Canadian Imperial Bank of Commerce (CM) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the CIBC second-quarter results conference call. Please be advised that this call is being recorded. (OPERATOR INSTRUCTIONS). 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 this afternoon. The format for our meeting will be remarks from our senior management team on CIBC's 2007 second-quarter results released this morning, followed by a question and answer period. The presentation slides are available in the Investor Relations section at CIBC.com, and a replay of the audio webcast will be available on our website later this evening.

Before we begin, let me remind you as usual that anyone speaking on behalf of CIBC on today's call may make forward-looking statements that are subject to a variety of risks and uncertainties. Such material factors or assumptions may be applied, which could cause CIBC's actual results in a future period 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.

With that let me now turn the meeting over to CIBC's President and Chief Executive Officer, Gerry McCaughey.

Thank you, John. Good afternoon and thank you for joining us. Let me remind you that my remarks today may include forward-looking information. Our actual results could differ materially from what is discussed here this afternoon.

Today I will review our second-quarter results we announced this morning, as well as CIBC's progress against our priorities. Following my remarks, our Chief Financial Officer Tom Woods will provide a financial overview. Ken Kilgour, our Chief Risk Officer, will then provide the risk overview. Following Ken's remarks, Sonia Baxendale, Head of Retail Markets, and Brian Shaw, Head of World Markets, will comment on the performance of their businesses during the quarter.

CIBC reported net income for the second quarter of $807 million, up from $585 million for the same period a year ago. Cash earnings per share were $2.29, a 39% increase from $1.65 a year ago. Return on equity for the quarter was 28.9%. Our results this quarter were in line with our goals 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 second quarter of $583 million, up 35% from the same period last year. Volume growth, taxes and our acquisition of a controlling interest in FirstCaribbean International Bank contributed to this result.

Our retail business continues to perform well overall. During the quarter we noted further marketshare increases in key areas such as deposits, GICs and mortgages. Our credit card business is the market leader in Canada and continues to grow in line with our expectations. Credit card loans in Canada were up 3.2% quarter-over-quarter and 10.6% from a year ago.

In the area of personal lending, our focus on credit quality has been reflected in improved loan-loss performance over the past year but lower revenue growth than the market. As the impact of the actions we've taken to improve our risk profile run their course, we expect our personal lending business to resume overall revenue growth rates converging on industry levels.

CIBC World Markets reported net income of $194 million, up 76% from the second quarter of 2006. This solid performance reflects the broad based strength of our franchise along with continued balance and discipline in the area of risk.

As I said, Sonia and Brian will provide more details on their businesses in a few minutes.

CIBC's second priority is to improve productivity. Our strategic objective is to have a median efficiency ratio amongst the major Canadian banks. We intend to achieve this through a balanced approach of consistent investment in our core businesses and continued expense discipline. We made further progress in Q2 towards achieving that goal with our cash efficiency ratio improving to 63.2% from 64.9% a year ago.

Our third priority is balance sheet strength and capital usage. At the end of the second quarter, our Tier 1 capital ratio was 9.5% above our target of 8.5%. On February 2, CIBC acquired an additional 8.5% of FirstCaribbean at a cost of $212 million US. This purchase brings our total ownership of FirstCaribbean to 91.5%.

Our first priority in the area of capital usage is to invest in our core businesses to sustain their strength and market position. After funding our internal needs, we will balance other capital deployment opportunities.

At the end of April, we announced plans to buy back up to 10 million shares or approximately 3% of our outstanding common shares to be completed by October 31. Since that announcement, we are on track having purchased 1.3 million shares.

Dividends are also an important part of our capital management plan. Our dividend payout ratio for the second quarter was 33.7%, which is below our target range of 40 to 50%, and therefore, we will review our dividend.

CIBC has achieved solid financial results during the first half of 2007. Our objective is to deliver consistent and sustainable performance over the long-term. By staying focused on our business priorities, we intend to build on our progress throughout the rest of this year.

I will now turn the meeting over to Tom Woods for his financial overview. Tom.

Thanks, Gerry, and good afternoon, everybody. My comments as well include forward-looking statements. Actual results could differ materially. Slide five, the summary, looks at the quarter in brief. Cash EPS, $2.29. Cash EPS excluding a large tax recovery and two other items of note was $1.95. We continue to have a very strong return on equity this year, this quarter rather, 28.9%. Cash efficiency ratio is 63.2%. Tier 1 capital, as Gerry said, of 9.5%, and to date we've bought back 1.3 million of our 10 million share objective for the balance of this fiscal year.

Slide 11, Retail Markets revenue was just under $2.2 billion, up almost 11% from Q2 last year when FirstCaribbean was equity accounted. Excluding FirstCaribbean revenue was up 4% on the year in Retail Markets.

Slide 13, Personal and Small-Business Banking revenue was down versus Q1 as expected due to three fewer days but up 2.2% versus Q2 last year as deposit balances were up 4.5% due in part to the continued success of our bonus savings account. Q3 revenue should be higher due to the longer quarter and higher balances.

Slide 15, Retail Brokerage had another strong quarter, though down marginally from Q1 due to the lower new issuer activity, which more than offset continued growth in annuitized revenue. Full-service brokerage AUA surpassed $120 billion, up 4.9% from Q2 last year. Q3 is off to a good start, but revenue for the full quarter will likely be down somewhat from Q2 because activity in July is typically lower.

Slide 16, current revenue was down versus Q1 due to the shorter quarter and lower seasonal purchase volumes but up almost 7% from Q2 last year. Managed balances were up 10.6% from a year ago. New account growth continues to be strong, helped by the Mileage Multiplier feature on Aerogold launched in December. Although average product APR declined marginally from Q2, our revolve rate was even higher than seasonal norms. We expect higher cards revenue in Q3.

Slide 17, Mortgages and Personal Lending revenue was down versus Q1, due mainly to the short quarter but up from Q2 last year. Residential manage balances were up 10% on the year. Mortgage spreads have come off a bit in recent months due to more competitive spring pricing and a continued gradual shift back to lower spread fixed-rate product.

Personal loan balances were up 3% on the year with secured up 23% and unsecured down 18. Personal loan spreads were lower due to the mix shift from unsecured to secured. New personal loan and line originations were higher in Q2 versus Q1. We expect moderately higher revenue and mortgage in personal lending in Q3.

Slide 18, FirstCaribbean's Q2 revenue reflects the first full quarter of consolidation in our accounts. We began consolidating in January, so the $15 million revenue you see under Q1 is FirstCaribbean's revenue only for the month of January. Prior to January, we equity accounted FirstCaribbean, and therefore, the revenue we booked prior to this time reflected our share of its net income. This is included under the other line which is immediately below.

Slide 20, Retail Markets net income was $583 million or $503 million, excluding the $80 million tax recovery. Q2 a year ago also had a tax recovery, making the comparable earnings number then $397 million.

Slide 21, turning now to World Markets, revenue $726 million, down from Q1 but well up from 2006.

Slide 23, in Capital Markets revenue of $351 million was down from the strong Q1 and back to the levels we saw in the three prior quarters. Debt, which represents just over a third of this number, was well down from Q1 and also down from 2006 levels. Our foreign exchange and US and Canadian debt distribution businesses had good quarters, but structured finance, interest rate derivatives and fixed-income trading were lower.

Equities had a good quarter, down from the strong Q1 but up from 2006 levels. Proprietary trading and commodities were down marginally from Q1. Equities was up marginally, and Canadian Equities was also up, excluding the $26 million gain we had in Q1 on the sale of our TSX shares.

One month into Q3 debt is trending slightly higher than Q2, but it appears equities will be down somewhat.

Slide 24, Investment Banking and Credit Products had a strong quarter with revenue of $247 million, the highest since Q2 of 2005. Our US Real Estate Finance business had a record quarter, and Canadian Investment Banking had a good quarter as well.

Pipelines in M&A and credit are very good, but a new issue equities and real estate are down from Q2 levels. Overall current prospects point to slightly higher investment banking and credit products revenue in the third quarter.

Slide 25, Merchant Banking, had revenue of $85 million, up $77 million -- up from $77 million in Q1. We had gains and distributions of $107 million, offset in part by write-downs and funding costs of $22 million. About three-quarters of the gains in distributions were from fund investments which had high levels of divestitures again this quarter. Although the market continues to be very active, we expect revenue here in the second half of the year to be down from the first half.

Slide 26, World Markets net income was $194 million, just under the run-rate for the last three-quarters and well up from Q2 a year ago.

Slide 9, turning now to our consolidated expenses, which were $1.976 billion in Q2. Excluding FirstCaribbean expenses were $1.88 billion, below the Q4 2006 levels of $1.892 billion, but in line when you adjust for the shorter quarter.

Excluding FirstCaribbean, expenses in Q2 were down $33 million from Q1, about half due to the shorter quarter and half due to lower incentive compensation and litigation more than offsetting higher advertising and communications. Our objective continues to be to keep the absolute level of expenses in 2007 at or below our Q4 2006 run-rate adjusted for FirstCaribbean. Ken.

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

During the next few minutes, I will provide a brief overview of risk and capital for Q2 with a focus on credit provision, value at risk in our trading portfolios and a discussion of CIBC's capital strengths.

Starting on slide 52, specific loan loss provisions totaled $190 million in the second quarter. This represents 47 basis points of net loans and acceptances. As we had projected, loan losses have begun to trend upward toward the bottom end of our through the cycle target of 50 to 65 basis points.

A $47 million increase in specific provisions versus Q1 '07 consists of first, a $14 million increase in World Markets specific provisions. Losses in the World Markets loan portfolio are low and stable; however, as expected recoveries are abating. As a result, we recorded specific provisions of $4 million in the quarter. And second, a $33 million increase in Retail Markets specific provisions. I will speak to this quarter-over-quarter variance in more detail in a moment. Net impaired loans are up $3 million or less than 1% in the quarter. Finally, the general allowance decreased $26 million in the second quarter. Steady overall credit portfolio performance as evidenced by stable growth and net impaired loan imbalances -- loan balances and the continued maturation of the discontinued student loan portfolio combine to drive the decline in the general allowance.

Slide 53 provides a more detailed breakdown of the quarter-over-quarter change in specific provisions. As I noted a moment ago, lower recoveries drove a $14 million increase in World Markets provisions. Retail Markets loan loss expense was $186 million in the quarter, up $33 million from Q1 '07. The FirstCaribbean portfolio was consolidated for all three months of Q2 as opposed to one month in Q1, resulting in a $5 million increase. This portfolio is performing as expected.

Credit cards loan losses increased by $11 million this quarter. The portfolio is growing. Volumes are up $1.1 billion year-over-year on a managed basis or 21% on an owned basis. Additionally in Q2 we enhanced our methodology for determining the balance sheet allowance for this portfolio. This resulted in a $5 million increase in provisions, which we would not expect to recur balance of year.

Provisions in our personal loan portfolio were up $4 million. The unsecured personal lending portfolio continued its more stable performance this quarter. This improvement continued to result in reduced specific allowance reserve requirements this quarter, albeit a lower reduction than the prior quarter. Small-business provisions increased $11 million in the quarter.

Similar to our unsecured loan portfolio, there are certain vintages of our scored small-business portfolio where we have experienced loss volatility. This volatility, combined with seasonality, drove higher provisions in Q2. We expect delinquencies in this portfolio to improve balance of year.

Turning to market risk, slide 54 displays Q2 daily trading revenues against the value at risk in our trading portfolio. Risk levels averaged $9.2 million, slightly above the levels of Q1.

Moving next to capital strength on slide 55, the Tier 1 ratio declined marginally in Q2. Internal capital generation was more than offset by risk weighted asset growth and now increased ownership of FirstCaribbean. At 9.5% the Tier 1 ratio is well above our 8.5% target.

This concludes my remarks. I will now turn the proceedings over to Sonia Baxendale.

Thank you, Ken. As Tom described earlier, Retail Markets experienced solid business growth in the second quarter. I would like to touch on a few key business highlights that supported our performance this quarter.

Our credit card portfolio is the largest in Canada and is continuing solid growth with credit card balances increasing year-over-year. Our card growth has been supported by two recent initiatives.

First, our No Fee Platinum Visa Card, which we launched in the first quarter, has been effective in attracting new cardholders to CIBC in a highly competitive market.

Second, the recent reward enhancements we made to our market leading Aerogold card have increased both existing cardholder usage, as well as attracted new cardholders. I'm referring to the Aerogold Mileage Multiplier, which enables clients to earn 1.5 points for every dollar spent on gas, groceries and drugstore purchases. This is proving to be an attractive value proposition to reward focused Canadians as they can earn more points faster through everyday purchases.

New accounts in our cards business were up substantially in the second quarter with Aerogold leading the way. In mortgages we had solid balances growth year-over-year and quarter-over-quarter. Our results this quarter are a result of increased focus in this area. We continue to support the business with strong marketing investments and have introduced 115 new mortgage specialists in the branch network. These initiatives combined with our strong alternate mortgage distribution channels are expected to result in continued mortgage balances growth in future quarters.

In lending, as we have stated previously, our focus to reduce risk in our unsecured portfolio has had an impact on revenue growth and market share. Secured lines and loans balances continue to have strong growth, while unsecured lines and loans were down as expected.

In unsecured lending we have refined our adjudication criteria and are focusing on existing clients with various acquisitions and accounts management programs in place to grow the portfolio.

In deposits we enhanced our bonus savings account by simplifying interest rate tiers and attracting new assets with a special introductory rate offer. Balances and market share were both up during the quarter. And we continued strong growth in GICs.

We have improved our overall mutual fund performance this quarter. We were the industry leader in top-ranked funds by Morningstar. As of April, CIBC has 21 4 and 5 star-rated funds, the highest in the industry. And in the area of distribution, we continued to invest in increased accessibility for our clients. As we have stated previously, we have plans to renovate, relocate and open 70 branches in priority high-growth markets across the country over five years. 17 of these branch projects are currently underway as part of this initiative.

In the area of ABMs, we completed our multiyear upgrade to our 3,800 ABMs across Canada, and we received recognition as the number one bank website in an independent industry survey. We will continue to focus on initiatives in key growth segments, including small-business and newcomers to Canada and will leverage tools such as our Financial HealthCheck to meet more of our clients' financial needs.

I'm pleased to announce that this month we hit a key milestone in our advisory strategy, having completed 1 million financial health checks for our clients. I will now turn over to Brian Shaw.

Thank you. I will provide an update on strategic priorities in CIBC World Markets, as well as comment on business trends affecting our outlook.

We have three priorities for '07. First, invest in our core Canadian business to build franchise value. Second, position the US region for sustained profitability. And third, combine expertise in select global markets with access to our North American platform.

A key thrust for achieving these three regional priorities is to focus on enhanced capabilities to service emerging client groups and to participate in structured transactions. In the second quarter, we made progress against each of these priorities.

First priority, Canada. We saw strong volumes in Canadian equity new issues. We participated in 85 offerings, including key leads on large offerings for Fortis at $1.1 billion and Enbridge in excess of $500 million and EnerPlus in excess of $200 million. We also advised Shell Canada on the minority buy-in by its parent, Royal Dutch Shell.

Our Canadian M&A revenue was down slightly from the first quarter, mainly due to the timing of deal completion. We are well positioned to benefit from strong activity in the M&A market in Canada during the remainder of '07.

In the debt markets, we saw the widening of credit spreads for some Canadian bond issuers as prospects for leveraged buyouts in Canada increased. In Q2 we also saw an increase in the sale of retail structured products, an area where we want to continue to develop our leadership position in the marketplace.

One final note on Canada. In April we opened an investment banking office in Winnipeg to service Manitoba and Saskatchewan. This extends our commitment and our footprint for our clients in these markets.

Second priority, the United States. Here our goal is to sustain profitability, and in Q2 we continue to achieve that plan. The US was profitable in the quarter and showed solid progress. We had particularly strong results from our Real Estate Finance and Merchant Banking Businesses.

In Real Estate Finance, we acted as the co-lead manager with JP Morgan on a $3.9 billion CMBS offering. In Merchant Banking we realized gains in our direct investing activities, as well as strength in Third-Party Private Equity Fund distributions. This performance in the first half of the year is stronger than we anticipate on a normal run-rate basis.

That said, current and near-term conditions continue to be conducive to investment performance in the portfolio.

In the area of credit structuring, our Q2 results, while generating positive revenue, were below the level of recent quarters. This reflects the slowdown or congestion in some parts of the structured credit markets pipeline, particularly in the US.

Third priority, select global markets. Internationally we continue to leverage our North American platform to support our European, Asian and Israeli businesses. In China, in addition to our role in mining and resources, we are focused on investment banking opportunities across four sectors -- healthcare, alternative energy, education and business services. This strategy has delivered some good deal momentum in '07. Year-to-date we have participated in 13 equity underwriting transactions for Chinese corporations issuing in North America, including eight in Q2 alone. This includes our first lead managed transaction, a $259 million US deal for JA Solar, one of our alternative energy clients. In all of '06, we participated in a total of six transactions from China, so we are off to a good start this year.

That's a brief summary of the progress we have been making on our three priorities. Now onto business trends. I will finish with some observations on our business in the marketplace overall.

First, the current environment is characterized by very liquid credit markets and covenant-light credit structures. When combined with large pools of recently raised private equity capital, these conditions should continue to fuel deal flow that includes M&A and Capital Markets transactions. While the credit cycle should remain favourable in the near-term, the current low level of corporate default rates is likely not sustainable over the longer-term.

We also expect the strong level of equity and new issue activity in Q2 will not likely continue into the third and fourth quarters.

As I mentioned earlier, we continue to focus on our capability in retail structured products. As income trust activity declines, this area is one source of yield in a market that continues to be receptive to yield. We are a leader in this area, and we want to continue to develop our capability in Canada which leverages the CIBC distribution network.

Finally, in the debt business, credit structuring is an area of growing importance. Having expertise in this activity will positively impact other parts of our debt and credit businesses. We view our capability in this area as a core competency that will continue to develop and evolve.

With that, I will turn the meeting back over to John.

Thank you, Brian. Operator, we will open up the phones for questions.

(OPERATOR INSTRUCTIONS). Steve Cawley, TD Newcrest.

I think you did a fair job of allowing us to piece together what FirstCaribbean did in quarter, but maybe just to help me a little more, does around a $50 million profit number sound right?

Yes, Steve, the best way to start is to think of it as benefiting Q2, about $0.05 more than Q1. That is the starting point. The contribution to CIBC, $50 million is a good number. We look at it at around $38 million because we charge the cost of the goodwill and capital, and that compares with about $23 million in Q1.

Okay. If I was to look -- if I tried to exclude some of the FirstCaribbean numbers from the results in quarter, would I be right to say that the efficiency ratio did bump up a little bit within the retail bank, and that is because I believe you say in the package due to advertising? And is that an advertising spend that you expect to continue in future periods?

There is a couple of questions there. We will come back -- I think the answer is not correct that the efficiency ratio went up ex-FirstCaribbean. I don't have that number in front of me, so we will do that and come back.

Sonia, do you want to comment on the outlook for advertising through the rest of the year?

There is a slight bit of seasonality in the advertising spend. So it is a little higher in Q2. But it will be -- the advertising spend will remain higher than it was in Q1.

Right. And then on credit, I think you did a fair job of going through what caused the increase on the retail side of things. Again, and I apologize for being repetitive here, it is just I'm trying to make you guys more comparable to the other banks and trying to include FirstCaribbean. So on that note, it would be great to have the disclosures completely separate in future periods.

But I get a credit loss rate of 53 basis points for the Retail bank. If I exclude FirstCaribbean, which is I'm guessing about $6 billion in assets, I would get a PCL rate that is 55 basis points or even higher than that.

You noted a one-time item of $5 million in the period, but in general it sounds like you are at a -- you are basically talking to us like this is a more sustainable type number within the retail banking environment that we're in right now. Is that right?

Steve, going forward we would expect Retail Markets loan losses to remain at or slightly below these levels balance of year.

One last one for Sonia. In speaking to mortgage brokers, it sounds as if FirstLine is doing extremely well. It looks like a lot of mortgage brokers like dealing with you. If we were to then separate that and talk about the branches, can you talk about how the branches have been doing on the mortgage front? Are they growing their balances?

So, Steve, we are very happy with our FirstLine channel, and we have had some very good growth this year through the channel. As you know, the market is growing in aggregate quite aggressively.

In our branch channel as I have talked about before, we had both of bit of a mix issue in the latter part of last year, as well as in the period where we were very focused on unsecured lending, a little bit of a falloff in terms of our training and support in the overall mortgage area. So we have been building that up and have been seeing some significant improvements in our branch channel. And I would say the spring period we saw some good growth in our branch channel, and that is continuing in terms of our current pipeline.

Just to make sure that I understood what you said there, so let's say the balances would they be down year-on-year on the mortgage front in terms of originations?

No, they are not.

Jim Bantis, Credit Suisse.

I have got a few quick questions. There was a comment earlier about the retail revenue growth resuming to industry average. And when I think of industry average over the past couple of quarters of your large bank peers, it has been kind of 8% to 10% range. And when I back out FirstCaribbean on roughly a 3% to 4% for CIBC on a year-over-year basis, maybe, Sonia, you can let us know in terms of what product there is and what market share gains you expect to get to that 8% to 10% range in terms of retail revenue growth and perhaps the time period that you expect to get there?

It is Gerry here, and the comments -- I'm going to turn it over to Sonia in a minute, and she is going to talk about each specific area and the growth. But you had referenced my comment, so the first thing I wanted to do was to reiterate what I said, which was that as our issues in our unsecured lending run their course, we expect to converge on industry growth rates. So we are not making a statement that we're going to be at industry growth rates in the near-term. But we do have confidence that our growth rate is going to increase in the direction of industry growth rates. If industry growth rates remain where they are, we would expect the difference between industry and ourselves to narrow. Eventually we believe we will converge with the overall growth rate in the industry. But we have not said that we're going to grow at 8% to 10% in the near-term from a 4% base.

All that having been said, just before I turn it over to Sonia, the reason why we believe that that is something that is somewhat empirical is that our unsecured lending portfolio given our risk posture has actually seen volume decreases, and the size of our unsecured lending portfolio has changed sufficiently that we are able to foresee when the rate of those decreases will decline quite significantly. And the reason we can do that is it is a much smaller portfolio now than it was when we started the exercise. And when one removes the negative of a high spread portfolio shrinking, that convergence proceeds almost immediately.

So that is the nature of the comment that was made, is that we're going to converge on industry growth rates. And Sonia will tell you a little more about how we're going to do that in terms of growth rates and various products. But the diminution of the issue in unsecured lending alone will have a significant impact. Sonia?

Okay, Gerry. Thanks. So let me break it down in terms of product categories. Credit cards and mortgages, I would say that we are very comfortable with our growth rates in those businesses. We think they are quite strong, and we anticipate them continuing at similar pace throughout the year.

In the case of deposits and our GIC business, again we would also see them being at or about where they are right now. I would not expect any material changes there. Where we are very focused in terms of change is in our lending portfolio.

As we have talked about, we have had some good strong growth in secured lending. We would expect that to continue at current levels. We have still been challenged on our unsecured lending portfolio. With the changes that we have been making from an adjudication and originations perspective, we would expect gradual improvement in that portfolio in particular.

Okay. Thanks very much. I appreciate the clarification. I just wanted to circle back on the PCLs on the retail side. I'm just looking back at the second half of 2006 in terms of the absolute provision levels, and the reason I go back there is because I do remember comments on the conference call saying that the run-rate at the end of 2006 was, as you had mentioned just earlier, was relatively sustainable at or just below these levels. So like Steve and perhaps other investors we are kind of surprised at the tick-up back up to the $180 million rate. Outside of small business or commercial, has there been any other portfolio that has been acting irregularly this past quarter?

No, there has not.

Okay. I appreciate that then. So I guess we will assume as you've indicated $180 million is near or above the run-rate.

The last question I have got is I think it is slide 54 looking at your trading revenue, there was a spike this quarter, a sizable spike in late April, and I just wanted to know what that related to? It is on page 27, slide 54.

The large positive revenue day in late March was due primarily to the booking of revenues on the closing of a securitization within our structured credit trading business.

So nothing unusual in that regard, just part of the normal day to day business?

Is that a question, Jim?

Sorry. Yes, I just wanted to confirm that was just the normal part of the day to day business related to that segment? That is the question.

Yes.

Nothing adverse? Okay. Thanks very much. I will requeue.

Andre Hardy, RBC Capital Markets.

I'm sorry but I want to go back to credit, slide 58. You alluded to unusual items about $5 million driving some of the increase on the credit card side. But even if you take that out, loss rates are increasing.

What is happening there? Is it a shift toward more owned than managed, or is it you targeting higher risk clients, or is it different strata of risk seeing a worsening experience? So that is my first question.

Secondly, in the sub-pack, I think, Brian Shaw, you alluded to the other trading being driven by credit structuring being slower. Is that something that you can already see improving, or does Q3 still look tough?

And the last question I have is for Sonia. It relates to unsecured lending. Again, we had an 18% decline in the portfolio. What would the sequential number have been as opposed to the year-over-year number?

As to the credit card question, the credit card loan losses increased $11 million in the quarter due to a combination of volume growth and a methodology change. The impact of the methodology change, which contributed $5 million of the increase, will not reoccur balance of year.

What I'm trying to -- okay. So you're telling me the methodology change is driving all of the increase in loss ratios? I'm not asking about the absolute losses. I'm talking about the loss ratio.

Well, absent the $5 million, the loss rate would have been 3.94%.

That is helpful. Thank you.

Brad Smith, Blackmont Capital.

I just wanted to circle back. Tom, I think in your presentation you had mentioned expenses excluding FirstCaribbean as being down $33 million. I was just trying to figure out what the FirstCaribbean expense run was. And I guess I was wondering if you can clarify it, I got something in the mid 80 range. But --

I will give you this answer, and then we did not get to Jim's I guess last two questions. Oh, Andre. I'm sorry, Andre.

Expenses in Q2 on our books for FirstCaribbean were about $104 million. That includes a little bit of allocation that we book, and you can map that from their public results, which we have accelerated to come out today as well. In Q1 they were $35 million because that is just one month of FirstCaribbean consolidated.

So let's just pause there and go back to Andre's question. Who is going to do the first one? Brian?

I think you had asked a question with respect to credit structuring results. I did indicate our performance was slower in the quarter, albeit -- so basically what happened was that whole market segment was a little slower across the industry by virtue of some congestion in the pipeline in the US. It relates to US subprime issues that have been well-publicized.

But your question really was delta into Q3. I guess if we had a crystal ball and could forecast how that market would evolve, we could give you an answer. Early indications are the market is attending to get a little better and more normalized, and I think as Tom referenced in his comments, after the first month we are anticipating for Q3 a little better results in our debt business.

And I think your last question was for me, and you were looking for the sequential decrease or sequential change, and that is a decrease of 3%. So 3% is the sequential versus the 18% that Tom had originally referred to year-over-year.

So we have taken care I hope, Andre, of your comments. Brad, are you still on the line? Did you have a follow-up to your first question?

No, I think I'm good. I just wanted to get that one number. Thanks.

Mark Ciccerelli, Elliott.

I actually have two questions. The first is that we understand that in late 2006 your prop desk purchased a $330 million super senior tranche of a mezzanine CDO, which was collateralized by subprime US mortgages. The particular transaction was called Tricadia 2006-7. Given its mezzanine structure and the performance of 2006 vintage mortgages, it is not impossible that this kind of exposure could be a complete loss.

So my first question is, do you have other exposures like this, and if so how many transactions, what is the total exposure, and what is the magnitude of the mark-to-market loss that you recognize on these exposures in this first quarter or the second quarter?

And then my second question is, today's announced departure of Steve McGirr as Chief Risk Officer and the addition of Leslie Rahl a couple of days ago to the Board, would her expertise in structured securities have anything to do with your exposure to these mezzanine CDOs?

Let me start and make just a couple of observations. You referenced Tricadia. That is one of the names that we have been involved with in our credit structuring area. And you referenced some very specific information on very senior parts of a capital structure on a synthetic CDO.

So we have referenced that in the quarter. We were positive revenues in the business. We had slower revenues than prior quarters, and I guess we have also now referenced in response to Andre's question that the trendline is likely as seen now to be a little better.

I guess I would probably say to the extent we have exposure in this space it tends to be more synthetic than direct CDO exposure. We don't see this as a major revenue contributor currently to CIBC. We are fairly -- as I think I indicated in my earlier comments, we're actually looking to end value the credit structuring area of our capability. I guess I would just conclude by saying in summary our risks in this space is not at all major.

I guess my question is not so much to the revenue contribution but to the credit exposure. For example, on this Tricadia transaction, the super senior tranche is $330 million, and that could become a liability of CIBC where the referenced mortgage-backed securities to sell as seems possible given the performance of subprime in the US.

Well, I guess I would just make a couple of observations. First of all, to the extent that the US subprime market has been a featured topic in the financial press, I think if you look carefully, you will find that in the RMBS space, it has been pre-06 and post-06 deals that have fared better than '06 vintages. The one you reference is not an '06 vintage.

Secondly, the way we get to a Tricadia, is we amalgamate a variety of CDOs that are reasonably well rated, and the ultimate position we have is a highly rated security. So, as I said, we don't view this as a major credit item at all for us, and the results are very much normal course.

Okay. So my understanding was that deal priced December 22 of 2006, and therefore, the collateral was, in fact, kind of right in the second half of 2006.

Okay. What I will do after the call is I will send you what I have on the deal, which is a research report from a provider that somebody had sent me. So, as I say, it is not a major issue for us in either a revenue area but certainly not a major risk issue.

Okay. And Steven McGirr and Leslie Rahl, are they related to this particular business?

Neither of them are related to this business. In terms of Leslie Rahl, CIBC on an ongoing basis does renew its Board of Directors, and our board was at 16. The addition of Leslie brings us up to 17, and the search in terms of a new board member is a long-term search. It is something that when we're looking for Board members, that happens over an extended period of time, and there is a variety of elements that come into that type of search. We have a competency matrix for our Board of Directors, and in the normal course, we do try to make sure that the mix of the board has representatives with all areas in the competency matrix, including the areas of risk that Leslie is expert in.

So both of these items are unrelated, and Leslie's appointment is something that was the result of a search that went on for an extended period.

In the case of the restructuring of our treasury and risk group into separate recording lines, again that is a restructuring that we think is in line with the types of structures that are in place at many financial institutions, and we do believe that the structure is the right structure for CIBC and will enhance the focus in terms of our risk and our treasury areas by having a separate reporting line. And the restructuring is unrelated to the issues that you have highlighted.

Great. Okay. I'm sorry, you did not give a number on the total exposure of this kind. Is there a number available on that?

Which exposure are you referring to? I'm sorry.

For the mezzanine CDO kind of super senior mezzanine CDO exposure with an underlying subprime real estate collateral.

We will talk about our disclosure that we make in normal course.

Yes, we have not disclosed items like that, but what I would suggest is Brian and I will give you a call after this meeting and see if we can help.

Michael Goldberg, Desjardins Securities.

My question was asked and answered.

Mario Mendonca, Genuity Capital Markets.

Looking at the retail segment, Retail Markets. Operating leverage about 0.5, including FirstCaribbean. MPCL is up a little bit. You really sort of have to look at the tax rate. The tax rate adjusting for everything this quarter and last year does seem to have come down a fair bit, 23.8% versus 29% last year. And I guess I'm inclined to believe that is FirstCaribbean, but it seems a bit much to be solely FirstCaribbean. Is there anything else you can offer us in that respect?

Yes, it is largely FirstCaribbean. Also, it is a reflection of slightly better treasury performance which we allocate out to the businesses in line with their capital exposure. So that is a result of both. It is probably a little light this quarter in retail. Consolidated tax guidance you may have noticed we bumped down a point, again mainly due to FirstCaribbean but also a reflection of domain of various liquidity pools. So we were up until last quarter 21% to 24%. We have knocked that back to 20% to 23%.

Okay. But in retail you would say mostly FirstCaribbean, a little bit of the treasury stuff?

I mean it is not 50/50, but it is not 80/20. It is probably two-thirds, one-third.

FirstCaribbean being the two-thirds?

Yes, probably.

CIBC -- you provide a great understanding of your overall -- the global NIM, and you go through that in a lot of detail. You don't provide as much when you look at the retail segment, specifically Retail Markets. So when we do our own calculations or when I do my own calculation, it seems like it is up a fair bit.

But I guess what happened on the quarter is there was a lot of other sort of nonoperating type things that may have caused that margin to look a little better in Retail Markets. Things like the interest recoveries or the interest on the tax recoveries. Could you speak to what margins were like in retail specifically this quarter and perhaps highlight some of those items as well?

Yes, I will start and certainly Sonia can chip in. If you go to slide 45, this may be the slide you were referring. Maybe we have not been clear enough on this. But what we have attempted to do here is to, in fact, isolate the retail impact because we have excluded on the second last line trading assets.

So, in fact, we start with a consolidated reported NIM at the top, which is actually going up. But as you slice away the trading businesses, securitization, fixed assets and the impact of financial instruments accounting, the spreads actually went down this quarter for us, which is intuitive, in that we had slightly greater competition in the mortgage business and slightly lower spreads in our deposit business. The cards business partly offset that. Even though APRs were down, our revolve was up.

So bottom-line spreads did tighten a bit for us in retail.

So we can look at that bottom line there as mostly retail. I, frankly, never did because I thought there was a little more in wholesale than just trading. But you're saying that is a reasonable proxy for --?

Yes, you are right. If we slice out the wholesale loans, that would be a pure. In fact, we will think about doing that because it would give you a pure retail. But the trading assets are the biggest factor that complicates it.

So drilling down on that a little bit, you said competition mortgages, this is certainly not unique to CIBC. This is becoming a little bit more prevalent around the industry. Is there someone -- not someone, but could there be a bank specifically you can highlight that seems a little more aggressive? What is sort of driving this again? Because it seemed like it cooled off for a few quarters, and now we are back. The competition that is. Is there anything you can offer us?

I would say that there is -- I would not point to a specific bank. It tends to change over time. There is nothing specific out there. There is a lot of -- there's just a lot of competition across the board.

But does it seem like it has been picking up recently?

It has been -- it actually I think was a little worse than the latter part of 2006 and then it improved, and you're right it is picking up a little bit. But that is also partly -- we're into the prime mortgage season. Spring tends to pick up.

So not -- you would almost expect this to be a little like this around this time period anyway?

Correct.

And can anyone speak to -- and I know this is a horribly complicated subject -- but when you look at that zero to three months bucket, something almost like $30 billion in the US were liabilities greater than assets -- this is last quarter -- down to about $18 billion. Now IR was good enough to describe to me there were certain equities that were taken off, and they were financed short-term with short-term funding. So you really did not need that short-term funding. I think that was the reason why it declined. But what is the bank's overall view on interest rates in the US, and how has the bank positioned itself?

I will take that . Here I see I think Investor Relations gave you some clarity of that. Normal ebb and flow reduction in our equity trading position can cause movements down in that number because we would not require the funding that was there funding those assets previously.

Overall our earnings risk this quarter reduced from the $56 million last quarter to $44 million this quarter. So that is the impact of an immediate 100 basis point increase in interest rates. And I would not have a breakdown of that between Canada and the US. We manage our interest rate risk much more dynamically than that, and we would be prepared for evolving market conditions from time to

But you think that the market or sorry the bank is making -- is taking a position in the US in terms of where the Fed may go?

I would say that we are constantly through each of our trading desks and also through our treasury group taking positions both in the US, Canadian and international markets within the normal strict limits process of any financial institution.

Okay. But it does not sound like you can really nail down for me this is what our position is right now?

Well, I would just say I mean I don't want to get into the specifics of how we are positioned. I will say that we're pretty neutral right now. We have a slight bias to a steepening curve but only very minor.

Ian de Verteuil, BMO Capital Markets.

I have a question on page three of the subpack on the noninterest income here. The gains on realized gains on securities, I went through -- I've tried to understand this and I continue to grapple with it.

When I look at those numbers, the 132 in Q1 and the 119 in Q2, this is a new item that has come out because of the available for sale bucket. Can you -- I mean how should we think about that number going forward? Is it -- I think, Brian, you have mentioned that the merchant bank, which would be one of the things in there, that number may be a little bit weaker in the second half of the year. But how do I think about that number going forward in terms of sustainability of the earnings this quarter?

Yes, you're right. It is a bit complex. But just as a refresher, until Q1 -- in other words, last year and before -- we had to split our gains for purposes of this table into the fund investments, which technically are limited partnerships. And that came down under the I believe it was the other asset line -- other income line. And merchant banking gains from corporate entities, which were on the investment securities line. Those are now consolidated. So that is actually a simplification.

So the 119 includes virtually all of our merchant banking gains that I referred to back when we talked about the business by business review. However, it does include some gains that are held in businesses, particularly treasury that are not part of the merchant banking management reporting. And, for example, this quarter the 119 consists of $91 million of merchant banking gains and about $22 million in various places across the organization.

What I would say -- what I did say in my comments was that we have had two quarters of fairly significant private equity merchant banking gains. And the back half of the year probably is going to revert to what I would call more normal levels. As to the split between Q3 and Q4, it is hard to know. It is probably a slightly bias to Q3, but it really depends on timing of distributions and timing of divestitures and private equity that we don't have control over. But the kind of run-rate we have seen so far this year is a little higher than we expect for the back end of the year.

So either side of 100 would not surprise you at all?

Say again?

Either side of 100 quarterly would not surprise you going forward?

Quarterly? Other side of -- for this --?

Yes, you were 132 in Q1, 119 in Q2.

I don't know. I guess so. I mean -- something like -- yes, maybe a little with a bias to be under 100 on an average for the last two quarters of the year probably in.

Sumit Malhotra, Merrill Lynch.

The first question is for Tom Woods. Tom, I just wanted to circle back on the FirstCaribbean revenue expense contribution. If I look at the Q2 results as posted on the website, the NIX ratio for FCIB looks like it's about 54%. It has been in that range since the last year or so. When the numbers you have given us in the press release today make it sound like that NIX for CIBC is about 66%, so a big difference there. You mentioned something to Steve Cawley about goodwill charges. Is that the differential, and does that all book through retail, or is that stuff go through corporate?

Yes, I was going to come back on that. Thanks for asking. Technically it is not goodwill. What it is, and this came up on the TV call in a similar context. It is a charge on capital. So when we make an acquisition and have to pay goodwill, we charge the business capital because that has to be funded centrally. So that business bears that cost.

So you're right this is a NIX 50, low 50s business that we have brought into retail. But because we have had to pay some goodwill, we are allocating in the revenue by a deduction an amount which in effect makes it, as you say, a 66% NIX. So when you layer that onto a business in retail that is high 50s, it actually does pull it down a bit Q2 versus Q1 when we only had one month of consolidation.

Yes, that is one of the things when I think all of us looked at FirstCaribbean being the low 50 range coming onto a platform in which expenses were dropping rapidly anyway, it would only be an accelerator but it seems to have worked in the opposite form at least this quarter?

Yes, the other dimension to this, which apologies it gets a bit complex, is from a pure NIX math point of view, as you can appreciate when we owned less than 50% and did not consolidate, our equity pickup went right to the revenue (multiple speakers), and that hurts us by about 40 basis points on a consolidated NIX basis.

So when you look at our consolidated NIX now that we consolidate FirstCaribbean, even though it is consolidated a better NIX then CIBC, it has pulled down because we now flow through both expenses and revenue.

That is a good point. I appreciate it. Secondly, the last question is for Sonia Baxendale. Sonia, some very good trends in consumer deposits and retail. I think three quarters in a row we have seen an increase in market share. It sounds like you are giving a lot of the credit to the bonus savings account.

The one question I had for you, given how successful this has been, you're still one of the only larger retail banks in Canada now who is not offering the bonus amount on the full amount of the deposit. It is only above a specified limit. One of your larger competitors decided to go on the high rate on the entire balance. Is that something given the success you're having with the product as is, is it something that could be brought on to continue the growth in the market share?

So the question on our bonus savings account, I would say if you looked at our base product, we have got a very competitive rate on there. Of course, a number of our competitors have been making changes over the last few months, so we continue to evaluate that and evaluate what we might need to do in terms of our product offer. But right now I would say in terms of our base product we have got a strongly competitive rate. And with the bonus that I have referred to, that it is one of the best in the industry.

Brad Smith, Blackmont Capital.

Just a quick question on the net interest margin and the decline that we see on that chart 45. I think one of the questions was about the competition and who the competition is. I just wanted to maybe get a clarification. I believed in a number of the other large competitors who have reported their results already that net interest margins in their personal and commercial businesses were either flat to modestly better this quarter. Whereas this number on slide 45 is down 10 basis points sequentially. And I guess I'm just wondering is it the commercial side you think that is making it look so different and it is not included in this number?

I will start, and if, Sonia, you would like to add, let me just say that I don't know that other banks give this kind of granularity to try to carve out securitization trading, other assets and FI accounting. I mean, as you can see, our reported NIMs are actually going up there. So I guess I would caution looking at reported NIMs and other organizations.

Since I have and Sonia can add is, Q2 on mortgages and the environment we have on deposits are both pretty negative in terms of compressed NIMs. So I don't want to speculate on whether this chart would be similar at other banks if they did it, but I would be surprised if they did and you saw NIMs going up in Q2.

Okay. Just to be clear, though, I'm talking about their bank -- personal and commercial banking segment NIMs. So there would likely be no trading influence. I think it would be a comparable calculation in many respects.

Well, you're right. It would not have trading in there, but the whole FI accounting, I have mentioned this before, the impact of swap accounting where you're giving up NII and you're getting it another income, in effect, takes it out of NIM. Unless you factor that back in, you are not really looking at the economic impact.

I guess I was just thinking, looking at those relative trends, if it is not, in fact, your bank that is the competition.

I don't follow that. Say that again?

I'm just wondering if given the compression in your reported NIM on 45 here, if it's not -- is the Commerce Bank competing on price out there? Is that what is happening that is affecting your net interest margin relative to some of your larger competitors?

Based on my assessment of the activity in the market and our various products, that is not -- that would not be our view.

Jim Bantis, Credit Suisse.

Just a quick question regarding trading revenue. It may have been asked, but I was looking at page nine of the subpack, and I know the other line on trading revenue had dropped this past quarter to $1 million, and it has obviously come down. And I was not sure, Tom, if it was related to the additional disclosure in the noninterest income page, page three. Maybe you could just -- give me a little color on what the other in trading revenue was that dropped and if it relates to a change in reporting?

Well, as a footnote -- and I don't know whether, Brian, you have any information you can give or we can follow-up -- it is largely the loan trading business, which in Q1 was down. You know, I don't know, Brian, do you have any information, or should we come back to Jim on this? Let us come back to you on that, Jim.

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

Thanks, everyone, for joining us today, and I know we have a few things to circle back with you, and we will do that shortly. Thank you.

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