Canadian Imperial Bank of Commerce (CM) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the CIBC First Quarter Results Conference Call. Please be advised that this call is being recorded. (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to Mr. John Ferren, Vice President - Investor Relations. Please go ahead, Mr. Ferren.

Thank you. Good afternoon and thank you, everyone, for joining us this afternoon. The purpose of our call is to discuss our Q1 results which we released earlier today. The call is being audio webcast and will be archived later this evening on CIBC.com.

In addition to the Q1 materials posted on our web site, CIBC held its annual general meeting this morning in Toronto and the management presentations from that meeting are available on our web site as well.

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 as usual that any individual 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. Before I begin, again let me remind you that my comments may contain forward-looking statements and actual results could differ materially.

This afternoon I will review CIBC's first quarter results and comment on the actions we have taken to position CIBC for future performance and growth. Following my remarks our Chief Risk Officer, Tom Woods, will provide the financial and risk review. Sonia Baxendale will then cover Retail Markets performance in the first quarter. Our new Chief Financial Officer, David Williamson, is in the room and will provide the financial review beginning next quarter.

Richard Nesbitt, who officially joins CIBC tomorrow, will provide the World Markets review beginning next quarter.

Let me start with our results. This morning CIBC reported a net loss for the first quarter of $1.46 billion and a net loss per share of $4.36. Our tier 1 ratio at quarter end was 11.4%. Our core businesses delivered solid results this quarter, but obviously our overall results were significantly reduced by charges related to CIBC's exposure to the U.S. sub-prime residential mortgage market.

Specifically, CIBC recorded valuation adjustments against purchased credit protection from financial guarantors of $1.96 billion after-tax as well as write-downs on CDOs and RMBSs of $316 million after-tax.

Earnings per share apart from those charges and other items noted in our press release were $2.02. This result reflects solid operating performance despite tougher market conditions than a year ago. Retail Markets reported net income of $657 million, up 15% from the first quarter of 2007. Revenue growth, expense discipline and good credit quality contributed to this result.

Retail Markets revenue of $2.37 billion was up, 4% from a year ago. Volume growth, higher Treasury revenue and the FirstCaribbean acquisition offset in part by spread compression and lower brokerage revenue contributed to our overall retail revenue growth.

World Markets reported a net loss of $2.16 billion for the quarter. This result includes the $2.28 billion after-tax of counterparty credit reserves and structured credit write-downs. It also includes gains on credit hedges and expenses related to the sale of our U.S. investment banking operation.

Apart from these items good performance from the Canadian Investment Banking was partially offset by lower U.S. real estate finance and merchant banking revenue. In summary while many of our businesses performed well this quarter, our overall results are disappointing. CIBC's strategic imperative is to deliver consistent and sustainable performance over the long-term.

With respect to risk our goal is to take risks that are consistent with our strategy and appropriate for a bank of our size.

Our losses related to the U.S. sub-prime mortgages do not support that objective. As a result let me now update you on a number of steps we have taken to reinforce our strategies. Our first actions were taken several months ago. First, we restricted our structured credit business where our U.S. sub-prime exposure were originated and are winding down this business. We also put on some hedges where the cost and risk was appropriate and we continue to examine opportunity to exit positions within a very illiquid market. And we suspended our share buyback while we focused on building our capital during the second half of 2007.

On a broader basis, we have recently undertaken several strategic initiatives to position CIBC for strength over the mid- to long-term. The first area of focus is to reduce the risk in our business mix. Specifically, we have exited businesses that do not offer the kind of solid and sustainable returns our strategy demands.

In November we announced the sale of our U.S. domestic investment banking business to Oppenheimer. This transaction closed in early January as planned.

In December we announced the exit of our European leveraged finance business. While this business performed reasonably well in 2007, its underwrite to distribute model makes it difficult to deliver consistent performance through the cycle. However, the outcome is a more targeted and lower risk range of wholesale businesses that are aligned with our strategy and where we have a competitive advantage in the marketplace.

Our secondary area of focus is to strengthen our senior management capabilities. To that end, we announced some changes to our senior executive team in early January. Tom Woods has taken on the position of Chief Risk Officer. Tom is a 30-year veteran who understands our risk profile and who is committed to our strategy for consistent and sustainable growth. Tom's focus will be to strengthen our overall risk management practices and procedures as well as adding talent to our team.

Succeeding Tom in the Chief Financial Officer role is David Williamson. David has broad financial experience as CFO and has worked extensively with banks in Europe, the UK and Canada in the area of risk management. He has also been CEO of two Canadian public companies.

Richard Nesbitt joins CIBC as the head of World Markets. Richard has spent many years in the securities industry and is a strong supporter of our plan to refocus and strengthen our core World Markets business.

In addition to these senior management changes, we have made changes at other levels of the organization to advance our objective of delivering consistent and sustainable performance.

The third area of focus is strengthening our capital position to provide a cushion against deteriorating market conditions. As part of this plan we completed a $2.9 billion common equity raised in January through a $1.5 billion private placement and a $1.4 billion public offering. Our capital rate is aligned with our previous stated intention to place additional emphasis on building capital strength in 2008.

CIBC reported a tier 1 ratio of 11.4% at January 31st, up from 9.7% at the end of October. The growth in our tier 1 ratio was supported by our capital raise, ongoing earnings and the management of our risk-weighted assets as well as favorable impacts of Basel II.

Our strong capital position provides a cushion and an environment that remains volatile and unpredictable. As long as this is the case, balance sheet strength will remain our most important priority.

In summary, I want to reiterate that CIBC's strategy of consistent and sustainable performance has not changed. The strong performance of most of our core businesses over the past two years is evidence that our strategy is a good one.

At the same time, our recent setback is proof proved that we have more work to do to ensure that all of our businesses reflect our strategic risk posture, particularly in portions of World Markets. This alignment is critical when faced with a sudden and severe turn in the credit cycle as we have experienced over the past nine months. We want our entire risk activities to be consistent with the progress we have made so far and the benefits that that has created for the bank.

I am confident that the actions we have taken to reinforce our strategy will position the bank for long-term performance. Over the course in 2008, we will focus on remediation and management in the areas that are of concern today, while investing in both our core Retail and World Markets franchises for future performance and growth.

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

Thanks Gerry. Good afternoon everybody. My comments contain forward-looking statements as well and actual results could differ materially. I am going to refer to the slides that were on our web site, starting with slide 5, which is our usual one-page summary of the quarter. In the top right you can see the items of note which when applied to the loss per share produced the $2.02 that Gerry referred to. The bottom left, Tier 1 capital ratio 11.4%. I will get into the makeup of how that went up from 9.7% at the end of Q4 and in the bottom right some of the main points why the numbers were helped. Volume growth in end cards and mortgages, better expenses and the flip side lower merchant banking, lower capital markets and just slightly higher loan losses. So those are the main points.

Slide 11 is a summary of the write-downs for the first two months of Q1 that we announced in our press release January 14th. The second column shows the additional write-downs we have taken in January. The $292 million number opposite ACA reflect the additional deterioration in value that the exposure underlying the ACA protection has suffered. The $624 million number opposite other monolines reflects the change in our accounting methodology for taking counterparty credit reserves against the other monoline insurers. The new methodology draws more on credit derivative spreads in the secondary market and produces reserves much higher than if we continue to apply the previous methodology which relies more on historic defaults and loss rates by credit rating.

We concluded we needed to make this change because the high degree of uncertainty regarding the future of several of these counterparties made us less comfortable relying strictly on historic default rates.

Slide 12 shows our U.S. real estate exposure that is not hedged with counterparties. This is updated from Table 2 in our January 14th press release and reflects the $13 million of additional write-downs in January.

Slide 13 is a summary of our U.S. real estate exposure that is hedged with monoline insurers. This shows that we have U.S. $7.91 billion of exposure. An underlying value of $2.9 billion and therefore monoline insured protection by subtraction of $5 billion. To date we have taken reserves of $2.8 billion leaving remaining exposure of $5.1 billion. In the extreme event that all the underlying sub-prime exposure went to 0 and all of the monoline insurers went bankrupt. In the event market conditions and the value of these assets deteriorated further, in other words to the extent the line beside the asterisk in the middle of the slide moved up or to the extent monoline insurer financial help deteriorated further, we would have to take additional reserves.

Slide 14 is a sensitivity analysis akin to the one that we showed in the January 14th press release showing the effect on Tier 1 ratio to additional hypothetical losses. I should note that it was done pro forma January 31 and therefore is conservative because it does not reflect the inclusion of any earnings beyond the first quarter. If the calculations were done as of the end of the second quarter for example, and assuming the same level of operating earnings as we had in Q1, the tier 1 capital ratio shown would each be 14 basis points higher.

Slide 15, looking at the business results now. First in Retail Markets, revenue was $2.4 billion, up 4.3% from Q1 last year. Ex FirstCaribbean which we began to consolidate in Q1 last year, revenue was up 1.9%.

Turning to each of the individual Retail Markets' lines of business, first on slide 17 in personal and small-business banking. Revenue was $544 million in the quarter up 5% versus Q1 last year. Deposit balances were up 5% from a year ago. Revenue in Q2 is expected to be down somewhat due to two less days and slightly lower spreads.

Slide 19, retail brokerage revenue was $276 million down 9% from Q1 last year, driven mainly by lower trading volumes and new issues currently offset by higher annuitized revenue. February is off to a better start and if markets gain a reasonable degree of stability Q2 revenues should be up somewhat versus Q1.

Slide 20, current revenue of $423 million was up 3.2% from a year ago as higher loans and purchase volumes offset narrower spreads. Loan balances were up 13% from a year ago, the highest in eight quarters. We expect industry growth this year of 10 to 12% in balances and we expect to maintain our market share.

Purchase volume growth was 7.7%, the highest year on year growth in five years. We expect slightly lower cards revenue in Q2 due to regular seasonal declines in balances and two fewer days.

Slide 21, mortgages and personal lending was $319 million, down 16% from Q1 last year mainly due to tighter prime BA spreads and a lower unsecured lending balances. Residential balances continue to show strong growth up 12% from a year ago.

Industry pricing was reasonably disciplined on the fixed right side but remains very competitive in variable rate mortgages. Personal and small lending balances were up just under 1% on the year, but spreads were well down due in part to mix and tighter prime BA spreads.

The outlook for Q2 in mortgages and personal lending is for moderately higher revenues driven by higher balances.

Slide 24 shows Retail Markets net income $657 million up 15% from a year ago, or 16% excluding FirstCaribbean. Revenue was up 4.3% or 1.9& ex FirstCaribbean as I just reviewed. And expenses were flat as the additional expenses from the FirstCaribbean consolidation offset lower performance driven retail brokerage payouts. Loan losses were up 5% which was mainly volume driven. So net income up 15% on the year.

Turning to our second business group, CIBC World Markets, slide 25, negative revenue reflects the $2.28 billion ACA reserve, the $626 million in reserves against other monolines and the $471 million in write-downs to our unhedged position as I noted earlier. It also includes $70 million in charges or negative revenue in connection with the sale of some of our businesses in the U.S. to Oppenheimer, as we'd indicated last quarter, as well as positive mark-to-market revenue of $171 million on a credit derivative portfolio.

The individual lines of business now starting with capital market slide 27, revenue excluding write-downs and credit derivative gains was $165 million versus $214 million in Q4 excluding these items. Revenue in the debt businesses was down from Q4 due mainly to the effect of credit spreads widening on many of our positions more than offsetting strong foreign exchange revenue.

Equity structured products revenue was down as much higher volatilities increased hedging costs in our equity links note business and new origination here was down as well.

Many of our proprietary trading strategies underperformed in a market characterized by declining equity values and widening credit spreads.

Canadian Agency equities, however, had another good quarter and U.S. equities was down due in part because Q1 includes only two months of revenue prior to the divestiture to Oppenheimer. So far in Q2 in capital markets were ahead of the prewrite-down Q1 run rates and with markets continuing as they are today, we should report higher revenue here than in Q1.

Slide 28, investment banking and credit products revenue of $283 million was up $43 million from Q4. This included $128 million in mark-to-market gains on the corporate loan hedges and strong performance from our Canadian and European investment banking businesses. M&A in Canada continued to be strong but was down marginally from a very strong Q4. Equity new issues were up from a slower than normal Q4. Contribution from the U.S. was down as here again we had less than a full quarter of contribution for the divestiture.

The current outlook for investment banking and credit products for Q2 is for lower revenue. Even after adjusting for the gains on credit derivatives in Q1 and the U.S. divestiture because of a reduced pipeline for new issue equity and M&A.

Slide 29, merchant banking results were well down from a strong Q4 with revenue of $9 million, due to fewer divestitures and lower distributions from third party funds. We had gains and distributions of $42 million offset in part by write-downs and funding cost of $35 million. The opportunities for financial sponsors to obtain debt financing on attractive terms is much reduced now and as a result, we are not anticipating a significantly higher run rate here for the balance of the year.

Slide 30, World Markets net income excluding the write-downs was $113 million and excluding the costs incurred with the sale of some of our U.S. businesses to Oppenheimer and other restructuring and the gains on the credit derivatives was $52 million versus $205 million in Q4. Revenue excluding these items was down $132 million for Q4, expenses excluding costs related to the sale to Oppenheimer, other restructuring and litigation reversals were down $9 million versus Q4 and loan losses were a positive $17 million versus a recovery in Q4.

Let me turn now to our risk management slides. Slide 53, credit risk. Specific loan loss provisions were $171 million in the first quarter 40 basis points of net loss and acceptances. The $37 million increase in specific provisions versus Q4 was due to a $29 million increase in World Markets and an $8 million increase in Retail Markets. World Markets' specific provision was $11 million in the quarter. The loss was mainly due to a single loan.

However, the provision from this particular loan was offset by revenue related to gains on the hedges and in our credit derivative portfolio. Recoveries in the large corporate portfolio were down from Q4 '07.

Retail Markets' specific provision was $160 million in the quarter. Provisions in the small business and commercial portfolios were up versus the prior quarter, largely due to lower recovery and reversal levels. And in the Cards portfolio provisions were up as were volumes.

Net impaired loans increased $360 million at the end of Q1 in line with same quarter a year ago. The increase in the previous quarter is mainly due to one loan in the World Markets portfolio as well as seasonality and a return toward normal levels from the unusually low levels last quarter in the Consumer portfolios.

Slide 54, market risks. This slide shows the Q1 distribution of trading revenue as we do every quarter. 47% of the days were positive, down from 54% last quarter and well down from the 2007 average of 75% positive trading days. Trading revenue here does not include the reductions in the mark-to-market value of our structured credit assets as this analysis is carried at only month end.

Slide 55, tier 1 ratio as Gerry said was 11.4%. That's up 1.7% compared to the prior quarter. Here you can see the makeup of that increase. Basel II contributed 71 basis points to the increase and the $2.9 billion common equity issue we did in January, net of the losses and dividends in the quarter contributed a further 97 basis points.

I will now hand it over to Sonia Baxendale

Thank you Tom. My remarks may also include forward-looking statements and actual results could differ materially.

Retail Markets' revenue increased 2.2% quarter over quarter and 1.9% year-over-year, excluding the previously announced Visa IPO gains and FirstCaribbean. Our industry leading credit card business continued to have strong growth. Credit card outstandings grew 13% year-over-year or 2% quarter over quarter. As I shared last quarter, this level of performance was last experienced in fiscal 2001 and reflects the continued success of our launch of Aerogold Mileage Multiplier and our no fee platinum card. We experienced strong growth in acquisition of new accounts and continued strong retention rate of existing accounts.

Portfolio credit quality has remained strong as our loan loss rates decreased year-over-year. In addition neither delinquency or bankruptcy rates have deteriorated.

Our mortgage business continued to perform at industry growth rates. Both new mortgage originations and balances grew 13% year-over-year.

In lending, we are starting to see moderate improvements as a result of initiatives to improve acquisition and account management. Our total leading balances were up slightly quarter over quarter and year-over-year with market share flat quarter over quarter, after numerous quarters of decline due to our previously discussed changes to unsecured credit processes.

In the highly competitive deposit and GIC market we continued to grow balances. Personal deposit balances grew 2.2% quarter over quarter and GICs 2.3%. We maintain our plans to increase our marketing investment in this area to grow existing client balances and attract new clients.

Despite the volatility in global equity and fixed income markets, mutual funds started the fiscal year with $730 million in net sales driven by short-term funds. These results placed us in third position overall in industry net sales up from 13th position in 2007 and increasing our market share by 17 basis points over the previous quarter.

The launch of new income oriented product solutions, the addition of proven investment manager talent to our team and the expansion of our wholesaling team will be key to our continued growth.

In distribution, we continue to make progress in our strategy to improve client accessibility in all of our channels. 40 of our planned 70 new branch deals are currently in progress with opening scheduled for this year and next.

Chinese speaking clients can now access any of CIBC's 3,800 automated bank machines all across Canada in their own language. And the Sunday opening pilot at six branches in Toronto and Vancouver are receiving extremely positive feedback from both employees and clients, and we are currently evaluating additional locations.

In December, Commercial Banking joined Retail Markets. This new structure will enable us to strengthen the partnership between our personal, small business, and commercial banking teams and position us for increased growth in an important market segment.

In Retail Markets overall, our focus will continue to be on leveraging our core strength and delivering strong advisory solutions to our clients, delivering a consistent client experience and offering competitive products.

I will now turn back to John Ferren.

Thanks, Sonia. Operator, I think we are ready to take questions.

(OPERATOR INSTRUCTIONS) Brad Smith. Blackmont Capital.

My question just relates to the non sub-prime monoline hedges which I believe saw a slight increase in their carried amount during the quarter. I was just wondering in view of the continuing uncertainty with respect to the monolines if it was possible to get some sense for sizing in terms of the aggregate notional covered by these monoline hedges? (multiple speakers) get some sense for the distribution of the counterparty credit ratings in a similar fashion to the distribution that you've provided us on the sub-prime bucket?

And then I was also curious if we could get some commentary on the composition of the underlying credit that has been underwritten in that non sub-prime bucket? Thank you.

Yes, I know you and a few others have raised this before. We haven't provided that granularity. I don't know that any North American bank has. We will take a look at that and I can tell you as I told you before, I mean this space with -- I mean it consists of corporate loans as well as CLOs and if you followed this in the market, you know they're trading in the low 90s for the most part. Some in the mid 90s. The numbers are a part of our overall CDS exposure which we do disclose. We give the mark-to-market which I don't know that anyone else discloses and that's I know helpful to you.

So we will take a look at whether we should provide additional granularity, but we have not done that as yet. Nor has anyone else as far as I know.

Can I just ask a follow-up on that? If you have a receivable of 855, I can't recall if you've taken any valuation adjustment against that. I don't think that you have. Is that to imply that the counterparties that are in your sub-prime bucket are different or that that $855 is not to any of those counterparties that you have adjusted in the sub-prime valuation?

Well, they are different. As we disclosed there are 10 of them. We have also disclosed the largest one is quite small of -- I think it's in the $200. So it's quite a dispersed group. Indeed however the valuation adjustment of $624 we took in the quarter was split.

I don't know that we disclosed this, but it's not something I'm uncomfortable disclosing. That $624 is split $516 to the other monoline sub-prime and $108 to the other monoline non sub-prime. So we have taken a VA. I think I'm right in saying that. Yes. On that to $885. So $885 is the mark, but we have haircut thatsing the same model approach, but in that case applied to a much more dispersed group of monolines.

Great and just lastly, you mentioned that you were using credit spreads guide for these adjustments and I was just wondering do all the counterparties have credit spreads or how do you deal with it when they don't?

Not all of them do, some are private. We've -- well, let me back up a second because I'm glad you asked this. This is an important point and just for those of you I know are particularly interested in this so I'll just give you a bit of background here.

Our understanding in working with our external auditors Ernst & Young is given the dramatic blowout in spreads in this space and the obviously continuing uncertainty about this space, relying on historic default rates as I said in my comments didn't make sense. We were very comfortable with that at Q4. The world was changed and we understand many of the other international banks are looking very hard at this.

Now their quarter ends lag ours so time will tell. But based on the information we have from our auditors, this was the right thing to do and as I said in my comments it results in a greater valuation adjustment.

We haven't strictly relied on credit default spreads. We've looked at a number of models and we've sort of triangulated but the credit default spreads market is the -- or method -- is the method that is the most dominant in this.

In the case of a couple of the monolines which are private, we have used a proxy. But for the most part we had enough public or enough that had public spreads to make this method supportable, and have integrity. And it will be the method that we will likely use going forward and until such time as this space reverts back, if it does, to what we've seen in the past.

Michael Goldberg. Desjardins Securities.

I've got a few questions. The first one is just from your slide number 5 and you note in there among the noted items, significant tax related items. What are those?

The main one and this is a bit complex, but I think you'll grasp it. With the large charge -- a reserve we had this quarter -- we were able to carry back those negative NIBT for tax book purposes in prior quarters when the tax rate was higher. So we got a P&L pickup because we were able to reduce our taxable income when the tax rate was higher. So we have treated that as an unusual item and therefore adjusted our earnings.

In other words, brought them down to what they would otherwise be because our tax rate is lower than it would be in the normal course.

And then turning to slide 48. Show -- looking at the right line, loss on sale of some U.S. businesses and restructuring of $108 million pretax. You talk about a gain on the disposal of the U.S. Investment Banking business. You had indicated that that gain would be in the order of $35 million. You also mentioned I think some (technical difficulties) dollars of charges related to the sale.

Can you help to put those, the $35, the $70 and the $108 together? What else is in there?

Well the $108 has the $70 in there. Okay? The difference between $108 and $70 is -- well, let me back up a step. The $70 is negative revenue. The $38 is expense. We combine the two into the $108 there. One's a revenue item. One's an expense item. Okay?

The $35 million -- let me just go back and see if I can dig up my notes here. As a matter of fact, Michael, let me come back to you on that one. I have it here somewhere but rather than hold the group up, I will come back to you on that one.

Okay, and my last question is just if you could give us some comments about your prognosis for the monolines, particularly with respect to some of the ideas that have been floated about banks investing in them. Particularly banks that have exposure to the monolines. Seems to me that that's bootstraps.

Yes, it's Ron Lalone -- I was going to comment on that. I actually think is premature to speculate as to what the outcome of the monolines will be and we're relying for the most part on the same information that you have access to. So it's difficult to judge where that will end up.

We are certainly monitoring the situation very closely and participating where we are able to participate. But I wouldn't want to speculate as to where these restructurings go.

[Greg Boland. Westface Capital.]

I had a quick question of the 624 valuation adjustment. I guess if I just look at the delta between this and your January -- early January press release, it appears that there's been a negative variance on Ambac of a $293 million. And I guess if I wanted to break down that 624 valuation adjustment I would assume that roughly half of it would have been the result of the negative variance on Ambac.

If I look at No. 1, in your breakdown of the USRMM related counterparties the notional amount of $2.6 billion I presume given the rating and size that would have to be SCA, whose obligations are trading $0.85 on the dollar. So is it fair to assume that that $624 is predominantly an adjustment for Ambac, roughly half for Ambac and half for adjustment of that other large A- rated counterparty?

We've given lots of disclosure on this. I'm not inclined to give granularity by monoline. In fact we have, as we said in our disclosure, confidentiality agreements with each of our monoline counterparties. Now we've disclosed the ratings and those ratings obviously have changed quite a bit from Q4.

So it probably doesn't take much to figure out that, but I can't really get into name by name. You can draw your own conclusions given the transparency we have now provided and given the fact that spreads are quite public. But I can't really go any further than that.

So just a couple quick follow-ups, then. The -- on the non subprime counterparties, I guess you said that you are somehow incorporating CDS spreads into the derivation of the value of the fair value of the derivative contracts. I guess that would imply that since there is credit risk in all of them that all of the non subprime counterparties must be (inaudible) monoline and you are not receiving any collateral with respect to those hedges?

(multiple speakers) Sorry. Go ahead.

If not all substantially all because otherwise the credit risk would be de minimus if you had (inaudible).

Okay. Just to be clear, we've got as every bank does, lots of exposure to credit derivatives with collateral posting, banks, insurance companies and monolines. What we are talking about here in the $885 is just the monolines. With respect to the former, because they are providing collateral. I mean there may be an unusual case where there's a de minimus amount of VA taken, but in the monoline space, you're right.

If that space that we are taking the VAs and we are now taking it on a basis that relies primarily on CDS spreads in the market as the input to the accounting calculation. In the same way as we are doing it for the monoline protection on subprime because both are receivables, the underlyings are dramatically different, but it's the receivable that we are treating in a consistent fashion in both cases.

Great. And just the final question on the non RMBS collateral being primarily loan-related products. The whole loan LCDX is trading in the low 90s. My understanding is that the majority of your exposure is through super senior tranches or from tranches that have some degree of subordination that would be in excess of 20 or 30%. I just -- with the mark-to-market seems a little high given those tranches. I wasn't aware that those tranches were trading at $0.96 on the dollar. I thought that they would have been trading a little deeper than that. Where do you get the mark-to-market on those given that probably a lot of this is bespoke? Do you have individual quotes or are you using the LCDX as a proxy or is this mark to model (technical difficulties)?

We are getting quotes where we can. In other cases in the bespoke situations, we are interpolating using proxies. And as to your subordination comment, it sounds as if you are quite familiar with this space. I mean it really varies on the investment grade side. Obviously the subordination is lower and could be as low as 15%.

What do you think -- what's your weighted average subordination?

That's not something we've gotten into. But these are conventional market deals so in that we haven't gone beyond mark-to-market, it's sort of academic to get into what a hypothetical subordination weighted average is. But this is a mix of marketed deals. Investment-grade deals would have probably 15 to 30%, 15 to 25% and the CLOs would have -- what, 20 to 40%?

And what's the logic for not being more granular on the non subprime monoline counterparties if you've given that granularity on your subprime side already?

As I said to Brad right at the beginning, it's an entirely different space. I mean it's not just a question of where do you stop. We've tried to provide as much transparency as we can and/or should. You know if this continues to be something that people feel they need to properly assess this, I would have thought the mark-to-market is what you need. There's no other bank that's providing this that I'm aware of. But it's something we will continue to look at.

I guess as I've stated before in person, I think the overhang of the uncertainty does affect the -- does affect your cost of capital because people always assume the worst and that's (multiple speakers)

You'd agree, Greg, this space is dramatically different than the real estate space. So I mean, certainly, in my discussions with analysts and investors while it's become a point of interest, I don't know that it's quite as a point of interest as the way you've characterized in terms of affecting our cost, but we will take your feedback and I appreciate that.

Mario Mendonca of Genuity Capital.

Tom, there's some disclosure the bank has provided on -- that relates to the $6.5 billion in total return swaps with embedded put options and that number has gone down from $6.5 billion to $2 billion from the end of October to now. I guess that ties in with the comment you made about taking some assets on the books at par from third party structured vehicles.

What I'm trying to understand is what assets are you taking on and is this just part of the disclosure it already provided or is this incremental?

It is already in the -- I mean there's some RMBS in there and there's some non RMBS. And the RMBS component is included in the $7.9. This was used -- or these vehicles were used strictly as funding vehicles originally. In one case, it appeared as if there would be challenges in that vehicle of funding, so we decided let's just take it on our books and we took, I think that piece was $2 billion. We've taken it all on. The other $4.5 billion was funding satisfactorily but it wasn't clear that it could continue funding so for certainty on our part we took it on our books. Because we had total return swaps originally and now we have the hard assets, we are in no different a position on that side of the trade. We have credit derivative protection on the other side. In some cases with monolines and other cases with collateral posting FIs.

So there's no difference at all from a risk point of view. It is only incremental funding that is the difference, but just for greater certainty we took it on our books.

The $2 billion you just referred to, you were referring to subprime then?

No, it's a mix. That $6.5 and I don't have the numbers handy -- it is a mix. Some of it is -- it is a number of assets. Some of it is subprime and some of it is not.

The reason I'm confused is you said is part of the $7.9. The $7.9 is subprime.

No, okay, let me take a step back. A component of the $6.5 is subprime and that component is part of the $7.9 insofar as there are monoline counterparties opposite it if you follow me.

I do now.

Okay. Yes.

Now the other thing I'm afraid that I have and others have spoken with inappropriate authority about the notional value tied to that original $750 million. Because I've written on several occasions that that's in excess of $20 billion and when I've done that -- I did that with confidence. Because that's what I understood from the bank specifically. So in not answering Brad's question, have I been mistaken in referring to $20 billion plus?

As I said we -- that amount is embedded in the some $85 billion of total CDS okay. I'm not quite sure when you say you've obtained this information.

Well I will be very clear. The bank's confirmed it, so I'm not sure why that's what I heard from the bank.

Okay. Well, why don't you and I talk afterwards? We have not published that number. There's nothing particularly sensitive about it. As I said to both Brad and Greg, we are trying to follow consistent disclosure policies here. This paper is, as I was saying to Greg and as I think he agreed, depending on the quality of the paper is trading in the low to mid 90s. You can do your own calculations. We are just cautious about being consistent in our disclosure.

If it's trading in the low to mid 90s, though, Tom, that would imply for a greater mark than $888 million though. Applied to the notional that I just referred to.

Some of it is trading there. It's not all trading there. It's a mix of CLO, corporate loan and there's a tiny amount of CMBS there. A tiny amount.

Next question. This one doesn't come from me, it comes from a client. So I'll just prefix it with that. This person wants to know why this wasn't disclosed in detail prior to the issue?

Why what wasn't disclosed?

The $20 billion plus notional hedge with monolines prior to the bank issuing $3 billion of equity.

As I just said we disclosed. We are the only bank that I am aware of in a space that is fairly commoditized to disclose the mark-to-market. Now you know and I know and we've been around long enough to know that at the margin there will always be a desire for yet further disclosure.

I've taken the point from you and from Greg and from Brad that this is helpful information. We will think about it.

In terms of materiality, it's embedded in the $85 billion of CDS. We have given a mark-to-market and market participants know where these things are trading at. I can't imagine that anyone would think that that is a particularly material number. You and others have written it with estimates that are actually very close to one another. So I mean I can give you more information on that. What we're trying to do is be fairly consistent with the amount of disclosure we provide. We've taken some comfort that we've given more disclosure on this point than others. So I'm happy to have the discussion with you further, but we are very comfortable with the extent of our disclosure on this.

But I think the bar for disclosure gets higher and higher as the charges get higher and higher. I think that's the point this investor is trying to make. But I appreciate your comments.

I appreciate that point; and I would be happy to talk further with you or your investor client.

Andre Hardy of RBC Capital Markets.

Going back to the nonresidential mortgage hedges. I suspect that the Q4 mark-to-market or fair value was very small; otherwise we would have had disclosure and then we got disclosure of a $750 million mark. January -- sorry, end of December and then $885. What's interesting is the LCDX index would have gone from 250 roughly in terms of spreads October 31st to 300 as of December 31st and now 400.

So can you help me understand? Maybe I made an incorrect assumption assuming that this was close to zero October 31st, but it seems like a small move in spreads had a much larger impact on the fair value of these hedges than did the 100 basis points increase in January.

Yes. Because this is a mix of different assets you can't just extrapolate based on the CDX. I don't know what else I can say other than we've got a diverse amount of exposures here. We've got pricing from market sources on -- on them obviously ones that are CDX directly related would follow the pattern that you've referred to.

But in the same way that our RMBS portfolio doesn't map with the ABX and, indeed, the hedges we've put on you see volatility quarter to quarter on that. So directionally what you are seeing is consistent and I tell you as I'm sure you know that in February the CDX has increased again.

So we haven't done the February month end, but if we were to do it today that $885 million would be well [up] and we will do it at the end of Q2. But there's not a direct correlation because this is a diversified amount of corporate bespoke and CDX and CLO, for that matter, positions.

And my other question's on asset-backed commercial paper. Can you update us on what is going on with Great North Trust, please?

Yes, it's Ron Lalonde. There are no material development certainly impacting our financial statements there. We remain the swap provider there. We remain well collateralized in that position.

So that hasn't come back on your books?

No, it has not.

Ian de Verteuil of BMO Capital Markets.

Tom, page 7 of the press release. So if I look at the value of the derivative contracts and exclude counterparty six, which obviously we would deduce to be ACA -- so excluding that there's $2.6 billion of in the money derivative exposure -- in the money exposure to the top four monolines.

Am I correct in saying since $2.6 is in notional you have written down $516 and that you also have credit hedges of $525 which in theory would operate exactly opposite how you would book valuation adjustments?

Yes, it's certainly directionally. That's right.

So is it reasonable to say that there is $1.6 billion of remaining exposure RMBS counterparty exposure to monolines?

Yes, give or take, I guess. I don't know is that $525 -- that sounds accurate? Yes, directionally, that's right.

The second question. Page 32 of the supp pack. The risk weightings on the derivatives. Because Basel II I think you moved from giving growth and then the net impact of the master nettings actually allocating it across -- I guess what I'm trying to get here is consistency or timeline. When you look at the risk weighted amount of the credit derivatives, if we did them apples to apples would they be up or down from Q3 and Q4? Do you see what I am getting at?

I see what you're getting at. I don't have a good answer for you right now. Anybody here have a good answer? No I'm getting a lot of nods here, Ian. Or heads shaking. So let us come back to you on that.

Sumit Malhotra of Merrill Lynch.

Last quarter, we talked a little bit about the real estate finance operations that you have in your U.S. investment bank. If I look at the loans disclosure you give us business and government, nonresidential mortgages of $5.8 billion, real estate construction just under $4 billion. Is this essentially -- how much of this relates to what you have in the U.S. real estate finance portfolio because I think we were told that it's not too much of it that stays on the balance sheet?

I don't know that we've disclosed this before, but I'm not uncomfortable just talking a bit about this. We've got about $1.9 billion in that business on our balance sheet today. And we've got no or, essentially, no CMBS mark-to-market. We've got -- and this as a business as most of you know, maybe all of you know, is a very successful origination business with a -- the commercial midmarket space generally. Typically loans $10 to $20 million that we would put into a conduit with one of the big New York banks.

That market as you know has slowed up considerably. We did a small transaction this quarter, but the outlook for the year is pretty slow. The fixed rate stuff is fully hedged or as fully hedged as can be for both interest rate and credit rate with the CMBX index. The floating rate is in an accrual book, but it is generally very low loan to value ratio so we are not concerned about that.

Just to make sure we are on the same page here, those two categories and loan portfolio that I've referenced, real estate and related business and government loans just under $10 billion. So you are saying about $2 billion of that $1.9, I think you said, relates to U.S. real estate finance. The rest is, I take it, to be Canadian commercial real estate exposure?

Yes. I'm not with you on the page, but I would believe that to be the case, yes. I'm getting agreement here. So that is correct. The rest would be our Canadian small business commercial banking exposure to the commercial real estate sector.

Okay. Let's switch over to Retail Markets for a second. Tom, this might be for you. It might be for Sonia. Last quarter we heard about the mortgage and personal lending. There were some issues with your securitization hedges. I think you had talked about that number bouncing back in a big way. Obviously, prime BA didn't move maybe as much as was anticipated.

What is going on with the hedged activity you have there because considering your volume growth, it doesn't look like that number moved very much still well down from the previous quarter?

There is still a lot of volatility in that number. I thought where you were going was on the -- and maybe this is of some interest, the plain vanilla mortgage revenue. We've -- really in an effort to help you all understand what's the main mortgage business versus the volatility, we've moved all the securitization stuff down into -- below the line.

So and that continues to be fairly volatile just because of the nature of the way we have to mark-to-market the seller swap in these deals. And while one might say, why bother if it's providing all of that volatility? As you know the CMBS or CMHC program is very attractive financing. We attempt to hedge that as best we can come up but a lot of those hedges still don't meet the test for hedge effectiveness. We are working to try to improve that, but we are just going to have some volatility from an accounting point of view, quarter to quarter.

As far as the main mortgage business, I know last quarter I did say that we expected that revenue to go up from Q4. Didn't go up, went -- well actually the mortgage component went up a little. The personal lending component went down. The combined number was down a bit. And that's basically due to slightly higher cost of funding, slightly lower prepayment.

Prime BA was better than it was in Q4, but not as good as we had been anticipating, based on how tight it was in Q4.

Maybe lastly, for Sonia. Credit cards, wealth management, two historical strengths of CIBC, not really seeing that right now. Credit cards, you've been talking for a few quarters now about some of the highest balance activity or activity rates that you've seen. But is this just a reflection on the spreads? When does it start to affect the revenue line? I would say the same thing on wealth management. You talked about the funds flows -- .

You did reference most of it as money market. So we are seeing mutual fund revenue essentially flat. Is this as long as markets stay weak, are we not expecting anything much here? Or I don't see how the conversions mandate can progress until these two big areas for the bank start to move. I guess I would just like to get your thoughts on that.

On the -- we did have -- on credit cards, first of all we had great growth in our credit card portfolio. We had revenues up one impact to our credit card portfolio much like the entire market was an increase in our cost of funds. But I think that was well offset by both the growth in our portfolio as well as the improvements in our loss rate. So very comfortable with the growth on that front.

On the mutual fund side, certainly given the market as we've talked about in mutual funds, we've had some challenges in 2007. The environment is such that most of the sales industrywide were in money market. So that's where we did particularly well. We made a number of changes to our products so as the environment improves we would expect to continue to see improvement in that area.

The other part of the wealth management business that would have not shown the growth that we might have otherwise helped with on the brokerage side and, again, that was market-driven.

Robert Sedran of National Bank Financial.

Good afternoon. Tom, I want to take you back to slide 14 for a second. I'm looking at these ratios and as you mentioned they are a spot in time. If we go out over the course of the year, presumably you could take $5 or even more billion worth of charges and still stay above your even target let alone regulatory minimums. Was the goal of the equity issue largely to insulate you from worst-case scenario and do you think you've done that and you don't sound terribly concerned about the nonresidential side. So do you think, basically, that your balance sheet now is in a position where you are comfortable that you are not going to need any more support even under any kind of a reasonable worst-case scenario?

I guess what I would say is, we provided in effect by the bond rating breakdown of our sub-prime exposure right now a lot of transparency and we can make judgments, you can make judgments in terms of that. The fact of the matter is, no one really knows where this space is going to settle out.

As I said in my annual meeting presentation this morning, you look at the loss rates imputed by prices in this space that we are basing our marks on. And they are at such extreme levels one might be tempted to say that we are at the bottom or very close and it's going to swing back as hedge fund money starts to come into here.

But we are not trying to do that. We concluded and, Gerry, I don't know whether you want to make any comments, in January, just with the uncertainty we wanted to have the comfort that that size of equity issue would bring.

You can see the sensitivity analysis that we provide there. But where the market ultimately settles in, you can make your judgments, we can make our judgments. What this shows is even at a very extreme case, we still have a very strong capital structure.

One of the things that when we were deciding on the size and whether or not we would do a capital raise, we had (technical difficulty) -- we did weigh up just earning our ways through this issue versus a capital raise. We concluded that we wanted to do a capital raise for greater certainty so we can have a capital cushion, but also be very competitive in the business environment.

And the other element was when we came to -- after we had decided to do the raise, when it came to the size of the raise, we considered the general environment as the important unknown out there. In terms of our own positions, that was only part of the consideration.

Another part of the consideration was the fact that, during the month of December, there was a considerable amount of -- there was really a sea change in terms of a sense of the environment and the fact that we could be in a slower economy this year. Again, there's many economists out there and many opinions. But we decided that were going to go the route of providing more cushion rather than less.

I know there is a risk, that there's a possibility that we may have raised too much capital here and that that would have been dilutive. We think on balance given the uncertain environment that the size was the right size to raise and to err on the side of caution.

Thank you. At this time I would like to return the meeting back to Mr. John Ferren.

Thanks, everyone. If you have any further questions, the Investor Relations staff will be around for a while tonight. So thank you and have a good night.