to break out from this kind of consolidation, and that has to do with disclosure. And the second thing is that, I will ask Tom to provide you with what disclosure that we do have available readily for the questions that you have asked. But I think it would be of interest to everyone as to why we are preparing the numbers this way. Tom?

Thank you, Gerry. Steve, as you may know, and maybe I can just elaborate on, we run this business on a very integrated basis. It all reports up through to Sonia Baxendale. We give quite good granular breakdown certainly of Retail Brokerage, and I would also say Imperial Service, which is a wealth-like customer segment in that it's the top 15% of our customers. I'm not going to be able to give you a percentage number. Clearly, the Retail Brokerage and a good chunk of that Imperial Service I think you would think of as wealth. The asset management component of the 323, just to help you out, might be around half or a little less than half. So I will leave to you those numbers if you'd like to work with them. But it's very much an integrated operations and I will let Sonia add if I've missed anything. But a key strategic thrust for us is to drive more mutual fund business through our non-Imperial Service where we've had great success there, but the other 85% of our front-line business advisers, and that is why we have reported the numbers this way, because that's the way we're managing the business.

The only suggestion or the reason for me is, with the markets being so strong in quarter, it would be nice to know why, with the big increase that you had in quarter and revenues, and also in net income, how much of that was driven from your retail banking business as opposed from the wealth. Granularity is always a good thing for analysts.

The second question that I had for you, slide 45, the securities gains. The $132 million that is there in terms of securities gains, that includes the $77 million that you reported for Merchant Banking -- is that correct? That's included in that number?

Yes, Steve, it's Tom. Yes, it is. That $77 million, as I said in my comments though, is a net number. You have to start with $115 million of gains. So the bulk of that $132 million is the $115 million. In fact, the $115 million includes a bit of distribution, so the $115 million you should think of as high 90s as it relates to that $132 million, okay? So that's step one. Step two is the $26 million we've disclosed on TSX, so that gets you almost all the way to the $132 million. We had a few other securities gains in some other businesses.

When I look to the Q4 '06 number of $48 million in other income and I believe I've gotten some disclosure from IR that it was $54 million the previous quarter, $50 million. Why wasn't that other income, or are those in security gains? Why were they in other income and not included in investment securities gains?

Steve, the reason is, it's accounting and this accounting has now changed, so it's a moot point. But to the extent you want to go back and make comparisons, and I thought we've given this -- I know we've given it on a number of quarters -- that ties to gains we have from our limited partnership fund investments. The way the accounting works is you cannot call those investment securities gains for perhaps an arcane accounting reason, but that $48 million is every bit as much a Merchant Banking gain, and indeed it has been included in the Merchant Banking revenue. We just had to classify that as Other income because it wasn't corporate securities. They were limited partnerships.

And when I think of that $132, the level of taxation that that would attract would be less than your normal businesses, or your other businesses? I'm just thinking, is it included in perhaps a Caribbean jurisdiction, rather than a North American jurisdiction?

No, it's actually -- it depends where the gain resided. Most of our portfolio continues to be in the U.S. and tax rates in the U.S. are actually higher. They run sort of in the low 40s, so they would be bearing their full weight and more certainly compared with our average TEB tax rate of high 20s.

And as you said I think, including the TSX gain and perhaps I think you said in your commentary that you would expect Merchant Banking to be at unsustainable levels from previous two quarters. That $132 million -- we should expect that to be going down over the course of this year?

You never know, Steve. Liquidity in the fund market continues to amaze. Our unrealized gains have maintained levels, even though we have reported quarter-in/quarter-out pretty healthy levels. But at some point, you will have to make a judgment yourself. We have, just to help people see how we're thinking about it, and I will just go back to my remarks. We expect another good year in Merchant Banking, but the quarterly run rate will likely be less than what we've seen in Q4 and Q1. I've been saying that for the last four or five quarters and we've continued to have pretty good gains. But at some point, I think it's prudent to expect that rate to go down at least a bit.

Thanks guys.

I also, as Tom has pointed out, there is always some question about one's ability to predict the level of Merchant Banking gains, but we feel fairly good about the guidance that Tom gave in the fourth quarter that we're in pretty good shape in relation to that. And this does tie back in large part when one considers looking at what the future level might be to the portfolio, which is currently at about $1.4 billion, it's about $1.350 billion, it's a portfolio that we have spoken about very frequently in the past. And one of the characteristics of this portfolio is that it's quite mature. We have within it -- a large portion of the portfolio is private equity partnerships that Tom was referring to earlier on and they are basically at a stage where the roll-off of the repayment of capital and the repayment of gains for investments that were made a number of years ago is fairly robust and steady at the moment. And so, although it's not something that you can use for a straight-line prediction, there is a relationship between this portfolio's gains and the health therein and the health of the private equity markets that you're seeing today. And as I say, the portfolio is fairly mature. And that's the reason why Tom's guidance in the fourth quarter was something that we thought was a good idea to point out to everyone, because we do have a fair idea of what's in this portfolio and we do disclose the overall level of profits in the portfolio in our disclosure.

It's important to provide that that, what, $770 million of total profits in the quarter, and with this number being at $132 million, it's a pretty important part of the overall contribution to earnings.

Do you mind re-queuing? We've probably have...

I'm done. I'm done.

Thanks, you can come back at the end.

Ian de Verteuil, BMO Capital Markets.

Thanks. Tom, just to make sure I understand what's going on in Retail Markets, the $350 million of earnings this quarter, I'm trying to understand how much of the bump over Q4 and over the previous year was FirstCaribbean. And all I have done is say that FirstCaribbean makes about US$45 million a quarter, and you have stepped up an extra, let's say, 40% of it and you have picked up one month of that. So my guess is it added about $6 million in the quarter. This is the fourth quarter and this is the same quarter a year ago. Is that right?

Ian, the numbers from FirstCaribbean have not been disclosed. They are coming out end of next week, but if you were simply to look at run rates from last year, which is what I hear you saying you've done, that would not be too far away strictly using the run rates. I would tell you though, and this is public information, the Q4 was a little lighter in respect of FirstCaribbean. But in terms of an average run rate, that number that you quoted is in the ballpark.

Okay. So as we go forward from here, you will consolidate 91%-92% for every quarter going forward now?

That's correct.

The unrealized securities gains, page 25, just to make sure I understand here, the $351 million, which is your difference between what will effectively be an amount that you can still run through your income statement should you decide to liquidate those various positions -- that doesn't include any estimate of the potential gains on the LPs, or does it?

Let's take it in steps. So for people referring to the supplementary pack, this is page 25. Ian is on the second slice of numbers under the heading Fair Value of Available For Sale Securities, and Ian is in the third column over, the fourth number down, you see $351 million. It's important to realize, that $351 million is the sum total of the four numbers above. The number immediately above -- $640 million -- is the unrealized gains -- quote-unquote -- for our securities portfolio, and that is the number that most people will focus on as it relates to Merchant Banking. It has a few other equity securities that don't reside in the Merchant Banking business. And it also doesn't include markups on private positions that don't have a market value. So one might argue, the real number is a little higher than that in the current market. That's the real equity number.

The way the accounting procedures work, we have to show unrealized gains or losses of debt, MBS and government debt, and you can see above the very large portfolio we have in our liquidity pools of government debt has unrealized losses of $318 million. We don't buy and sell those terribly actively, so I think it's fair to conclude that we're not going to see that hit the P&L quite as rapidly as the $640 million. And indeed over time, that number could change based on interest rates, but it will bleed into the P&L to the extent the coupons on those are lower than prevailing interest rates. And because rates have gone up, the fair value of those have gone down. That's not to say that we are $300 million off in those, because often, those are hedging other positions that are above fair value. But, Ian, to make a long story short, $640 million is the number that we have focused on as it relates to Merchant Banking.

So the $640 million, that's certainly post the liquidation of Global Payments and stuff like that; it's a pretty high number. Why would you would still be directing to -- I think it was $50 million a quarter of securities gains? The private equity world has just been on fire here, you know, even since the close of the quarter. Why wouldn't we have several more quarters that looked like this on securities gains?

Ian, I will have to let you and others make a judgment on that. We have gone about as far as we're comfortable with guiding that the last couple of quarters feel a little high. But having said that, $77 million of revenue in Merchant Banking for one quarter, the words we have used would lead one to conclude that we're not inclined to annualize that. So you pick a number on a per annum basis and contrast that with the aggregate $640 million. And recognizing, we're not going to be divesting all of this in the next couple of years, but I don't think the $640 million is out of line with the wording we've used on guidance, recognizing this is like a four- to five- to six-year or more process.

Thank you very much.

Michael Goldberg, Desjardins Securities.

Thanks a lot. Maybe first to pick up on Ian's question a little bit further. Looking a little bit further up on page 25 at the change in unrealized gains on other assets, and that is down from $374 million at the end of the year. Is that because of the reclassification of those gains realized and unrealized into -- now, you're just including them in all investment gains?

The short answer, Michael, is yes, but the longer answer probably merits a discussion off-line. Financial instruments as a policy is quite complex, and there's lots of interaction among the lines. But the $640 million number I think from a value point of view is the number to focus on.

Right, but previously I guess going back a quarter, it would have been the sum of the $300 million plus the $374 million.

Yes, in that vicinity, and we also had the TSX, which had a hedge on it as well, so you would have to account for that as we showed in the footnotes. But that's more less in the right ballpark.

Let me turn now to just a couple of other questions on FirstCaribbean. How much did they actually add to personal non-term deposits on consolidation, and how much did they add to risk-weighted assets?

Does anyone have that right at hand, or should we come back to that? Why don't you ask us another question, Michael, we will come back to that.

My last one is about the $43 million financial instruments revenue. None of the other banks that have reported so far had a line item like that, and I'm just wondering, is it fair to treat this revenue item as being in substance like trading revenue for the most part?

Michael, it was classified as trading revenue as I think Steve may have mentioned in his comments in the past. This is largely revenue from our very strong real estate finance and securitization business in the U.S. Under the new FI rules, we have to classify it this way.

How come nobody else has to do that?

Nobody else has this business amongst the Canadian banks. We are unique amongst the Canadians with this business.

Okay, so it is fair to treat it as in substance being the equivalent of trading revenue?

Michael, that's what I was about to say. Yes on the basis of that's how it has always been treated. I actually view it more akin to underwriting fees, because the bulk of that business is packaging up securities and then divesting them into CLO vehicles. To me, that feels like underwriting revenue, but you can call it trading, because that's the way the accounting rules, up until this quarter, have required us to call it.

Has anybody found those numbers on FirstCaribbean?

Those numbers will be disclosed by FirstCaribbean when they make their public disclosure, and we're in this awkward period for a week, so we will be able to have a more fulsome discussion on that what they make their disclosure.

Okay, great. Thanks a lot.

Mario Mendonca, Genuity Capital Markets.

Good afternoon. Gerry, when you referred to Retail revenue growth approaching industry average, you're not making any adjustments for FirstCaribbean I suppose. FirstCaribbean is implicit in your thinking when you referred to Retail revenue growth approaching industry average -- is that true?

What I have been talking -- the Retail revenue growth approaching industry that I stated today is on the same basis that I have used in the past quarters, and that is our Canadian retail operations, is what I have been referring to because I'm associating the revenue growth causally with some of the actions that we've been discussing in terms of our Canadian operations. So I am not adding in FirstCaribbean incremental revenue in order to get to my assertion that we'll approach industry averages -- I mean apples to apples.

Okay. And can you give us a sense for what you think is average?

Well, the numbers that have been reported over the course of the last couple of years have varied depending upon which banks you were looking at, and I think that the sustainable industry growth rates that you will see over the next few years are what I've referred to in the past, which would be in the low-single digits. But if the industry was growing at a higher pace than that on a sustained basis, then I would think that our performance would be consistent with that performance because it would mean that we had a continued healthy environment and very, very robust credit growth environment, similar to what we have today. I actually expect there will be some moderation in that regard and that what we'll be looking at in terms of sustainable industry level would be more mid-single digits with a sight bias to the lower side.

And will you help us going forward in understanding the contribution FirstCaribbean is making to your revenue growth?

The thing that we are dealing with at the moment is this complexity about the reporting timing of FirstCaribbean, so it makes things a little bit awkward, but we will, either in this forum or in the various other forums where we present, be willing to treat the historic numbers and to talk about the growth rate of FirstCaribbean independent from the growth rate of our retail business. Once we're past reporting periods, we will be able to look back and talk to you about that.

I see. And a question for Steve McGirr. Last quarter, there was a series of questions about your PCLs guidance, and I can totally understand that your guidance, the 50 to 65, is over-the-cycle guidance. This quarter, you seem to be a little bit more specific in suggesting that you get to the bottom end of the range over the next couple of quarters, and that just sounded different to me. So you're at 36 or so this quarter, close to the bottom end; that is a material increase over the next couple of quarters. Am I my mischaracterizing what you suggested?

You're absolutely right that we spent a lot of time trying to say exactly -- or what exactly to say, but let me take another stab at it. 50 to 65 we think is a reasonable through-the-cycle; i.e., through-the-credit-cycle target for loan losses. We have been in net recoveries for three years or more and we have, in our business and government portfolio especially, we will move up to expected losses and that will move us up closer to the 50 to 65 range. But, clearly, we're well under that now and recoveries are an interesting timing phenomena because they are lumpy and I could find myself in a position where we have still a substantial recovery next quarter or the quarter after that which impacts on the numbers. So what I was meaning to convey is I think over the cycle, 50 to 65 basis points is reasonable. I'm acknowledging that we're well below that now and I'm also telegraphing that we will likely see us moving up towards that and I didn't think it was credible to say, as we've said before, that we would be at the bottom end of that. So we changed our language to say we thought we'd trend up towards the 50 to 65.

I should also say that, notwithstanding that recoveries are lumpy and sometimes we don't have perfect visibility on them, given what we see now, we don't see much out there that is in effect changing the credit quality. So there's nothing out there that I'm telegraphing that is negative. We continue to see credit markets steady as she goes, and it's conceivable that we might be well under that 50 to 65 for some number of quarters. And there is nothing there that I'm seeing that I could point to specifically that would create a different view.

And I'm just going to repeat that just for my own understanding, and tell me if I have it right. You see it trending up toward the 50 to 60 over the next few quarters on the presumption that reversals and recoveries will slow -- is that fair?

That's fair, and I think from the point of view of giving the guidance on the through-the-cycle target, you have to make the presumption that recoveries will slow.

And even up with the next few quarters?

Yes.

Thank you very much.

Brad Smith, Blackmont Capital.

Thanks very much. Gerry, just a quick question with respect to the dividend. I am wondering about the frequency of review. Are we back at a semi-annual frequency here, or can you give me any clarity on that?

As we've stated in our scorecard and fairly consistently, our target is 40% to 50% as a payout level of our earnings, and we will review in the context of our ongoing earnings and where we are within our target range. So the first thing that's very important is, we do to review this on an ongoing basis and it's the consistency of the dividend versus our overall earnings that is the key determining factor. If we're at the lower end of our range or below the lower end of our range, obviously we have a scorecard. It's one that we've said that we're committed to, and therefore that would encourage a more frequent level of review if we were at a lower level -- at the lower end of the range or below the lower end of the range.

What I also have said and I said it this morning at our Annual General Meeting, is that we are going to be reviewing the dividend this year for further increases. So there will be an ongoing review of it in the fashion that I've just described, but particularly this year, we will be reviewing, and looking at another increase at some point this year because at the current time, we are very much still at the lower end of our range.

Right. So just to be clear, the fact that you have increased your dividend this quarter does not preclude you from increasing it again next quarter?

We are not precluded from that, but all that I have said is that we're going to review it throughout the year. So I think that review is something that makes it possible, but we have not particularly focused on next quarter in terms of our disclosure.

Thank you very much.

Jim Bantis, Credit Suisse.

Hi, just a couple of questions. Just, Tom, to focus back on that page 3, $43 million line item, I just want to understand, in the past, that was being reported as a net trading revenue?

Correct.

-- which was part of page 9, if I looked at the net trading numbers. So if I look at Q1 '06 and I'm comparing trading revenues $184 million versus Q1 '06 of $198 million, the $198 million included similar revenues which you have kind of classified as underwriting fees for real estate securitization, just to be explicit about it.

You've put a degree of precision on there that and I'm not sure is correct. The real estate business has revenue that varies from quarter to quarter. Where we had revenue, it has been called trading up until this quarter. I'm not suggesting that you were inferring that there was a similar amount in each of those quarters, but it varies from quarter to quarter. This is the first quarter where it has been explicitly stated.

Thank you. My next question is Retail Banking and looking at the sequential increases in terms of provisions, and I wanted to get a sense if any of the increase came from FirstCaribbean, going from $132 million to $153 million.

It was very, very minor; infinitesimal.

Okay, so following that up then, the amount of increase seems fairly substantial when you -- I guess just trying to reconcile your comments earlier, Steve, with an increase in Credit Card volumes. It didn't look like the Credit Card business increased as dramatic as what maybe the provisioning did. Can you help me through that?

Well, it was for two reasons; first of all, the Credit Card business, and volumes went up and there is a cost of doing business in the Credit Card business, and as your volumes go up, you're going to get commensurate notional loss rates. And then, there was -- we had reversals and recoveries in Small Business and Agriculture, which we didn't have this quarter. So those are the two reasons.

Okay, thanks very much. Tom just as an observation, it's a shame that the quality of the results are being not discussed but more on accounting.

Say that again, Jim, I missed that.

It's just an observation that, at this conference call, that the number of the questions are accounting-related, as opposed to focusing on the quality of the results.

And I think you're seeing that in some of the other calls as well, I think. The new financial instruments policy is quite complicated, and whenever you get realignments of revenue, that is I guess the result. So we certainly tried through the day for those of you that have called in to help articulate that, and we are certainly willing tonight and tomorrow to provide more. But this is about the biggest change in accounting policy that we have seen in the last four or five years, and anything we can do to help you understand how these numbers compare to previous years, we're certainly willing to do.

Darko Mihelic, CIBC World Markets.

Great, thank you. I almost hate to do it, Tom, but I'm going to refer you back to page 25 of the supplemental. With respect to the asset mortgage-backed securities, your amortized cost and fair value is at about $1.7 billion. Previous quarter, it was much higher, somewhere around $6.5 billion. Is that just another accounting adjustment that I shouldn't be looking at too seriously?

Darko, where exactly are you on 25?

25 -- Fair Value of Available For Sale Investment Securities -- Asset Mortgage-Backed Securities, $1.7 billion; and last quarter, it was $6.5 billion.

Does anybody have that answer close at hand, or should we come back? Well, it's not shown here, because all of the other numbers on this -- .

Right, no, I'm just looking at the previous results.

Yes, you have last quarter's results. We'll come back to you on that, Darko.

That's fair, thanks. Maybe just one last question, maybe for Gerry. What's you view on stock splits?

Our focus in terms of our capital picture, share splits and capital deployment and that sort of thing is to at the moment focus on what we have in our scorecard which pertains to our dividend. Our view of our dividend range that we have and trying to make sure that we stick with the targets that we have in terms of dividend payout was our focus this quarter because we believe that that is a more substantive shareholder issue than stock splits. And so that's where we have been putting our focus.

Okay, fair enough. Thank you.

Ian de Verteuil, BMO Capital Markets.

I guess the same question, I will try to ask it a different way. You know, I would have thought this quarter, the Bank would have looked at buybacks as well. Tier 1, I think we generally had been sensitized to Tier 1 coming down to sort of 9%. I think we had thought 150 bps of Tier 1 off because of FirstCaribbean. So in my mind, I thought it was 9, and here we are at 9.6. Your payout is very low as a percent of ongoing earnings. There is no comment on buybacks. Is there something that's stopping you from being more aggressive on either dividends or buybacks at this stage of the game?

Ian, there's nothing in particular that's stopping us. We have indicated that we are proceeding in terms of all of these issues step-by-step. We had said that we were going to conclude FirstCaribbean. We concluded FirstCaribbean in fact at the beginning of the new quarter and we were fortunate enough to actually receive some extra shares as a result of the minority follow-up offer. So, we were very pleased that we were able to place another portion of our capital in that investment opportunity, which brought us up to 91.5%. The shareholder issue around dividends is one that we have made it very clear that we have a commitment to be within that range of 40% to 50%. We thought that the 10% increase this quarter was the right level and we will review and we've made it very clear that our dividend level is a topic of ongoing review, and we're very aware that we are at the low end of our range, and so -- and, we have also said we are reviewing it with increases in mind.

So I think we have a very clear path that we have outlined in terms of our dividend policy. In the area of excess capital, we do have the extra portion of FirstCaribbean that we're still going to be paying for, and of course that will result in incremental earnings that will show up in the same quarter where we're paying for it. And we also have as our first priority, what we have indicated to the marketplace is that investment in our core businesses, and we do believe that there is some opportunity, at a very positive risk-reward level, to invest within our core businesses. All that having been said, as we indicated in the fourth quarter of last year, issues such as buyback are something that will be reviewed with the Board during the course of 2007. Our priority has been, however, on the dividend increase first.

I guess I would just close by saying, I certainly hear from a lot of your shareholders a desire, and of all bank shareholders, to receive more of the ongoing earnings of the bank on a regular basis. So last year, the average bank returned 55% of earnings to shareholders through dividends and buybacks, and I know last year was a year of tremendous transition for you, but I just sort of make that comment to you. Thanks.

Thank you, Ian.

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

Thanks, everyone, for joining us. I know there's a few follow-ups we've promised, so we will get back to you on those questions. Thank you, everyone, and have a good day.