Canadian Imperial Bank of Commerce (CM) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the CIBC third-quarter conference call. Please be advised 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.

Good afternoon and thank you, everyone, for joining us today. We're speaking to you today from New York City. On our call this afternoon, Gerry McCaughey, CIBC's President and CEO, will provide an overview of our third-quarter results and an update on our strategic priorities. Tom Woods and Ken Kilgour will then provide the financial and risk reviews. Following their presentation, Sonia Baxendale and Brian Shaw will provide business highlights from the quarter. We will be happy to take your questions afterwards.

Today's presentation slides are available in the Investor Relations section of CIBC.com, and a replay of the audio Web-cast will be available on our Web site later this evening.

Before we begin, let me remind you that anyone speaking on behalf of CIBC on today's call may make forward-looking statements that are subject to a variety of risks and uncertainties. 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 in today's press release.

With that, I will turn the meeting over to Gerry.

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

Today, I would like to review our third-quarter results we announced this morning, as well as CIBC's progress against our priorities. Following my remarks, our Chief Financial Officer Tom Woods and our Chief Risk Officer Ken Kilgour will provide the financial and risk review. Sonia Baxendale, Senior Executive Vice President of Retail Markets, and Brian Shaw, Chairman and CEO of CIBC World Markets, will then comment on the performance of their businesses during the quarter.

CIBC reported net income for the third quarter of $835 million, up from $662 million for the same quarter a year ago. Cash diluted earnings per share were $2.34, a 25% increase from $1.87 a year ago. Return on equity for the quarter was 28.3%.

Let me update you on our progress, beginning with our business results.

Retail markets reported net income for the third quarter of $555 million, up 14% from the same period last year. Volume growth in our Canadian franchise and our acquisition of a controlling interest in FirstCaribbean International Bank contributed to this result.

Our retail businesses continue to perform well overall. During the quarter, we had marketshare increases in most of our core businesses, including cards, mortgages, deposits, and GICs.

In the area of personal lending, the actions we have taken to reduce our risk profile have improved our loan loss performance. Year-to-date, retail loan losses are $505 million, down from $519 million for the same period last year and $548 million for the same nine months in 2005. Over the past two years, the size of our unsecured portfolio has been shrinking significantly. With this portfolio now stabilizing, our focus is on growing from a stronger base. Over time, the expected result is a growth rate for our personal lending business that converges on industry levels.

CIBC World Markets reported net income of $261 million, up 37% from the third quarter of 2006. This result includes previously announced mark-to-market write-downs in our structured credit business. Outside of this area, World Markets had a solid quarter, with broad-based business strength. Sonia and Brian will provide more detail on their businesses in the few minutes.

CIBC's second priority is to improve productivity. Our strategic objective is to have a median efficiency ratio or better amongst the major Canadian banks. In the third quarter, our NIX ratio was the median with our cash efficiency ratio improving to 59.4% from 65% in the same period a year ago. Each year, we have also established a nominal expense target in order to measure our progress towards our strategic objectives. In 2006, we exceeded our target of reducing expenses by $250 million. In 2007 our target is to hold our expenses flat to Q4 2006 levels, excluding our FirstCaribbean acquisition.

As Tom Woods will review shortly, our third-quarter expenses are well on track to exceed our 2007 productivity targets. As we look to 2008, we expect expenses will be at the same standard and test as we set in 2007 given initiatives already in the pipeline and our performance year-to-date. Specifically, this means that we will again absorb inflationary pressures and all increases, thereby holding costs flat to the fourth quarter of 2006 or better, excluding FirstCaribbean.

It is an important measure of productivity that we're growing revenue and improving marketshare while maintaining a disciplined expense base. CIBC's third priority is balance sheet strength and capital usage. During the third quarter, we repurchased 3.1 million shares. After giving effect to these repurchases, our Tier 1 capital ratio was 9.7% at the end of the third quarter. This is above both our Q2 level of 9.5% and our target of 8.5%. Our dividend payout ratio for the third quarter was 33%.

This morning, we announced a 13% increase in our quarterly dividend from $0.77 to $0.87 per share. This represents a more than 24% increase for full-year 2007 and substantial progress towards our overall goal of a 40% to 50% payout ratio. However, we are still at the lower end of our range, and we do expect to continue to review our dividends with an eye to increases in the quarters ahead.

Before I close, let me add some broader comments on recent developments in the financial markets. While at present time, it is not clear when the current volatility and uncertainty will end, there are a few key factors on which we need to remain focused.

First, both the Canadian and international economies continue to perform relatively well. Second, the Canadian financial sector in general and CIBC in particular have solid earnings and strong capital ratios. Finally, similar events in the past have often provided additional business opportunities for well capitalized financial institutions. We have no reason to believe it will be any different once the present conditions stabilize.

CIBC has achieved solid financial results during the first nine months of 2007. Our objective is to deliver consistent and sustainable performance over the long term. By staying focused on our business priorities that I have spoken about today, we intend to build on our progress during the remainder of this year and into 2008.

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

Thanks, Gerry, and good afternoon, everybody. My comments as well include forward-looking statements, and actual results could differ materially.

Starting with slide five, this summarizes the quarter and provides the details on the items referred to in our prerelease on August 13. We had cash EPS of $2.34, and even looking through the unusual items this quarter, we had excellent results. I would highlight in particular the strong retail product volume growth, the high M&A revenue, the improved loan loss performance and continuing reduction in expenses.

Slide 11, the retail market revenue was $2.26 billion, up 11% from Q3 last year or 5% excluding FirstCaribbean, of which we owned 44% last year versus 91% now.

Slide 13. Personal and small-business banking revenue was up marginally from Q3 last year as deposit balances grew 6%, helped by the continued success of our Bonus Savings Account. But spreads were lower due to product mix and a pricing environment that is getting more competitive. Q4 revenue here will likely be a little lower due to seasonal deposit balance declines and lower seasonal mortgage commission revenue.

Slide 15. Retail brokerage had another strong quarter with revenue up 12% from a year ago. Revenue was up marginally versus Q2 as higher annuitized and mutual fund revenue more than offset lower new issue business. Trading volumes to date in August are up versus the Q3 run rate. But the Q4 outlook is for lower annuitized and new issue revenue.

Slide 16. Cards revenue was up 8% from Q3 last year as balances were up 10.5%, the highest annual growth we've had in six years, and purchase volumes were up 7.5%. Spreads were down marginally from a year ago as higher growth spreads did not quite offset the higher cost of funds. The outlook is for higher revenue in Q4.

Slide 17. Mortgages and personal lending revenue was up over 10% from Q3 last year as mortgage balances were up 12%. Spreads were down marginally from a year ago, due mainly to a higher proportion of fixed rate in our product mix and a more competitive pricing environment. But this was more than offset by the higher balances, prepayment fees and securitization revenue.

Personal loan balances were up 3% on the year with secured up 19% and unsecured down 16%. However, new sales of unsecured loans were up 35% from a year ago and 31% versus Q2. Personal loan spreads were lower due to the continuing mix shift from unsecured to secured. We expect lower revenue and mortgages in personal lending in Q4. Higher expected balances and stable to higher spreads will not likely offset lower prepayment and securitization revenue.

Slide 18. FirstCaribbean's revenue was down $17 million from Q2, $11 million of which was due to the weaker US dollar on translation. As a reminder, Q1 revenue was lower because we equity accounted FirstCaribbean prior to January.

On slide 20, regional markets net income $555 million, up 14% from a year ago and up 22% adjusting for FirstCaribbean and for the tax recovery we had in Q3 last year. Revenue ex-FirstCaribbean was up 5% on the year, and expenses ex-FirstCaribbean were down 1% for an operating leverage in this business of 6%.

Slide 21. Turning now to CIBC World Markets Corporation, revenue was down from recent quarters due to the 290 million mark-to-market write-downs net of gains on related hedges in the US CDO and RMBS portfolio that we announced on August 13.

Slide 23. Capital markets revenue reflected the $290 million write-down. Apart from this, our debt businesses were up as higher volatilities drove greater client interest rate derivative activities. Equities were down versus Q2 due to lower new issue activity and lower proprietary revenue, offset in part by higher structured product volume.

As we said in our press release this morning, we've not yet completed the August 31 month-end marks on our CDO/RMBS exposures. But using dealer quotes in the ABX indices as proxies, we would expect additional write-downs of about $90 million so far in the fourth quarter.

I would point out, however, that these indices have recently begun to recover after being down a greater amount earlier in the month. In other capital markets businesses, the outlook for revenue in Q4 is about the same or a little lower as it was in Q3.

Slide 24. Investment banking and credit product revenue was well up from recent quarters, mainly due to $77 million in gains on credit derivatives hedging our corporate loan books. M&A in both Canada and the US was very strong, offsetting slower new equity issuance in Canada and a reduction in our US Real Estate Finance revenue. Q4 revenue for investment banking and credit will likely return to more normal levels. But of particular note, we have a good pipeline of M&A transactions expected to close in either Q4 or Q1 next year.

Slide 25, merchant banking. Revenue of $161 million, well above the revenue in recent quarters. We had gains in distributions of $187 million, offset in part by write-downs in funding costs of $29 million. Approximately two-thirds of the $187 million number were distributions from fund investments, which again had high level of divestitures this quarter. We have good visibility for the merchant banking revenue in Q4, but expect revenues to be back to levels seen in quarters just prior to Q3.

Slide 26. World Markets net income -- $261 million was affected by several large items this quarter, including the CDO RMBS write-down, the credit derivative gains and the reversal of tax and litigation expenses. Excluding these items, net income was $283 million, well up from recent quarters, due primarily to the strong merchant banking revenue.

Slide nine. Turning now to consolidated expenses, which were $1.82 billion in Q3. Excluding the litigation expense reversal and the FirstCaribbean expenses, this was $1.79 billion, and this was about $100 million less than our Q4 '06 expense baseline of $1.89 billion which is our 2007 run rate objective. We expect similar or slightly lower expenses in Q4 to what we recorded in Q3.

Project spending and advertising are typically higher in Q4, but the outlook is for reduced incentive compensation accruals based on our latest analysis of the market environment.

Finally, slide 47 shows the normal disclosure on our tax rate adjusted for the recoveries. This quarter, our adjusted tax rate was somewhat higher than it has been in recent quarters because more of our profits fell in higher tax rate jurisdictions. However, we are not changing our tax guidance, which is shown here in the Footnotes. In fact, as we look out over the next several quarters, we expect our tax rate to fall in the lower end of the ranges indicated. Ken?

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 Q3 with a focus on credit provisions, value at risk in our trading portfolios and a discussion of CIBC's capital strengths. I will also make some brief remarks regarding certain topical risks.

Starting with credit risk on slide 52, specific loan loss provisions totaled $164 million in the third quarter. This represents 39 basis points of net loans and acceptances. A $26 million decrease in specific provisions versus Q2 '07 is the result of a $12 million decrease in World Markets and a $14 million decrease in retail markets. World Markets reported a net recovery of $8 million in the third quarter as recoveries and reversals in the large corporate and commercial portfolios increased from Q2 '07 levels.

Retail market loan loss expense was $172 million in the quarter. Credit card loan losses decreased $12 million in the quarter, largely due to lower delinquencies. Additionally, Q2 2007 included a $5 million increase in the provisions related to an enhancement in our methodology, which as expected did not repeat this quarter.

Small-business provisions decreased $11 million in the quarter. The improvement occurred across several of our small-business portfolios due to a combination of lower delinquent and impaired balances and lower classifications. The improvement in the cards and small-business portfolios was partially offset by higher loan losses in the personal loan portfolio. Personal loan losses were up $12 million due to a lower quarter-over-quarter reduction in specific allowance reserve requirements. Net impaired loans were $316 million at the end of Q3, down $44 million or 12% quarter-over-quarter. Overall we are pleased with the performance of the credit portfolio this quarter.

Turning to market risk, slide 53 displays Q3 daily trading revenues against the value at risk in our trading portfolio. Risk levels averaged $9.9 million, slightly above the level of Q2. The material negative revenue days were due to write-downs in the value of a number of structured credit assets as Tom has already discussed.

Moving next to capital strength on slide 54, the tier one ratio increased to 9.7% in Q3. Internal capital generation and lower risk-weighted assets were partially offset by dividends and share repurchases. At 9.7%, a tier one ratio is well above our 8.5% target.

Turning to slide 55, I would like to make some brief remarks regarding certain topical risks. As a reminder, our exposure to the US residential mortgage market through residential mortgage-backed securities and collateralized debt obligations is as described in our August 13 press release. CIBC's underwriting exposure in the leveraged buyout area is minimal and actively managed. Our pre-correction underwriting commitment to this space amounts to less than 0.6% of the bank's assets with no covenant light exposure. Our exposure to hedge funds is minimal and collateralized.

With respect to asset-backed commercial paper, as we've previously announced, our direct holdings in the third-party asset-backed commercial paper market are not significant. None of the CIBC's money market funds have any exposure to nonbank sponsored asset-backed commercial paper, and approximately 85% of our $20 billion of committed liquidity facilities are for the benefit of CIBC-sponsored Canadian conduits.

That concludes my remarks. I will now turn the proceedings to Sonia.

(technical difficulty) -- for domestic retail markets up 12% versus year ago. Our performance was driven by our continued focus on strong advisory solutions, enhancing the client experience and offering highly competitive products. Our credit cards business maintained its solid growth performance with outstandings increasing 10.6% versus the third quarter of 2006. This was also the strongest quarter-over-quarter improvement in more than two years.

Marketshare improved over last quarter as the result of strong acquisition and continued high retention. In addition, the quality of our credit card portfolio remains in line with expectations. Current strategies are successfully growing the portfolio in high-scoring and profitable segments.

In the highly competitive mortgages market, we have the highest quarterly growth in the last several years as a result of our marketing investment, continued support of alternate mortgage distribution channels and the strength of our branch networks. Mortgages market share was up 5 basis points over the prior quarter.

As in recent quarters, we're focused on improving our acquisition and account management in our lending portfolio. We had a strong quarter in deposits with marketshare up 74 basis points year-over-year and 40 basis points over the quarter. Both our savings and checking accounts performed well as the result of product enhancements and active marketing and promotion. In particular, our summer campaign, which focused on rewarding product consolidation.

GIC marketshare was up 80 basis points year-over-year and flat quarter-over-quarter as a result of strong product support. Mutual fund net sales were substantially improved in Q3 due to strong fund performance and sales support. While overall market volatility may impact our results in this area in the near-term, we are pleased with the progress in this business.

In distribution, we continue to improve accessibility for our clients. Of the 70 branches that we previously announced were planned for building or relocating over the next five years in high-growth markets, we have 26 projects underway. We are also continuing to invest in upgrading our overall distribution network with over 70% of our branches receiving upgrades and enhancements in fiscal 2007.

To summarize, we delivered improved revenue and marketshare in the quarter and are making good progress against our key strategic priorities.

With that, I will turn it over to Brian Shaw.

Thank you, Sonia. Let me remind you that my remarks may also include forward-looking information, and actual results could differ materially.

CIBC World Markets delivered a solid earnings performance in the third quarter. Net income was up $71 million or 37% from the same quarter a year ago and up 67 million or 35% from the prior quarter. Through the first three quarters of this year, net income is up $237 million or 55% from the same period a year ago. Revenue in the most recent quarter was down, primarily due to the mark-to-market write-down net of related hedges on structured credit positions related to the US residential mortgage market.

The majority of the write-down occurred in the latter stages of July and coincided with the rapid deterioration in the market during that period. In light of the unprecedented volatility and deterioration in the US residential real estate market, we have not initiated any new activity in this segment of our structured credit business. We will continue to review the overall conditions and risks in this market on an ongoing basis to ensure that any future activities remain consistent with CIBC's overall goal of delivering sustainable performance over the long term.

Outside of credit structuring, our business performed well during the quarter. In Canada investment banking revenues were strong due largely to solid M&A momentum. Major deals in the quarter included acting as adviser to Fortis on the acquisition of Terasen and adviser to Van Houtte on the sale of the company. We also acted as adviser to BCE on its pending acquisition by a consortium led by the Ontario Teachers Pension Plan.

Although equity new issues were down from the previous quarter, revenues year-to-date continue to be solid due to strong issuance activity and common shares and particularly in mining and energy.

In the United States, we had a strong quarter driven by revenue growth in investment banking and merchant banking. We acted as sole adviser to TALX Corp on its sale to Equifax and financial adviser to William Scotsman on its acquisition by Algeco and as adviser to Steel Technologies on its sale to Mitsui. A strong performance in merchant banking was highlighted by solid gains in direct private equity investing and in third-party fund distribution.

In Europe, M&A activity increased in the quarter with completed transactions including Scandic Hotels. We also announced our role as one of two principal advisers on Rio Tinto's pending acquisition of Alcan. Our IPO pipeline for China-based companies lifting in the United States continued to be strong. We participated in eight equity deals and one M&A transaction originating in the Asia-Pacific region during the quarter.

In summary, CIBC World Markets has performed well through the first three quarters of 2007. Overall, our business remains strongly positioned for the future. Intense M&A activity through the first three quarters leaves us with a solid revenue pipeline for the remainder of the year. Much of this activity will settle in Q4 or perhaps Q1 of 2008, and this should partially offset the uncertainty in trading room results due to the choppiness in markets we are currently experiencing.

Market and industry conditions are clearly difficult at the moment. This will mean our results during the fourth quarter are not likely to match the strength we have seen over the past year, which has been a particularly robust and vibrant period for the markets and the industry.

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

Thank you, Brian. Operator, we'll now take questions from the phone.

(Operator Instructions). Darko Mihelic, CIBC World Markets.

My first question relates to the expense control targets that you talked about, Gerry, as well as perhaps some of the expense control we saw in the quarter. Maybe this question is better directed to Brian. When I'm looking at CIBC World Markets, it looks as though expense levels were reduced drastically during the quarter. In fact, revenues fell about 144 million quarter-over-quarter and expenses fell by 140. So, I'm not quite sure how much of that was variable comp and how much of that was something else that was structurally removed from World Markets and how sustainable or how should we think about World Markets capabilities of cost-cutting in, say, an environment where revenues fall significantly?

Darko, I'm going to ask Tom Woods to take that. Tom?

Yes, the expenses in Q2 were 524 and in Q3 were 384 in World Markets. But the main difference was the litigation expense reversal which we highlighted upfront. That was $77 million. So that gets you up to about, what, 460. Most of that delta remaining of, what, 60 or 65 is reduced incentive compensation. And even though revenue was not down that much versus the very strong Q2, a lot of that Q3 revenue was merchant banking revenue, which does not track incentive compensation accruals nearly as high as other business comps. So the majority of the remaining 60 is reductions in comp. There were a few other one-offs that went our way for small dollars -- probably $10 million.

And so looking forward my question I guess still stands with respect to the capability of reducing expenses in a period of choppy markets. What should we look for from an efficiency ratio from World Markets as a run rate do you think would be normalized?

Tom will provide you some further detail on that in a minute, but I want to repeat what I said in the call. For 2008 we have set our target in terms of bank-wide expenses, and that target is that we're going to again hold our expenses flat to Q4 of 2006 levels. We've been fairly successful in our expense targets. We did go through a period of large reductions in 2006.

In 2007 we wanted a more balanced approach, which was to hold expenses flat and have projects on the go that would generate efficiencies so that we could absorb the inflationary impact that would come on during the year from a variety of expense increases such as rent and wages and that sort of thing. We do believe that with the bank-wide -- with the efforts that have been ongoing throughout 2007, that we will have a continued capability in 2008 to again hold our expenses relatively flat. Again, we're going to commit to the same levels that we committed to for all of 2006, which would mean we would have to absorb again the inflationary increases that would normally occur. So we think we are very serious about that on a bank-wide basis. Tom will give you a little bit of color in terms of the World Markets picture in particular.

It's hard to be too precise for a target, but through the cycle I mean I think the way to think of it is, if we're going to get mix ratios in the high 50s consolidated, that means retail has to be mid '50s and World Markets low to mid '60s. But that is a pretty simplistic summary. But through the cycle, you are probably looking at mid-'60s.

You see, the 59 we reported in Q3 clearly was affected both by the litigation reversal, as well as the merchant banking as well as the write-down. So, to the extent you average it out over time, probably low to mid '60s.

Sumit Malhotra, Merrill Lynch.

First question is for Sonia. Sonia, I think when we had the investor day in September, for the first time in years, it looked like you guys were talking about opening branches, and yet this quarter retail markets looks like Canadian branches still going down. Can you give us a timeline on when we can expect some of these branches to start coming through? Because it looks like right now you are differing from most of your peers in Canada.

Yes, as I mentioned in my comments, we have 26 of the planned 70 initiatives, just in the early stages. So in 2008, essentially you will see those starting to come onboard. It is primarily a timing issue because included in the whole branch plan, there is also consolidations, relocations, those kinds of things. So, definitely, that slight decline that you have seen in the last two quarters is entirely timing driven.

Okay, so this is a 2008 issue that we will see those onboard.

Well, the branches are started. They are in progress but, until we -- it will be in 2008 when we start seeing them open.

This one might be for you, maybe for Ken as well. Personal loans I think I heard the number was 30% year-over-year and quarter-over-quarter in terms of new sales, credit cards, highest number in six years. This quarter, the guidance you gave us on the Q2 call that retail PCL was flat to down the second half of the year. When we see these two higher loss rate businesses increasing at this pace, how comfortable are you with the provisioning levels being able to stay at a flat to down level? Is the credit quality in this business still an improved rate? We're not going to go back to the trends we saw in the first half of the year?

It's Ken Kilgour. Overall, we're pleased with the performance of the retail credit portfolio. We think the measures we have taken over the past two years have reduced the risk in the unsecured personal loan portfolio in particular. Outlook for the next quarter we expect our specific provisions to be near Q3 levels and then beyond next quarter would expect specific provisions to trend up towards the bottom of our 50 to 65 basis points range.

And that is all bank, 50 to 65?

Yes.

Last one for me. This could be for Gerry. It could be for Brian. Gerry, I think it was in the December call that you said trading was an area where the bank could profitably employ some more capital. Brian, last quarter we heard that structured credit, not a big issue for CIBC from either a credit or a revenue perspective, now $300 million have been marked down. Now it looks like another 90 in August.

When we look at the trading business as a whole, capital markets as a whole, adjusted numbers look pretty good, and we're all going along with that. But how comfortable are you with some of the business that may be pushed into in trading -- we're talking specifically about structured credit right now. But just in terms of the bank's overall trading risk management, what is the level of comfort that there's no other surprises that are lurking especially in the environment we have had over the last few months?

It's Gerry here. As Brian said in his remarks, in the area of structured credit that has caused us the difficulty, we're not adding positions, and obviously, the fact that these were highly rated securities that are being marked down in this volatile environment has been a concern for us, and we're proceeding with due caution.

You had a question before I turn it over to Brian that touched on risk management and our comfort level with our risk management policies in this area. And so I would like to turn it over to Ken first so that he can touch on that, and then Brian will cover the revenue opportunities and the outlook for World Markets in the trading areas. But, first I think we should go to Ken on the risk management question that you had. Ken?

Thanks, Gerry. Well, from a risk management perspective, these mark-to-market write-downs have resulted in higher capital allocations for this business and a more limited capacity to participate in these transactions. Credit structuring is an important reality of today's marketplace and retaining our capacity to service our clients' needs in this area in many cases mitigate risk is important. In light of the recent evolution of the markets, we are reviewing our focus and capacity in these areas so that they are aligned with our goal.

Now I will pass it over to Brian.

Well, perhaps I would just add to your question on trading room risks and performance, we're quite comfortable with the trading businesses that we have been -- that we have today and have been developing over quite a long period of time, and I would put in that category businesses in debt equity and Real Estate Finance. So, I particularly have a high degree of comfort. So, I think Ken has spoken to the issue as Gerry has on our credit structured credit business, so I will leave it there.

Michael Goldberg, Desjardins Securities.

I have a couple of questions. First of all, on the expense side, can you remind us actually what that Q4 2006 baseline for non-interest expenses was? And what is the comparable number for the third quarter just reported?

I think it was 1,892,000,000, but Tom Woods will confirm that and give you the third quarter of '06 -- excuse me, of '07 numbers and take them apart for you. But over to you, Tom.

Yes, Michael, it was 1.89 billion in Q4, and in Q4 last year you will recall we were equity accounting FirstCaribbean. So our share of their income flowed through to our revenue line. We picked out none of their expenses in the financials.

In Q3, that number adjusted was 1.79 billion, and that adjusts out the litigation reversal as well as all of the FirstCaribbean expenses. So we ran in Q3 almost 100 million underneath that target.

I can tell you that the main deltas there were incentive comp, computer systems savings. Advertising is seasonally lower in Q3, so that's not sustainable. Op losses were a little lower, and we had the wind at our back in a few one-offs. We had a slightly higher VAT recovery in Europe. Not big dollars.

So, that 100 delta had probably 15 million of one-offs in it, but the bulk of the rest of it was comp and computer contract savings that we had renegotiated through the year.

I have another question. I guess, related to the move to global style liquidity, has CIBC actually said that it is moving to global style liquidity, and if so, what is the capital impact going to be? What would that mean in terms of additional risk-weighted assets?

It's Gerry McCaughey here. Yes, we have said that we're going to global style liquidity. We did put out a public statement in that regard, and I will turn it over to Tom for the capital implications of that. Tom?

Michael, under the current regime, Basel I is the 10% capital, whereas under market disruption, it's 10% risk-weighted assets. Okay? So on 17 billion, that is about 1.7 billion risk-weighted on a base of about 125 billion we have today. So, a little over 1.5 points uptick.

Under Basel II, it varies either side of 10%, 7 to 12 depending on the situation. So not a material uptick going to global style.

And Michael, that global style liquidity that we announced is for CIBC sponsored conduits.

Andre Hardy, RBC Capital Markets.

The first question relates to merchant banking. We've had three-quarters of high gains. You're guiding us toward high gains again next quarter. Is this an acceleration of planning to getting out of this business? Is it just your funds getting more sales? What is happening there?

Andre, it is Gerry here. What we said was that we do have high visibility over the next quarter or so. We also indicated that the level would be more consistent with the earlier quarters in the year than last quarter because last quarter was somewhat high. And part of this is the fact that we have a fairly large portfolio of private equity funds, and this portfolio of private equity funds is well seasoned and has been invested for a number of years and is more in, let's say, the harvest mode if you would as a positioning point. So that's the first part.

The second part is that there are some investments that we know are in a windup phase or an end phase in terms of them being -- the sponsors are selling them more or disposing of them because they have come to full maturation in terms of value. I would say that we are at a stage in the cycle and we have been for awhile that is favorable for our merchant banking portfolio, and that does throw off this current status of higher visibility and very healthy gains.

We have set targets publicly as to the level of merchant banking that -- excuse me, as to the book value that we want to have in terms of our merchant banking portfolio, and it's in our scorecard from the viewpoint of all bank goals, and the limits that we have put in place in regards to that is $1.4 billion, and we continue to have that limit in place.

As you know, we set a number of limits over the last few years that were targeted at lower levels to bring down our merchant banking exposure. In recent times what we have said was, rather than go through because the portfolio was so mature, we have said that rather than go through target setting that would force sales or would force the maturation of the portfolio, we have said that as the portfolio matures and naturally these things are sold off that we would set lower limits.

The portfolio is starting to get to a point where it is falling below our target level that we had set at $1.4 billion, and the action that we do think we will take at some future date is to again set a lower level of maximum exposure to our merchant banking portfolio. And that will be in line with as I say the natural decline in the portfolio.

The reason we're doing that is because our experience of the past has been that at this point in the cycle, you want to ensure that you don't build up your merchant banking portfolio when things look very healthy and frothy, and there is some element at the top of the cycle. Also, we want to make sure that the portfolio is very balanced in terms of sustainability and at the right size for CIBC so that we can be a well-positioned holder of these investments if required.

Does that basically cover what you asked, Andre?

Maybe just -- actually it covers a lot of it. Just maybe one point of clarification. Are you selling funds or the funds are selling investments?

The funds are selling investments, and we are receiving the proceeds. The sponsors do control the timing of that. We do have some awareness in terms of visibility when they have if the sponsors themselves have transactions that are transparent to the marketplace and coming to a final date, then those transactions pay out to the sponsors' funds, and they pay out usually shortly thereafter in the form of a gain and a distribution.

The only time where we've engaged in a significant sale of funds was in 2004 we sold off part of the portfolio in a block that we did talk about to the marketplace. It was somewhere in the range of $300 million. That was in order to get to our first target that we had set a number of years ago of $1.7 billion.

We have not engaged in any large transactions or sales like that, and if we did a sale of a fund in here, it has been something that was for reasons particular to that fund. Our general process has been to hold these funds at this stage and take the gains as the sponsors are bringing the portfolios of each fund to maturation.

Thanks that helps a lot. My other question was on expenses, and I guess it was a two-part question. At what point do flat expenses start mattering to revenues? You have done very well in controlling expenses in the last two years, but when does it start hurting revenue growth?

And the other one is, why commit to fix targets when a business like World Markets has so much variable comp? Are you implicitly giving us a revenue target for World Markets in there?

That would be forward guidance, and we actually are not trying to do that here. What I wanted to start off with -- I think I will answer your second question by answering your first.

We specifically set a framework -- remember, we do continuously repeat the consistent and sustainable performance is extremely important to our long-term strategy. In order to ensure that our expense reduction programs fit into a framework that is consistent with sustainable performance, we set a strategic target of the median within the industry, and what we have done each year is set a nominal target so that you could track our efforts and our plans, and then at the end of the year, we have looked at how we made progress versus the industry and how that progress was versus the median. We believe that these nominal targets are good benchmarks for us to manage to and for you to measure our progress. We do not believe that these benchmarks will risk our overall revenue growth or our share picture as long as we're still short of the median target. And we selected that target because it has a certain resonance from a reasonability viewpoint in terms of competitive practices and frameworks. It's hard for us to believe that we are being too tight on expenses and restraining revenue when we're still below the median of the industry.

And, in answer to your question of when would you be reexamining your practice of expense reduction and/or holding expenses flat, I would be reviewing that when we hit our median goal. That would be one way that we would measure it because there is, as I say, we would be competitive, if you will, from a NIX ratio viewpoint, and you would have to, of course, verify whether or not going beyond that was reasonable, and I think in that case you would have to look at the mix compared to the other banks and all the rest of that sort of sensitivity analysis, which we have done, and we do not believe that that is particularly relevant until we get to the median.

The second element of this is that we are also monitoring our business very carefully from the viewpoint of the overall franchise positioning. If we can continue to maintain this expense posture while we're growing share, growing or maintaining share in our various businesses, we think that is an important measure of reasonability of the expense posture. But we do monitor all this on an ongoing basis to ensure that we are taking advantage of the full opportunities within the businesses and will continue to do so. Did that answer the question?

Yes, thank you.

Mario Mendonca, Genuity Capital Markets.

Good afternoon. A question perhaps for Brian. Page nine of this supplement, Brian, structured credit and other, you have been clear with us that now is not the time to build out that business, and we can all appreciate why. But looking back over the last few years, take 2006, for example, $248 million in that business and presumably structured credit is the lion's share. That is a good portion of your total trading. If the bank is to sort of just be on the sidelines for a good amount of time, do we need to see then a reallocation to this interest rate to the interest rate trading that we saw this quarter? And sort on that basis, what drives interest rate trading to essentially be double any other quarter on this page?

We will start with Tom Woods who will go through the supplemental and the data that you put there, and then Brian will provide additional commentary as to the importance and the size of the structured credit business within the overall World Markets business.

The portion of the structured credit business that Brian is referring to is not as material to the CIBC business overall in terms of its profitability as you positioned it there, and Tom will start by giving a little bit of the relevant data and then Brian will fill in. Tom?

Yes, the 137, Mario, was -- well, the delta versus the run rate of 50, 60 was a number of things. Just good debt trading volumes apart from the structured business. With the volatility, we had quite good client flows in various businesses. We also had good treasury positioning, and that, for the most part, gets picked up in that. We had I would say 20 million-ish of one-off things go our way in terms of mark-to-market on some bonds. But, for the most part, it was a quarter where we had quite good offset to that 290 markdown in our plain vanilla debt interest rate business, partially because of the volatility that we saw.

Brian?

Okay. Mario, I'm just looking at the data now. I think the answer has to do with an adjustment we've made in our reporting. I think the numbers you're pointing out had included businesses in those in that line item that are no longer incorporated in there. Specifically, my recollection is that Real Estate Finance was captured in that revenue line and subsequently has moved out of that revenue line. So, it makes quite a difference in the results.

It may very well also be the case, and we would have to confirm this, that our loan sales and trading business in the US might also have been captured in that line. So I think what you're ending up seeing is quite a different business today captured there than what was once the case.

So it probably would be a very big overstatement to suggest that the 248 is your structured credit business?

That's correct.

Maybe you could get me a ballpark on about half of that?

That would be much too big a number.

Oh, still too big. Half is still too big. That's helpful in and of itself, that information.

Can we go back then to, Tom, what you were suggesting on the interest rate side? Good client flows, debt trading, the treasury portion. Can you just explain how the treasury positioning -- what was it in the quarter that caused the treasury positioning to be so helpful?

Yes, I'm not going to get into specifics, Mario. I mean, we have a number of treasury books that we run, the main ones being the mortgage prepayment book, the equity-linked GIC book, as well as our structural gap, and this quarter, it wasn't way out of line compared to other quarters, but it was a particularly good quarter on positioning.

Structural gap.

I'm sorry?

It's the structural gap you are referring to, right?

That's part of it, but also our mortgage prepayment hedging book was very well positioned, and these are not major exposures. But, as you can appreciate, when you do the volume we and the other big banks do, as you hedge it up, you are positioned to take views, and this was a very good quarter for that business.

So then the 137 doesn't seem out of line. That's something that we could see in subsequent quarters?

No, I think it's fair to say, Mario, just about everything went right in that number. I wouldn't say it's double out of line. But I think 137 is going to be a hard act to follow. I think in the high -- just shy of 100 would be a good quarter all-in for that business.

That's very helpful. Just going back to the CDO, the write-down -- the 290 and then the 90 that's coming up, it would be helpful to understand of the $1.7 billion in exposure, was the 290 the write-down related to one security, or was that more of a sort of general type write-down that you would say, well, there are several securities in there, and all of them should be written down by a small percentage. Was it really just one that really went to zero?

Mario, the $1.7 billion consists of a relatively small number of positions but more than a couple. RMBS warehouses, some CDO -- one CDO structure and some other CDO exposures. So, think of it as being five or six positions in that vicinity. Each one we do a very detailed fair value calculation because all of this is in mark-to-market books, unlike many of the -- well, virtually all of the American investment banks who have these in accrual books.

As you know, these have traded very rarely in the last couple of quarters. So, the marketing exercise is a very rigorous process using independent dealer quotes to the extent we can get them. We have our own models which are market-driven, like ABX input models, and to the extent there are relevant ABX indices on the RMBS portions, we use those as well and really triangulate in on values. We have applied some liquidity discounts where applicable and worked through all that with our auditors. So, it's certainly quite a rigorous process.

And was the $290 million split evenly across the 5 to 6 or was it one?

Neither. It wasn't one, and it wasn't split evenly. It was a case-by-case valuation basis. But, like there is no one or two that dwarf the others. They were split amongst those positions.

The only reason I'm asking is, it would almost be better if it was one because I need to know the others were fine, and that's why I'm sort of pursuing it that way. But I appreciate your help. Thanks.

Ian de Verteuil, BMO Capital Markets.

I'm going to one question here. Slide 53 of Ken's presentation, it's more unusual -- one of the more unusual of the trading revenue charts we have seen. I understand why the last day had a huge loss. I presume that's when you trued up the model on the CDO book. Why would you have had pacing (inaudible) two other days?

Ian, it's Tom. I can deal with that, and Ken, if you want to add. Ian, that's actually a good segue from Mario's question because of the challenges in marking these positions to market, given the fact that they are not trading and given that brokers typically don't provide quotes that I would call well thought out if you will because there's no real need to do that for these illiquid positions. We've marked these at month end, and you can see that June 30 the first bar was the month-end mark.

We also, because things were moving so quickly in July, we did the best we could to get intra-month quotes on these, and you see around July the 13th, like a midmonth quote, almost a midmonth quote. That was the second time. And then as July came to an end, we did it not every day but every second or third day. So, certainly the three times it penetrated that limit were the valuations on the CDO/RMBS positions.

So, when we see those spike down, it really is truing up the model at a particular point in time?

That's correct.

Ohad Lederer, Veritas Investment.

I wanted to ask a little bit about the ABCP conduits. The first question would be about the US conduits. Are these conduits that CIBC sponsors, or are these sponsored by other parties?

It's Brian Shaw. Just to take it from the top, I think we've got, as Tom said, about 20 billion of liquidity lines out, and I think we've said about 85% of that pertains to conduits sponsored by CIBC. Those CIBC-sponsored conduits are all Canadian conduits. So that leaves 15% spread amongst both Canadian and US clients. So, the US clients we have are not clients sponsored by CIBC. They are just one-off business relationships we have.

Okay. And are those funds, are those conduits -- are you guys aware of the asset composition and the ability to turn paper? Because that market obviously hasn't had the same liquidity problems that Canada has, but it has been shrinking over the last little while.

Well, I guess what we would say is, we don't -- we tend not to comment on specific clients. We follow the progress our clients make, and so we understand something about their business by virtue of their contractual relationships we have with them. I'm not sure that there's a whole lot else to say. We would view our business relationships with those US conduits as normal course.

And then, just in terms of the Canadian ones like CIBC sponsors, I know what the press release -- it cited by name the Crisp and Franchise and a few of the others. The one thing that I didn't see on that list was the Great North Trust. Could you just describe the sort of risk profile of that? Because I understand that is a sort of 100% leveraged super senior swap, and could you just describe again that one I understand has always had a global style liquidity. Is that one turning over its paper? Is that one the asset exposures that have been synthetically created. Are those in any way -- are those included in your US mortgage disclosures that you've already made, or are those separate if there are any in there?

Just commenting on GNT, first of all, there is no liquidity provider on GNT. So, GNT is quite different from the other conduits that are sponsored by CIBC that have been specifically named in our release. Basically, GNT is a much narrower conduit, and it was specifically structured for a few large and sophisticated counterparties who are paper holders in that conduit. The structure has individual features and agreements very specifically tailored for those circumstances, and of course, we continue to abide by the agreements we have around GNT.

Now maybe you could clarify because the DBRS documentation for that conduit does discuss how the bank is a liquidity provider.

Sorry, can you just repeat that?

Yes, some of the DBRS documentation describing that GNT vehicle doesn't name CIBC as the liquidity provider. So I'm not sure I understood your reply to my previous question.

Alright. Just give me one second on that. Why don't I turn it over to Mike Capatides who will make a comment.

The confusion comes from the fact that there is a liquidity facility in that transaction. However, all of the securities that have been issued to date under that transaction do not -- under their terms do not have access to the liquidity facility. So, while it's there, there is no notes issued currently that can draw on that liquidity.

Okay. And just to that one other part of the question as to the synthetically created exposures, do those reference US real estate, and/or if they do, do they reference sub-prime?

The answer is no.

Thank you. That is all the time we have for questions today. I would now like to turn the meeting back over to Mr. Ferren.

Thank you for joining us today. If you have any follow-up questions, please do contact Investor Relations and have a good long weekend, everybody.

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