Canadian Imperial Bank of Commerce (CM) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the CIBC fourth-quarter and year-end results conference call. Please be advised that this call is being recorded. (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. The purpose of our conference call this afternoon is to discuss our Q4 and annual results released earlier today. The call is being audio webcast as usual and will be archived later this evening on CIBC.com.

In addition to the usual quarterly materials, CIBC's 2007 consolidated financial statements and MD&A are also available now on our website. This afternoon CIBC's senior management team will deliver some prepared remarks and will be available for a question and answer period following.

Before we begin, let me remind you that any individuals speaking on behalf of CIBC on today's call may make forward-looking statements that are subject to a variety of risks and uncertainties. Certain material factors or assumptions may be applied which could cause CIBC's actual results in future periods to differ materially from the conclusions, forecasts or projections in these forward-looking statements. For more information, please refer to the note about forward-looking statements in today's press release.

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

Good afternoon and thank you for joining us. Today I will review CIBC's fourth-quarter and fiscal 2007 results. I will also comment on our structured credit exposure to the US subprime mortgage market. Following my remarks our Chief Financial Officer, Tom Woods, will provide the financial and risk review.

My comments as well may contain forward-looking statements, and actual results could differ materially.

Let me start with our results. This morning CIBC reported strong net income for the fourth quarter of $884 million, up from $819 million a year ago. Cash earnings per share were $2.55, up from $2.34 a year ago. Return on equity for the quarter was 30.3%.

For the year net income was a record $3.3 billion. Cash earnings per share were also a record $9.30. Return on equity was 28.7%, and our Tier 1 capital ratio is strong at 9.7%.

For the second consecutive year, CIBC delivered the highest total shareholder return among the major Canadian banks at 20.2%. Our overall results in 2007 reflect progress against our priorities. Many of our core businesses delivered strong performance that allowed us to absorb the CDO write-downs in 2007 and still deliver strong results.

Many people across CIBC pulled together to deliver this performance, and I want to thank them for their efforts this past year on behalf of our shareholders.

However, the year results are marked by challenges in our structured credit business. Before I turn over to Tom, I am going to comment on the disclosure we have provided regarding our exposure to the US subprime residential mortgage market, as well as the actions we're taking in this area.

Let me start with our unhedged exposure. As we have disclosed today, our growth unhedged exposure at October 31 was approximately US$1.6 billion. Against this amount we have recorded mark-to-market write-downs of US$860 million, offset by write-downs on assets sold of US$41 million, leading us to a remaining unhedged exposure of US$784 million as of October 31, 2007. This remaining unhedged exposure is directionally mitigated by the remaining value of the ABX hedges of US$174 million. Conditions in the US residential mortgage market have continued to deteriorate in the new year and the month of November, and we estimate that we would incur further mark-to-market write-downs on this portfolio in the first quarter. Tom will comment on this during his presentation.

In addition to our unhedged exposure, we have also disclosed today US$9.8 billion of hedged credit derivative exposure to the US subprime residential mortgage market. Over 90% of the rated underlying assets are AAA-rated securities, and the average subprime component is about 60%. We have protection offsetting the US$9.8 billion through credit default swaps. 47% of our hedged exposure is spread across five AAA-rated financial guarantors. Although the financial performance of these guarantors has received some scrutiny, all five have maintained their AAA rating, none have been downgraded, one has been recapitalized by its parent banks, and many of the others are partially or fully owned by other financial institutions. These financial guarantors represent a very important part of the US and global financial system, and we believe they will continue to play an important role in the future.

As a further hedge against this portion of our exposure, we have purchased approximately US$420 million of additional credit default swap protection against these AAA rated financial guarantors.

The next level of our hedged exposure representing 18% is with two large AA-rated well diversified institutions. One is a large European multinational bank, while the other is a large American multinational insurance and financial services company. Any credit exposure to these two large financial services companies is protected by cash collateral arrangements. We have also purchased approximately US$465 million of directional hedges that we believe will correlate with stresses in this sector.

The rest of our hedged exposure is to one A rated financial guarantor that has recently been put on credit watch. This institution is working closely with advisors and its shareholders and is maintaining an active dialogue with its counterparts, including ourselves. One possible outcome is a recapitalization of this company.

Ultimately if there are losses, the probability is that these losses would play out over a period of time, although we would continue to assess the counterparty's ability to pay and possibly incur counterparty credit reserve charges in advance of losses actually occurring. If that were to happen, CIBC has the capital strength to absorb any such losses.

Now that I have outlined our exposure, let me take a minute to put them in context. The business of structuring credit is one that CIBC has been in for many years. These particular exposures formed a small part of our Debt Capital Markets business and were not a large contributor to CIBC's profitability.

In our risk assessments, we underestimated the extent to which the subprime market might deteriorate and the degree to which that would impact securities that were structured to be very low-risk. This, coupled with an overdependence on the extremely high ratings of these securities, resulted in the buildup of exposures that are too large for CIBC's risk appetite.

Let me now review the steps we have taken to date to address our exposure in these areas. First, we halted new business activities in structured credit. Second, we have put on hedges against our unhedged position, and for our hedged positions, as I mentioned, we have continued to take steps to mitigate extreme tail risk. Third, we have changed leadership of our debt Capital Markets area, and our structured credit business is being managed directly by Brian Shaw, the head of our Capital Markets business.

In addition to these specific actions, we are also strategically examining all of our business activities to ensure that they are aligned with our imperative of delivering consistent and sustainable performance.

For example, in November we announced the sale of our US investment banking, cash equities and research business in the United States. The risk return characteristics of these businesses were not consistent with our expectations or strategic framework that we have set for CIBC, a framework we intend to vigorously adhere to.

We also intend to place additional emphasis on building capital strength, which we believe to be prudent given the uncertainty of the current market conditions.

Our Tier 1 ratio is currently at the high end of the industry. With the favorable impact we expect from Basel II, our ongoing earnings and management of our risk weighted assets, we expect our capital ratios to continue to be comfortably above our published target. Our focus on building capital strength means that is unlikely that we will be active on our share buyback in the first quarter.

In summary, let me say that over the past two years we have focused on positioning the bank for consistency and sustainability. The fact that we have delivered record results this year despite the CDO write-down reflects the opportunity and potential of our core businesses. At the same time, it is clear that we have more work to do to ensure that all of our businesses reflect our strategic risk posture, particularly in certain parts of World Markets.

Our World Markets product development activities over the years have at times followed US and international money center banks and investment banks. In the case of our current structured credit exposure, that was also true. Part of the solution is to not participate in such business activities, and therefore, we have discontinued them. We will continue to take this approach in other parts of World Markets as necessary by seeking out further areas in World Markets that do not fit our strategy and risk profile. We want our entire risk activities to be consistent with the progress that we have made so far and the benefits that that has created for the bank.

As always, we believe this balance is important. So our emphasis in 2008 will be equally placed on remediation and management of the areas that are of concern to date, as well as ensuring that our strong healthy businesses continue on their growth path and that others join them once remediated.

Thank you and I will now turn the meeting over to Tom Woods. Tom

Thank you, Gerry, and good afternoon, everybody. My comments as well contain forward-looking statements, and actual results could differ materially. Let's start with slide five.

It summarizes the financial results for the quarter. As Gerry said, we had cash EPS of $2.55. This was helped by the Visa gain and partially offset by the write-down on our CDO/RMBS exposure. While these two items dominated the quarter, we had good results in several business areas and continued strong loan loss and expense performance.

Slide 11, Retail Markets revenue $2.65 billion was well up from recent quarters because of the $456 million Visa gain. Excluding this, revenue was up 7% from Q4 last year.

Slide 13 the first business within Retail Markets Personal & Small Business Banking, Q4 revenue was up almost 5% from a year ago as deposit balances grew over 7%. Deposit spreads widened in the quarter as the BA rate increased. The BA rate has since fallen back, so transaction deposit spreads are back to normal although GIC pricing has become more competitive. Q1 revenue here will likely be about the same as it was in Q4.

Slide 15 Retail Brokerage, revenue was up 1% from a year ago but down from the first three quarters of the year due to the change in market sentiment reflected both in lower trading volumes and lower new issue activity. Q1 will likely be down as well as many investors remain on the sidelines.

Slide 16, current revenue excluding the Visa gain was $374 million, in line with recent quarters. Managed balances were up 11.2% from a year ago, the largest year-on-year growth in six years. We see industry balances up at least 10% again in 2008. Q1 should be another good quarter with the benefit of seasonal balances growth.

Slide 17, Mortgages and Personal Lending revenue was well down this quarter for a number of reasons, very little of which related to volume, as we maintained market share and mortgages and lost only a small amount of share in personal lending. Mortgages accounted for most of the revenue decline due to the narrower prime BA spread, tighter pricing, lower prepayment fees, lower CMB securitization and various securitization hedging adjustments.

Going forward, to avoid combining the volatility from hedging activities with core mortgage revenue, we're looking at alternatives where part or all of this revenue would appear under either Retail Markets Other or Corporate and Other the way some of the other banks do it. Managed balances and mortgages were up over 13% on the year and almost 4% on the quarter. We foresee industry balances growing 7 to 8% in 2008.

Personal lending revenue was also down, though not as much as mortgages due as well to the prime BA narrowing and also due to the secured/unsecured mix. Personal loan balances were up almost 3% on the year in total with secured balances up 15% but unsecured down 13%. We expect mortgages and personal lending revenue to be well up in Q1. The prime BA spread is back to normal, and mortgage pricing has improved.

Slide 20 retail markets net income excluding the Visa gain was $531 million, up 12% from Q4 a year ago and adjusted for the tax recovery we received in that quarter and up 8% excluding FirstCaribbean, which we owned 44% last year versus 91% today.

Turning now to CIBC World Markets, revenue was well down from recent quarters due to the $463 million net write-downs on CDOs and RMBS related to the US residential mortgage market.

First business in World Markets, slide 23, Capital Markets revenue excluding the CDO/RMBS write-downs was $214 million, down from levels we saw earlier in the year. This was due primarily to increases in counterparty credit and other reserves in our hedged structure credit intermediation books.

In addition, our credit flow trading business was down, due mainly to negative marks on credit derivative trading positions, and our interest rate derivative business was down due to low client activity.

On the positive side, our new issue business was up, and foreign exchange continued to be strong, helped by the Canadian dollar volatility and retail customer buying of US currency.

Equities had a good quarter, particularly in equity derivatives, which had high dividend income offset in part by a slower quarter in retail note structuring. However, so far in Q1 both our debt and equity businesses are off to a slightly slower start.

Slide 24, Investment Banking and Credit Products revenue was back to a more normal run-rate. Last quarter's revenue included $77 million in gains on credit derivative hedging compared with only $17 million this quarter. Canadian mergers and acquisitions revenue was strong with large transactions for Stelco Aur resources and Abitibi. And our US business had a more normal quarter after a very strong Q3.

Q1 revenue will likely be down as the Canadian new issue pipeline is not as strong as it has been, and we expect only two months revenue from the US before the sale of our Investment Banking business there to Oppenheimer closes. Although we have a reasonably large backlog of M&A transactions, the prospects for new M&A business, particularly large transactions, appears to be lower due to the declining market appetite for leverage corporate lending.

Slide 25, merchant banking, had revenue of $141 million, down from the very strong Q3. We had gains and distributions of $164 million, offset in part by write-downs and funding costs of $25 million. Approximately 40% of $164 million were distributions from fund investments, which had high levels of divestitures again this quarter.

Merchant banking revenue in 2008 will be driven primarily by how easily sponsors can divest businesses into the leverage finance market. But at the moment it appears our revenue will be down significantly from 2007.

Slide 26, World Markets had a net loss of $64 million in Q4, due mainly to the $302 million after-tax write-downs on the CDOs and RMBS; the other charges in our structured credit business and the write-offs in connection with the upcoming sale of some of our US businesses.

Let's go back to slide nine, turning now to our consolidated expenses, which were $1.87 billion in Q4. These included $47 million of US divestiture write-offs, higher seasonal advertising costs and lower than normal incentive compensation accruals. Q3 expenses benefited from higher litigation expense reversals. We continued to be running at a better rate adjusted for FirstCaribbean than our objective, which is the Q4 2006 baseline of $1.892 billion.

Beginning in Q1 we will adjust this baseline further to exclude the cost of our US divested businesses for comparability.

Slide 47 shows the normal disclosure on our tax rate adjusted for the unusual items. This quarter the Visa sale gain was taxed at the capital gains rate, which is half the regular income tax rate. As well, we had a higher amount of dividend income, which is non-taxable.

Let's go to slide 51. This provides a breakdown of our CDO/RMBS positions that have exposure to US subprime and that are not hedged with counterparties. You can see that as of October 31 we had our US$1.6 billion exposure market roughly $0.50 on the dollar. Although we have not completed our November marks, the outlook for this exposure is to be marked down to about $0.34 on the dollar for remaining exposure netting to under US$400 million.

All but US$300 million of this US$1.6 billion notional has been marked based on independent dealer quotes, which as you know are at very distressed levels. The US$300 million that was marked to model is the most straightforward super senior position we have, and its mark is not that different than the quotes we have received.

Although there were no other international banks with October year-ends to compare these marks to, I can tell you that our August and September marks when compared to the published figure for such banks appear to be conservative, and certainly the imputed ultimate defaults and loss rates behind these marks are considerably higher than those being generally forecast.

Slide 52 provides a breakdown of our CDO/RMBS positions that have exposure to US subprime and that are hedged with counterparties. You can see that all but US$3.5 billion notional is hedged with AAA and AA counterparties. As Gerry said, the A-rated counterparty has recently been placed on credit watch. It has begun discussions with its rating agency and with its counterparties, including CIBC. It is too early to tell what the outcome of these discussions will be.

One possible outcome could be a recapitalization, possibly involving the counterparties. This would likely result in CIBC taking a counterparty credit reserve in excess of the small reserve that was in place as of October 31. If a downgrade occurred, CIBC would have to take a larger counterparty credit reserve. Even in an extreme outcome however, we would anticipate that our capital ratios would still be comfortably above our published targets.

Turning now to our credit and market risk management measures, with respect to credit risk on slide 54, specific loan loss provisions were $134 million in the fourth quarter. This represents 31 basis points on net loans and acceptances. The $30 million decrease in specific provisions versus Q3 is a result of an $8 million decrease in World Markets and a $22 million decrease in retail markets.

World Markets recorded a net recovery of $16 million in the fourth quarter as recoveries in the large corporate portfolio increased from Q3 levels.

Retail markets loan losses were $150 million in the quarter. Provisions in the personal loans portfolio here declined $23 million versus the prior quarter. The improvement was driven by lower write-offs in our unsecured portfolio.

Net impaired loans declined to $310 million at the end of Q4. Gross impaired new formations were up somewhat from Q3, but continued the downward trend over the last several quarters. Whereas the industry trend for new formations continues to go up.

Turning to market risk, slide 55 displays Q4 distribution of revenue in our trading portfolios. In Q4, 54% of trading days were positive, down somewhat from prior quarters. The trading revenue here does not include the reductions in mark-to-market value of our structured credit assets, as this analysis is carried out only at each month-end.

Slide 56, our Tier 1 ratio was up 5 basis points compared with the prior quarter. Internal capital generation was partly offset by higher risk-weighted assets and exchange rate impacts on our international capital balances. At 9.7% our Tier 1 ratio is well above our 8.5% target.

I will now hand things over to Sonia Baxendale, Head of CIBC Retail Markets.

Thank you. My comments may also include forward-looking information, and actual results could differ materially.

Overall Retail Markets performed well in 2007. Consistent with our stated strategy, we continue to focus on our three strategic priorities of building strong advisory solutions, enhancing the client's experience and offering highly competitive products. We had strong performance in our industry-leading credit card business. Average credit card balances grew 11.2% year-over-year while maintaining a high quality portfolio. 2007 average balance growth was both the highest year-over-year increase and the first double-digit growth since fiscal 2001.

Growth in credit cards was largely driven by two key initiatives launched at the beginning of 2007 -- the revitalization of Aerogold, including Mileage Multiplier and increased marketing spend, and the launch of the no fee Platinum Visa credit card. Both initiatives have increased new client acquisition, client retention and overall spend.

In a highly competitive mortgages market, we achieved full-year growth and balances of 13% with flat market share. This growth was driven through a combination of branch and alternative distribution channels; the introduction of over 120 branch network mortgage specialists, increased capacity of our alternate mortgage distribution channels by our additional mortgage adjudicators, and strong marketing investments against key promotions, as well as incremental training and support in both channels.

As anticipated, our total lending balances were flat in the quarter and slightly down year-over-year. Our focus in 2007 was to improve acquisition and account management in our lending portfolio, and we are making progress. New personal unsecured lending originations are demonstrating better characteristics versus older vintages at similar points in time.

We are very pleased with our strong growth in deposits and GICs, particularly in this extremely competitive market. This quarter we experienced the highest market share increases of the big six banks. Our 8.7% combined balance growth in deposits and GICs was driven by growth in both the CIBC and President's Choice Financial brand, revitalization of our bonus savings account offer and increased marketing.

This past year in mutual funds net sales were $1.1 billion, our highest net sales year since 2004. Our performance was driven by a strengthening in our overall funds portfolio. Currently we have 16 four and five-star rated funds by Morningstar. We were recently awarded two Canadian investment awards for the Renaissance Canadian Monthly Income Fund and the Renaissance Global Health Care Fund. And last month we launched two new income-oriented funds that will provide incremental growth opportunities in 2008.

We had a solid year in our full-service brokerage business with a record high level of fee-based assets at in excess of $47 billion, representing a 12% increase versus 2006. This growth has been supported by continued strength in our separately managed account business and in the launch of our discretionary investment management programs. Good growth in overall revenues with a 4% increase versus 2006.

And in distribution we have made progress in 2007 in our strategy to improve client accessibility in all of our channels. With the second-largest physical distribution network of branches and ABMs, our focus is on improving both the client and employee experience. We have 40 of the 70 new branch builds in progress which will open in 2008 and 2009. We increased our 2007 maintenance budgets in existing branches by 70% year-over-year. And last Sunday we launched our pilot in three branches in Toronto and two in Vancouver with our Sunday openings. Early feedback from both employees and clients is extremely positive.

In summary, 2007 was a solid year for Retail Markets. In 2008 we will build on this foundation and make progress against our key strategic priorities in support of delivering consistent sustainable revenue growth.

Thank you. I will now turn over to Brian Shaw.

Thanks and good afternoon, everyone. My remarks may also include forward-looking information, and actual results could differ materially.

As Tom covered off in his financial review, the fourth-quarter earnings performance for World Markets was impacted by the pretax mark-to-market write-down net of related hedges of $463 million on structured credit positions related to the US residential mortgage market.

Largely due to the write-down, net income was down $324 million from the prior quarter. This resulted in a quarterly loss to World Markets of $64 million. For the full year, net income is $601 million, down 7% from the $646 million recorded in '06. Revenue for the year was also down 12% over last year, primarily due to the mark-to-market structured credit write-downs.

Like other investment banks in the financial services industry, we continue to be impacted by a current market environment characterized by continued volatility and weakness in structured credit products, as well as illiquidity. As a result of the challenges in credit markets, our focus in '08 will be to significantly refocus our structured credit activities.

Specifically our emphasis will be on reducing exposures while maximizing recovery, reducing risk and volatility in financial results and on narrowing our credit structuring activities. Given the nature of these securities and the fact that the market for these products continues to be illiquid, we would expect that management and exiting of these positions will occur over some period of time.

Our second area of focus will be on completing the transition of our US domestic investment banking equities and leverage finance businesses to Oppenheimer. This sale allows us to reduce resource use and operational complexity. At the same time, it reduces risk and frees up capital without giving up earnings.

Our third area of focus will be in Canada where we have strong origination and Capital Markets businesses. These are robust and competitive businesses with strong talent and a legacy of high-quality client relationships.

In addition to our activities with large clients, we have been actively working over several years to extend our reach by developing midmarket relationships and broadening our base. We believe an intensified focus on these core Canadian businesses, including connectivity to targeted capabilities beyond our home market, provides us with a solid foundation for our business as we move into '08.

Our performance in this quarter demonstrated our continued competitive strength in these core businesses despite difficult market conditions. Our Canadian Investment and Corporate Banking business continued its strong '07 performance. Canadian M&A revenue increased by 40% for the quarter. Canadian investment banking revenues overall were up 13% from Q3.

Revenue from Canadian equity new issues was flat quarter-over-quarter. Q3 and Q4 were down significantly from the first two quarters, reflecting market conditions. However, revenues were up strongly for the year due to improved volumes from a variety of sectors.

We also had another solid quarterly performance from both our Canadian and US merchant banking businesses. This was driven by strong results in our direct investing activities. Our US real estate finance business also showed profitability in a quarter of challenging market conditions.

In summary, CIBC World Markets Q4 results were once again impacted by market and industry conditions characterized by volatility. Like our competitors, we operate in a risk-oriented business. Managing market volatility is, therefore, an integral component of what we do.

Given current circumstances in our industry and in the marketplace, our results in the early part of '08 are not likely to match the strength and consistency we saw in the corresponding period last year. That said, consistent M&A activity throughout the year leaves us with a solid pipeline of business entering '08. We will focus on continued momentum in our core Canadian origination and Capital Markets businesses as the catalyst for the success of our franchise moving forward.

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

Thanks, Brian. We will now take questions on the phone.

(OPERATOR INSTRUCTIONS). Brad Smith, Blackmont Capital.

This is sort of a two-pronged question. First of all, Gerry, I was wondering in your opening remarks, you made some reference about subprime mix, I think 60% was what you said. I just was not clear what the other 40% was. Is it Alt-A, is it some other mortgage exposure?

And then the second question relates to the hedged CDO/RMBS and the position with the single-A rated financial US financial guarantor. I was just curious, that notional amount of $3.5 or $3.46 billion, it seems like a rather large amount for a single credit exposure. Is that somehow different than the criteria that you would use in managing your loan credit exposures for example?

Well, I will start with the second question first, and then Tom will give you a breakdown of the exposures on the subprime percentages. The transaction question on the A were intermediation transactions, and essentially those are back-to-back derivative transactions. It is now clear that the combination of having a concentrated exposure to a A-rated counterparty in a significantly stressed market is not a position that we would choose to be in.

At the onset here, the securities underlying the A-rated hedge were rated as AAA super senior. As a result of that, the coverage that normal risk management systems would throw off from the viewpoint of a credit risk equivalent, the coverage of an A would under the risk management system be sufficient to offset that.

The issue here is that the structuring features that were to provide the protections that one would have expected have not functioned the way that we thought in a significantly stressed marketplace. That has led to a number of changes in our risk management practices.

First and foremost, we're not doing this type of business anymore. Secondly, in addition to the normal credit risk equivalent, we have put on notional limits for any assets that would resemble this. And thirdly, in our normal loan practices, this is not something that could take place because there are concentration limits around industries and concentration limits around single name exposures that would pick up this type of issue. Does that answer your second question?

Yes, I think it does. Thank you very much. Just to be clear, you have now put notional limits in place in your risk management practices?

For assets that would not be picked up by single name concentration or industry concentration limits, we have done that. Any areas where we have single name and industry concentration limits, it is not necessary because that is fairly robust and operates under models that are very common across the industry.

Great. Thank you.

Okay. Tom?

Yes, it is Tom. Just on your first question, the comment in Gerry's presentation related to the hedged book and how the underlying mortgages underneath the various reference assets, about 25 reference assets, is under 60% subprime in the underlying.

Now, as many of you know, that does not necessarily mean that the other 40% are necessarily going to perform the way non-subprime has performed in the past. A fair bit of that is what is called Alt-A, which is better than subprime, but it is still mortgage business that has inferior documentation compared to prime mortgages, which are in there as well.

The point we are making here is the underlyings in this portfolio are not 100% subprime. They are about 60% subprime.

And just one follow-up. The leverage in those CDO of mezzanine RMBS, roughly of the 25 references, do you know what it might -- how you can characterize the leverage there? Is it 10 to 1?

Yes, the attachment points, just looking at the range, I mean they range from 12 up to 50 with an average attachment point of about 30%. So what that means is the super senior tranches are senior to the junior tranches by 70 to 30. So there is 30% subordination.

John Aiken, Dundee Securities.

In terms of the underlying -- sorry, obviously this is on the hedged CDO exposure. In relation to the underlying CDOs that were brought on to the -- that are actually on the balance sheet, was this actually -- were these originally purchased for the balance sheet, or was this brought in from a conduit?

I will have a shot at that. Maybe I will start off by just describing two different tranches of activity. I was not sure which one you're referring to, but let me cover both. We had a business that was involved in structuring transactions. In other words, we bought securities, we pooled them and we looked to move them off to other holders. That is the business we refer to as long or unhedged positions. So effectively think of that as getting our pipeline jammed up as markets deteriorated.

A second category is investment was what we might refer to as intermediations where we plan to have those on the balance sheet and create a low risk portfolio of positive spread income. So you have got some of each in the inventory.

Okay. Thanks, Brian. Can you give us a sense of what the vintage is on the underlying CDOs?

There are a variety of vintages. 0602 would be the one that would be the highest, and I think 0601 would be second. Is that right, Geoff? Is there a bit of 0701 in there?

(inaudible).

A tiny bit of 0701 and not much 05.

05 and 0701 were about the same.

About the same? So mainly 0602 and 0601 with a bit of 07 and a bit of 05.

Maybe I can just jump back in. It is Brian Shaw. I'm missed part of your question. I think when you asked it, you had asked it also in the context of conduits. Not to confuse issues, none of the positions that we have on the balance sheet, whether in the structured category, i.e. what we call unhedged, or in the intermediation category has any particular reference to conduits. We did not put any product on our balance sheet that was otherwise destined to go in conduits. I think that was perhaps what you were asking?

Yes, thanks, Brian. And just finally, Tom, you had mentioned in your prepared comments that there was -- you had taken some counterparty credit balance as at October 31. Can you let us know what the magnitude of that was?

Yes, that is formulaically driven based on our internal rating system. For that A it's the formulaically driven number, and it was under $20 million.

Michael Goldberg, Desjardins Securities.

In view of the uncertainty regarding your exposure to the structured credits and your objective to build capital, would the prudent thing to do in terms of expectations be to not look for any dividend increase until this cloud has dissipated?

Michael, it is Gerry here. First of all, I think that from a viewpoint of capital availability that the buyback is or other capital investment activities has a far greater impact. So that is the area we're in at least in the first quarter. I wanted to be very clear that we do not expect to resume the buyback.

In the area of dividends, we have had a very clear policy in place around our dividend payout and the fact that we intend to payout 40 to 50% of our earnings. It is my view that subject to continuous review with the Board of Directors as we always do, that that policy is one that we are going to stick with. And I think that what we will need to do is review the ongoing earnings profile as we proceed throughout 2008 to determine where we are in relation to the 40 to 50% payout ratio. If as the year progresses we feel we are on reasonably solid ground in terms of needing to adjust our dividend upwards to achieve our 40 to 50%, then I think we would look very seriously at that because the 40 to 50% payout ratio was intended to be in relation to what we view as our sustainable earnings and our earnings over the longer-term.

In addition to that, the differential from a dividend increase in the period of time that we are looking at would not have a major impact on our capital cushion. So I think that it is fair to say that in the near-term the share buyback is something that is improbable. I think that you should look at our dividends exactly the way we have talked about them for the last few years. We will review for increases against our targets that we have stated.

Okay. And I have one other one going back to slide 52. The mark on the AAA is 61% of the notional, and it is 51% on the A. Why such a small difference?

Keep in mind these marks are on the underlyings, not a reflection of the quality of the counterparty. So what this tells you is the underlying positions of the CDO of mezz RMBS on the 14 reference assets in row one are slightly better quality than the CDO mezz RMBS supported by the A.

Okay, and one more. You said that you would be -- Gerry, you said that you would be reviewing World Markets for other areas where return might not compensate for risk. Could you give us some idea of what areas within World Markets you are concerned that there is not the appropriate risk/return balance?

Well, our structured credit business that Brian Shaw is currently managing directly is an area of primary focus, the entire structured credit business. And, on an ongoing basis, we recently did make some changes internally in terms of our overall Debt Capital Markets business. And the management that has been put in place is working closely with Brian Shaw to review the businesses overall within Debt Capital Markets at this time to make sure that we have the right configuration from a viewpoint of capital deployment and capital return. I think it would be a good idea that Brian would expand on this a bit because he is participating in leading these reviews. Brian?

Maybe I will just add a couple of comments. I think it would be the worthwhile stating that given all circumstances, including market conditions we have been fairly actively undergoing a bit of a reorganization of the senior leadership team at World Markets. In the last period of time, we have appointed two new Deputy Chairmans for World Markets, one to run our origination businesses and another to be a senior person in the trading room. Those two individuals and myself are also working together to table what I would call a bit of a revised plan for our Debt Capital Markets group, which, of course, is the business unit in which structured credit resides. So there is that activity going on.

In addition, I think as referenced we did change some of our leadership in the Debt Capital Markets area and also in some of -- in one of our businesses outside of Canada. So I think the net result of all of that is a fairly significantly revamped leadership team at World Markets, which is now doing a number of sets of -- creating a number of sets of output to ensure that all the businesses we have we're comfortable with.

And Michael, it is Gerry here. Another example of this would be the fact that we have recently announced our divestiture of our US investment banking business as well as our US cash equities and research business. And those businesses we believe we're not giving us adequate return for the capital deployed and the risks that we would have to take to be in those businesses. And that is the type of review that is ongoing.

I think it is very important to also emphasize that the purpose of this is to reinforce the very focused World Markets on businesses that we have tremendous track records in and we have done very well in. And I think when you think about our World Markets business, it is important to think about the core and reinforcement of the core and other activities that may have grown up and are more peripheral are the areas that we would tend to examine. We have a very strong Canadian investment banking business and our Debt Capital Markets business, our foreign exchange and fixed-income businesses are strong. And in the United States, during a difficult period, our US real estate finance activities have performed extremely well over the course of the summer and into the fall and have had a record of high profitability. We will continue to focus on those businesses, and the purpose here is twofold.

First and foremost, to ensure that our risk management has the right focus and that that focus is working well with the businesses. In order to do that, we believe that we should focus on their activities where we are strongest and other activities that are more peripheral or may have grown up around the key businesses. If they are supportive of the businesses such as some of our overseas operations, then I think that that is important, because they strengthen core activities.

If, on the other hand, they have grown up as a result of opportunism in certain areas because we happen to be there, I think that requires closer scrutiny. Does that answer your question, Michael?

Yes, thank you.

Rob Sedran, National Bank Financial.

My question surrounds the endgame on the CDO and RMBS issue, and I guess I am also going to focus on the hedged exposure. The hedges I'm assuming have to do with underlying credit quality, but not necessarily the value of the CDOs, and we have talked a lot about counterparty risks. But if the market recovers and you can sell these securities at, say, $0.80 on the $1.00, would you have to book a $2 billion loss, or is there some kind of benefit you would recognize on the hedge?

Now I mean at the moment we are intermediaries between counterparties on either side. So at the moment, we have positive mark-to-markets on the exposures on the page with the counterparties. They, in effect, if things stopped right now would owe us that money, and we in turn would owe the other side the money. So we would not want to collapse either side because you would be unhedged in respect of that.

So the objective here would be, in order to mitigate that counterparty risk, attempt to work our positions down on both sides at prices that we felt were reasonable. So that is the challenge going forward, and hopefully it should match on either side.

I think also when one looks at this portfolio, we need to consider the fact that the portfolio is something that is also being managed on an active basis. In my remarks I talked about some of the offsets that we have engaged in, and for example, we have been purchasing credit default swaps from broad-based highly rated counterparties who are banks as an offset against extreme tail risk for our AAA exposure and our AAA counterparties that are hedging our exposure.

In the case of the AAs, we have full cash collateral arrangements, and so we have the offsets in hand. And in terms of the A, that is the area that we have mentioned is more challenging, and we're working with that counterparty on their restructuring activities.

But there is an active strategy in place that we believe will be successful in terms of mitigating the exposure in terms of our AAA and AA counterparties. In terms of the A, as we say, it is an ongoing series of activities in terms of working with the counterparty.

Andre Hardy, RBC Capital Markets.

Two questions. One, on slide 57, the fourth box, asset-backed commercial paper. How much of that $17.3 billion would be invested in structured finance assets and how much leverage in general would there be in those conduits?

And my other question relates to your US real estate finance business. How much risk would you keep on the balance sheet in that business, whether hedged or unhedged? And what would keep the problems that are facing US residential real estate from spilling over into that business?

I will answer the second question first, and then I will turn the first question over to Tom Woods.

In our real estate finance business, first of all, this is in the commercial real estate area. It is not in the residential real estate area. In that business we are involved in the origination of real estate loans. And so our team works directly with the commercial real estate counterparty and does the underwriting. So that the risks that one has seen come in through the structured credit business in subprime, part of which are as a result of the fact that there are multiple counterparties involved in the chain of origination, that risk is not present in terms of our activities in the commercial real estate sector in the United States because we do the underwriting ourselves. That is the first difference in terms of these businesses.

Secondly, the asset class while it, of course, can come under cyclical pressure also, has characteristics that are quite different from a loan underwriting viewpoint than the residential sector was in the United States.

Thirdly, our real estate team has managed through the cycle quite well. Despite the turmoil of the summer, they cleared product in September, and any origination that has occurred since then has been a pace of the new market conditions. And Brian Shaw will talk in a second about the activities that we are engaged in today.

But the group managed through this period quite well. They did manage their inventory through the summer with hedges in a fashion that allowed them to pick up any spread widening so that they could clear inventory in September.

On an ongoing basis, the group proceeds with caution. Because of the fact that this is an area that when you are originating these loans, you are originating them at a level that does not have initially this AAA super senior element to it. And so it receives a tremendous amount of scrutiny, and I think that that is something that has been very helpful here. Because the management of ongoing risk, when it is perceived as part of the core activity, is something that I think allows for a wider margin established for error.

Brian, why don't you talk a little more about that?

Just a couple of additional comments. So in that business we do both fixed-rate and floating rate lending. One attribute of the business is that we have been fairly active in developing a hedge program for that business both in terms of interest rate hedging and also spread hedging. So, as you probably know, there has been quite a backup in CMBS spreads in the recent period. But our book is in good shape. I would say relative (technical difficulty)-- or with respect to the hedging we have done.

Another point would be that one of the problems in subprime residential is the whole way loans came to be initiated is obviously with the benefit of hindsight seemed to have not been perfect. Here we take an approach of individually adjudicating each separate credit. So I think that gives us quite a high-quality way to develop business. The credit adjudication is all our own, and it's on each individual asset. So I think that is a bit of a different approach than in the other space.

And just lastly, it is fair to say that given the spread widening and the backup that we have seen, volumes have slowed so we're seeing loan originations slow, and we are taking a cautious approach given some of the changes going on in that space.

That is helpful but can you clarify how much stays on your balance sheet once you securitize assets?

I guess I see the portfolio as having three components. The bulk or the core component is a fairly short term cycle to originating and distributing, and that is fixed-rate product. So, at this moment in time, we have a very modest portfolio of positions. It would be -- I will do a quick calculation in a moment, but it is a small number of single of hundreds of millions of dollars.

We have another component of our portfolio that is a little longer standing, but in aggregate it is certainly less than 1% of our asset base.

And that is unhedged, and is there an issue with hedged like there would have been in the residential world?

No, that is the -- I'm speaking there about the aggregate side of the portfolio, and against that we have some interest rate hedges and some spread hedges.

Okay. That is helpful. Thank you. And on the asset-backed paper?

Yes.

It is Tom. So the way to think of this is of the $17.3 billion in backstop liquidity facilities, 15.7 of that is to CIBC sponsored and structured facilities. Those are conduits, and those are the ones we have listed in the press releases.

So the other 1.6 are to conduits that we have either sponsored but third-parties have structured, or we have given lines to the conduits that are structured and sponsored by third parties. Of that $1.6 billion, there is no real estate exposure is our understanding. And more important -- just as importantly, two-thirds of that $1.6 billion are general market disruption facilities as opposed to global liquidity facilities.

Mario Mendonca, Genuity Capital Markets.

First, just to clarify the response to Andre's question, the inventory of commercial mortgage-backed securities, Tom, you would say that is less, or Brian rather, that is less than 1% of the bank's total assets on a gross exposure basis? Is that true?

Say that again. What are you and --?

Part of this real estate finance business, the commercial mortgage-backed securities on the bank's books now, I think, Brian, you characterized that as being less than 1% of the bank's total assets gross.

Yes, it is less than 1%.

Gross, okay. The other question, I want to make sure I understand all of this disclosure on page 52. It sounds to me that if the subprime market were not to deteriorate any further from where it was on October 31, the exposure at this point would be -- and if only that A-rated counterparty were to fail, the exposure would then be precisely the $1.7 billion, the far right of that table?

Yes, that is correct based on the marks that we have today, correct, as of October 31.

And maybe you could just tell us how -- things have probably deteriorated because November was a tough one.

Yes, and this is probably a good spot for me to make a few comments on the challenges in marketing. And I know many of you, perhaps all of you understand a lot of this. But as of November we have not done marks as of November. But we have started on our unhedged book as I told you, and things have clearly deteriorated there.

You know, so much of that is influenced by the US investment bank's calendar year-end November 30 influencing the marks is hard to know. But, as I said in my presentation, the imputed loss rates there are way above any predication of what will actually transpire by extrapolating the trajectories of the delinquencies.

Having said that, to try and answer your question, that 1.7 would be higher based on the quotes that we have. I want to emphasize, though, that is a number at a point in time. The ultimate losses would play out over a period of time.

But to your question, if this Company were to, for example, be downgraded or worse, we would have to base our P&L charge on the marks that we're looking at there. And to the extent those marks prove to be pessimistic as things played out over time, then any gains would be brought back in through our P&L in the future.

It is Gerry here. The peak exposure was on the real estate finance business in the United States as per your previous question would have been more in the range of 1%. But they did liquidate a large portion of their inventory in September as a result of their distribution activities. And so they would be well below that at this time.

So, for example, in the past they would originate their mortgages at the client level, build up to as much as $2 billion of mortgages, maybe a little bit more. Then those would be securitized to third-parties, not to CIBC.

At this time they would be running because of what Brian talked about earlier on much slower activity levels. They would probably be running at half that in terms of the level of originations that we're holding for distribution down the road. And that is as a result of the new originations that would occur to be distributed post our September deal that we did. So the levels are actually -- 1% I think it would be higher than we would expect to be at this time.

And then finally, when you refer to trying to eliminate some opportunistic businesses or businesses that came about as you suggested opportunistically, the decision to write protection for some parties and then buy protection from others, does that qualify as one of those businesses you would say really came about just for opportunistic reasons?

I think you're talking about what Brian referred to as the intermediation business?

Right.

Well, we are no longer going to be participating in those types of activities. We would from time to time. It is not that we would never do a transaction like that again because there are many derivative activities that take place that involve at times hedging yourself with one counterparty and then possibly laying it off elsewhere later on.

And so the fact is that we do continue in the business of working with derivatives to hedge our activities and at times hedge client activities. But this business that Brian was talking about where its purpose was to intermediate or stand in the middle of two counterparties and build exposures and hold them on our books, we're not interested in continuing in those activities.

Ian de Verteuil, BMO Capital Markets.

So the intermediation business, which gave rise to this $10 billion of positions, when were these positions put in place, and what would you have perceived to have been CIBC's value-added?

Those positions would have been put in place in fairly recent timeframes for the most part within the last 18 months. There may have been -- and I do not have the data right in front of me -- a more modest portfolio prior to that time, but substantially in the period I described.

And I guess on the second part of your question, I guess it is an age-old view in financial markets that one of the things you need to do to be successful is get yourself inserted into the information flow and the client interaction game to a sufficient extent that you then see opportunities that come from that. You know whether it be the equity business or the debt flow business and I would say the credit game or the credit business is really not much different.

So the value-add or perhaps the motivation is a better way to say it. What has sufficient volume of activity that it allowed us to do things, have client relationships thereby get information and create a broader-based business.

I think as Gerry alluded to earlier, it did not get to the point where it was ever a very meaningful bottom-line contributor, and therefore, ending up in this circumstance is something that is not -- you know, is something that we as management obviously reflect on as not being something we set out to achieve, but nonetheless this is where we are at.

So I think the way to think about it is a way to create sufficient levels of interaction in the marketplace to drive the business forward on a few different fronts.

The second question is it looks 35% of your insurance was purchased from the lowest rated insuror. Why would you have done that? Why -- I think this year you have a total -- it looks as if you are almost 10% of all that counterparty exposure. Why would the bank have chosen to go with that one as supposed to somebody that was much higher rated?

Well, I guess I would say a version of what Gerry said earlier. We set out to create what we thought at the time was a low-risk positive spread intermediation portfolio. We were looking for opportunities. The particular counterparty in question happened to have a business plan that had them active in the very space that we were in, and I think as Gerry suggested or as I will suggest now, a combination of having today a very concentrated A-rated counterparty and a very stressed market, even though our primary objective was wrapping or protecting AAA portfolios is not one we would feel very comfortable with today.

In the final analysis, I think I talked a little bit about how we got there. I guess with the benefit of hindsight, we have underestimated or we overestimated the extent or the value of the diversification we thought we had, and we underestimated the severity of the security performance and the counterparty performance in a stressed market. That is basically what it comes down to.

I guess I want to pick up on a point you made on being in the flow and having information on this. I mean I would love to hear Gerry's response to this. It certainly seems as if a number of people knew you had $10 billion worth of gross exposure and a relatively large exposure to a relatively lowly rated counterparty. I mean how -- Gerry, how do you think about that?

If you could just repeat the question. I did -- I just wanted --

Well, it certainly seems as if some people knew you had $10 billion worth of gross exposure with a fairly high concentration towards lower rated counterparties in this current situation. And I guess I'm just sort of wondering -- I mean do you perceive that?

Do I perceive that people seem to -- like you're saying that people knew about it? I'm not sure the direct question.

Maybe I will go on then --

But I mean I can take a stab at it. I mean you could just -- you know, if you were a little more direct, I can be sure I answered it. But while you are thinking about that, I will take a shot at what I think the question was.

The situation of awareness around our counterparty, our counterparty risks picked up steam after the A-rated counterparty was put on watch by the rating agencies. And I think that what took place at the time was that the activity level picked up a fair bit in the marketplace in terms of discussions amongst a variety of people in the marketplace about what the implications of that might be, as well as what the potential workout might be on a recapitalization basis. Because the activity level in terms of people speculating on this insofar as we could see from -- and you're never certain because you're looking at your stock price movement and you're picking up things from analyst comments -- but all of that seemed to pick up a fair bit of steam after that counterparty was put on watch. And so we think that is when the focus in the marketplace shifted in that area.

Also, we had been fairly clear that the exposure that we had that we had been talking about was our unhedged exposure, and then at a certain point in time when that counterparty went on watch, people looked at our declarations where we had been clear that we were not yet talking about our hedged exposure and we did not have a reason to. Once it went on watch, I think people started to focus on that more so than they had in the past.

So if you were asking, why the pickup in interest on the part of the marketplace, I think it was related to the counterparty going on watch. Did that answer your question?

I think so, but I think we are all aware the counterparty was on watch. But the counterparty I think is about 7% or 8% of all counterparty exposure in this space. But it ended up being 35% of your exposure.

I guess my next question is, how -- I mean do you feel the bank needs to add talent in the risk management area?

Well, first of all, from a risk management viewpoint, I think we need to not be in certain businesses, and this is one of them as I have stated earlier on. That is the first thing. The value-add for the risk taken does not fit our criteria in terms of long-term returns with lack of volatility.

The second thing is that I think that it is important for me to talk about the fact that when one was looking at this during the period of time where you had the wrapping process going on, the perception would have been that you had diversification in terms of the underlying assets that were being hedged by the counterparty.

Today subprime real estate has reacted with a very high correlation across all geographies and across all of these securities. At the time the perception would have been that these were super senior AAA securities, and I know today that sounds very hollow looking at the marks on these. But these were securities that the structuring was intended to give diversification across large geographies and mitigation around the potential for high correlation across the full suite of securities.

So there was a perception there was diversification among the securities which would have diminished the concern around the A-rated counterparty having such a large exposure. Under risk management systems, classic risk management systems, the credit risk equivalents that these securities would throw off would be reasonably small and would map to the capacity of a single A-rated counterparty which at the time people thought of as being investment-grade and well into the area of investment-grade by all the standards that existed from a coverage viewpoint at that time.

(multiple speakers)

That leads me to your second part of your question. When one can look at all of those mechanical indicators and say that all of those boxes would be checked off and yet you find yourself in a situation that subsequently is unacceptable, I think there are two things that you do.

You look at the business that you were in, and you ask whether or not the returns are worth it, and we have said the answer is no. And you also look at the risk management practices that got you there. And to your question I think that we do need to be stronger in that area, and we're looking at that.

Because it does seem to me that as you say you have checked off all the boxes, things according to your systems that work, but it is almost as if because of the extensive turnover in the risk management area, and there were not enough people that can smell where these things can come out. And it does, it is something I wonder why you have done a great job in controlling costs and getting the organization tighter, but I wonder whether one of the implications -- one of the side effects of that has been a thinner risk management and management ranks than the bank really needs. Anyway, that is just a statement, Gerry.

Well, I have to emphasize that when I speak about risk management, I'm not speaking specifically about only the formal risk management staff functions. I'm talking about risk management across all areas of CIBC that would have been associated with these activities.

The first thing I think is extremely important to remember is that all activities start with the ticket being written. And, therefore, I think that the risk management and thought process that takes place at the origination level in this case is important.

I think in addition to that there are elements of the classic risk management systems that in this particular case throw off results that can lead to large variances that you have noted. And I think, therefore, that in a world that is rapidly evolving I think the classic risk management algorithms that are used need to have further checks put into them. And then, of course, I think that one can always decide whether or not more resources would make a difference, and that is something that we would also look at. But I believe that first and foremost we have to decide about the businesses that we are in and whether or not their risk profile fits CIBC and whether or not the returns are the type of returns that our shareholders are interested in.

Once we have decided that, as I said, first and foremost I believe that the responsibility for risk starts when you originate and write the tickets, and we have to make sure that we have that right. We also need to make sure that all of our algorithms for the risk management system are correctly calibrated for the risks in the environment. And I think it is a changing environment, so we either have to be excellent or not in those businesses.

And thirdly, one should always look at whether or not staffing levels are adequate. I do want to emphasize, however, that I think that there are some elements of this business that -- it is a business question first about whether or not you want to be in them. And, as I said in my earlier remarks, CIBC has tended to go where the large international banks and money center banks have been in terms of some of our activities.

We're now having an experience that is more similar to those types of competitors in terms of our loss experience, and I think that historically we have tended to participate in those marketplaces, and I think we have to be more circumspect than we have in the past. So I think this is more a business question than a risk management question, but we are reviewing our risk management practices.

Darko Mihelic, CIBC World Markets.

I have a couple of clarification points and a few questions as well. The first point of clarification is, Gerry, you mentioned that you had cash collateral with the AA. It did not sound like you included the A exposure, so the first question is that. Do you have any cash collateral that has already been posted by ACA?

The second question, point of clarification again, you mentioned that it may be a slow sort of drip of losses over time. I guess my question from that standpoint would be, if you had lent money to ACA, wouldn't you have classified the loan as impaired already and taken a large provision? Why wouldn't that be the case with the counterparty risk?

The third question along those lines is you mentioned that it may be recapitalized. It almost sounded as though you were leaning towards CIBC playing in the recapitalization. Would that be true? In other words, would you be willing to be a participant in the bailout to save the counterparty?

And then I guess the fourth question is, it sounds like you want to reduce your risk exposure even to the AAA and the AA. How much are you willing to lose in that endeavor?

And then my last question is, with respect to Basel II coming into play, what will be the estimated impact on your capital ratios?

So the first question I'm going to turnover to Tom in a minute. It is around -- if it was a loan and impairment, and Tom will talk to you about the fact that if this is -- if they are downgraded, there will be a valuation adjustment, which I think would come -- would match your view of it acting like an impaired loan.

So Tom will answer that one in a minute, but I will take the recapitalization question and whether or not we would participate in that first -- whether or not we would participate in that.

We're not actually at that stage. The counterparty that we are working with has not up until now made a request of us of capital and, in fact, has indicated that they feel that their capital position is something that is adequate. Although I think that these matters are being updated as the rating agencies are rolling out their new models in terms of stress-testing the various financial guarantors in the marketplace.

So we have not had a request in that area. If we did, it is something that we would consider. We would have to consider it versus the other alternatives, and we would have to consider it also in terms of its investment merits.

The third question that you had I think was around the AAA and AA. And I have to say that, first of all, in terms of the AA, we have -- there is no particular reason to take any form of loss there, and there's no value add from at least perceptually from a risk diminution viewpoint because full cash collateral is exactly that. You are fully secured against the collateral that you have in hand.

And in terms of the AAAs, at this time what we have been doing is buying credit default swaps against the broad portfolio of counterparties that we have as a form of insurance against extreme tail risk. We, in fact, think that the purchase of the credit default swaps, the $420 million that I mentioned, we, in fact, think that that will be something that there may be more opportunity in as time goes by. Credit spreads in those areas have actually been tightening in in the last week or 10 days, and that is an area that we could see adding to our credit default swaps that we have purchased against those AAA counterparties, which as I say is just a matter of ensuring against extreme tail risk in that area.

Our view is that we would participate in a limited fashion if these are too expensive because we really do think it's a remote tail risk. But if the prices came in because of spreads tightening, we might purchase more, and again, it is just against the potential for extreme tail risk.

So I will turn it over to Tom for the impairment question, and then I just want to check that we have answered all of your questions. Tom?

Yes, on the impairment question we would treat this A-rated financial guarantor the same as any other counterparty in any of our derivative contracts. As at October 31, this is a company whose rating agency actually went public and said that no company in that space was in danger of being put on credit watch. Now that changed about nine or 10 days later.

Certainly with a downgrade, and I think I covered this in my presentation, we would take a counterparty credit reserve. You know, if your question is, let's say they do not get downgraded for a period of time through Q1 but they were still on credit watch and there was still some doubt, would we take a counterparty credit reserve?

I do not want to prejudge where we would be at the end of January, but I would say that the odds of us taking something if this uncertainty continued would be pretty high. Nowhere near the magnitude of that mark-to-market loss, but we would treat it just the way we treat any other counterparty. And if there was any good doubt on collectibility, we would have to take an impairment.

Okay, thank you. And I guess my other question was about Basel II. If you had any estimation of the impact on capital? And while I'm still on the horn, just another question. Do you have any subprime auto exposures we should be worried about?

Okay. Well, the Basel II question, we have got a very good idea what our 9.7 Q4 Basel II Tier 1 ratio maps to. We and the other banks are all in the same position, however, if not disclosing that until we have final regulatory approval by towards the end of the month. But I would say it is meaningful, and it reflects the fact that we have got a large book of mortgages, Canadian mortgages, low risk mortgages in Canada. We have got a corporate loan book that is quite low risk, so whereas today the capital is the same for any risk-weighted corporate loan when you overlay the low risk corporate loan portfolio we have today on that. Those two benefits more than offset the new operational risk capital charges.

Great. Thank you. And subprime auto, any exposure there?

Is your question on US subprime auto given the increasing concern of that sector south of the border?

Yes.

I'm not aware of any. I do not believe we have any.

Sumit Malhotra, Merrill Lynch.

Tom, I just wanted to follow-up on the process when it comes to a downgrade for some of your counterparties. You mentioned I think it was formulaic for the A-rated exposure. I believe you said it was $20 million that you had set up as a reserve. You do not sound quite as concerned about the AAA ones, but what is the process there in terms of timing?

Does a downgrade automatically trigger CIBC having to establish one of these adjustments in terms of the counterparty credit reserve? Can you give us a little bit more color on how that works? Because you described it as formulaic, but some more detail in that regard would be helpful.

Well, yes, we have as part of our risk management governance processes I call it formulaic. It is a very specific policy that quantifies the percentage of counterparty credit reserve that is required that maps to our internal risk rating processes, which generally are the same or very similar to the public rating agencies. So we have a risk rating on this Company today.

I have to say though that given the magnitude of this mark-to-market exposure and how it has grown and while this is always an overlay, I would say here we would not rely solely on the formulaically driven percentage mark-to-market.

So it is really a two-step process. You look at what your formula tells you, and then you overlay your judgment in terms of how things might play out. And to be very frank, in the extreme case if this Company were to file, we would take the entire mark-to-market because that would be the only metric we would have to assess the exposure.

And just to be clear, so right now the only amount that has had any kind of P&L impact is, did you say $20 million?

I think it is about $17 million is the formula-driven number as of October 31, which as I said given what has happened since then is obviously not sufficient. But that is a decision we make at the end of January.

Okay. And nothing yet for the AAA and AA exposures?

Well, yes, there are tiny amounts. Again, those are formulaically driven. But I would say the same situation would occur there. Again, given the magnitude of the mark-to-market positions, we would assess those numbers and decide whether increases would be required. But those would be much smaller magnitude.

Okay. And lastly, Tom, on the ABCP on slide 57, can you talk about a $61 million valuation adjustment for the third-party? I did not see that if you flagged that. It sounds like it hit the P&L this quarter. (inaudible) any new disclosure that you have giving us today, I just wanted to confirm that that was one of the items that came through this quarter. And a little bit of color on the $3.1 billion of CIBC sponsored paper that you're holding. What is the nature of the market in terms of the CIBC sponsored paper, how comfortable are you with that?

Yes, the $61 million -- I have $59 million here. 18 of that was through P&L. The other 41 was through OCI, other consolidated income, on the balance sheet. Because of that 358 we own, 326 is available for sale accounting treatment. So any mark is through the P&L -- is through OCI until divested. And then the remaining 32 is for trading, so that is the $18 million. And that represents about a 17% mark based on the face of 358. But only 18 went through the P&L.

The $3.1 billion number was the amount that we held on our books of the CIBC sponsored ABCP as of October 31, and even as of October 31, that market was still a bit unsettled. And we stood in for any paper any day that did not roll, and the market knew that as a support mechanism to that.

Today that number is in and around $1 billion, $1.4 billion, and is a much more settled market. I'm talking about the bank-sponsored ABCP.

Shannon Cowherd, Citigroup.

Sonia mentioned an increased maintenance budget at the branches, and you want to add to that the [CDS] insurance you're paying for. How does that fit with the cost control initiatives, especially since you are establishing the benchmark below the Q4 '06 number, and will you quantify what the new benchmark will be?

The expenses that I was commenting on throughout my comments, both the upgrades to our branch network, as well as increased advertising marketing, etc., all of those costs are built into the total numbers that Tom has shown you and have been part of our expense base throughout this year. So they have been fully recognized. So they are within that -- the expense guidelines and the productivity targets that were identified.

So the target was what? $1.8 billion? That is what you were kind of benchmarking yourself to? Is that still the same benchmark?

Say that again, sorry.

The Q4 '06 number that we were to look at was $1.8 billion. Is that correct?

$1.892 billion.

And then so what is the new number? Was that in the packet and I missed it?

No, what we have committed is for fiscal 2008 to stick to that target in our expenses. Now the two adjustments we are making just to be sure it is apples-to-apples, back in Q4 '06 we were equity accounting our 44% interest in FirstCaribbean, so there were no expenses coming through on that line. Now, of course, we are consolidating, so we are bearing those expenses. So we're going to take out those expenses when we compare back to the $1,892 million.

Secondly, as we are about to divest some of our US businesses, those costs will go away. We're not going to give ourselves the benefit of that. So we're going to take those out as well and continue to report apples-to-apples with that $1,892 million, and today the number for Q1 was under $1.8 billion.

We know, as we've said before, that there's a lot of puts and takes here. Currency is actually helping us now, although that will be less of an issue once we divest the business. You know brokerage commissions -- I mean you want a good equity market and hence pay higher brokerage commissions. But nonetheless we have found that it helps the discipline if you set a target and work towards that.

It is John Ferren here. Operator, we are going to take one more question. I hope everyone appreciates we have run on a little longer today. So we will take one more question, but please do follow-up if there's more later on.

Jim Bantis, Credit Suisse.

When I think of CIBC's prospects for 2008 going forward, obviously a lot of discussion regarding the potential write-downs. But also looking at the earnings power, the retail bank is a key component of it. And when I look at the revenue momentum on the retail slide, if I back out the Visa gains and make adjustments for FirstCaribbean, on a year-over-year basis for the full year, we have got less than 3% gross in on the growth, and when I look at the quarter, it is less than 2% revenue growth. And I just wanted to see if we could talk about what the core revenue run-rate is and what the potential operating leverage is for 2008.

Let me start and Tom may want to add. Overall in terms of our revenue growth in retail markets, as we have talked about before, it has been negatively impacted by our unsecured lending business and the decline in that business as a result of us addressing legacy risk issues.

So, over the past two years, that has been a shrinking business. As we have talked about previously, our focus now is on growing that portfolio from a smaller higher quality foundation base of loans. So we would expect to see some reasonable improvements in that area throughout 2008.

Maybe the last question is, Tom, when I look at the EPS growth target 5% to 10% per annum, not to be cute here, but what would the base EPS number be for 2007?

We have reported what we are calling adjustments, and I believe the number for '07 was around $8.90, $8.88. So that is the base. But I want to stress, and I suspect you know this, that 5% to 10% is a medium-term objective. We grew over 20% in 2007. So that is not single year guidance, but that reflects what we think we can do or perhaps even exceed over the medium-term.

Okay. I think we have gotten everyone. We have got another event we have got to go to. I know there's still a couple of you on the line. Feel free to give John Ferren or myself a call afterwards, and we will try to answer any questions. Thanks very much, 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.