Canadian Imperial Bank of Commerce (CM) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the CIBC second quarter results conference call. Please be advised that this call is being recorded. To reduce the audio interference within the Board Room and over the conference call line, please turn your BlackBerry off during the duration of the meeting. I would now like to turn the meeting over to Mr. John Ferren, Vice President Investor Relations. Please go ahead Mr. Ferren.

Good afternoon, and thank you everyone for joining us today. The purpose of our conference call this afternoon is to discuss CIBC's second quarter results, released earlier today. The investor presentation slides are posted on our Website, the call is also being audio Webcast and will be archived later this evening on cibc.com. This afternoon, our senior management team will deliver some prepared remarks and they will be available for a question and answer period following.

Before we begin, let me remind that you 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, 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 second quarter results. Following my remarks, our Chief Financial Officer, David Williamson and our Chief Risk Officer, Tom Woods will provide the financial and risk review. Sonia Baxendale will then cover Retail Markets performance and Richard Nesbitt will discuss the actions underway to refocus our World Markets business.

This morning, CIBC reported a net loss for the second quarter of C$1.1 billion and a cash net loss per share of C$2.98. Our results this quarter were impacted by charges in our structured credit run-off business. Earnings, apart from these charges and other items noted in our press release, were C$1.63 per share. Our loan losses and expenses were well controlled and our Tier 1 capital ratio, after accounting for writedowns this quarter, was 10.5%, the highest of the Canadian and U.S. money center banks.

While the second quarter was a challenging period as market conditions remained difficult, internally, it was very much a quarter of transition, change and progress at CIBC. We made significant progress this quarter in exiting noncore business activities, managing down our structured credit run-off activities, enhancing our risk management functions and refocusing World Markets. We are encouraged by the progress made given the scope, range and intensity of these activities. We are confident that these actions we are taking will strengthen CIBC over time and get us back on track to delivering the performance and value we had achieved in 2006 and for much of 2007. I will touch on these actions in more detail in a moment.

But first, let me comment on our business performance in the quarter, starting with retail markets. The retail business continued to deliver solid performance this quarter. Retail markets reported revenue of C$2.2 billion and net income of C$509 million. This result was lower than a year ago, primarily due to a tax recovery in the second quarter of 2007 and the Visa loss in the current quarter. Strong volume growth in cards and mortgages, as well as continued expense in loan loss performance, contributed positively to our year-over-year results. Sonia Baxendale will comment further on our retail performance and priorities in her remarks.

In the area of productivity, we continue to make steady progress. Expenses for the second quarter were C$1.78 billion, down 10% from a year ago on a reported basis. Our target for 2008, which was established at the end of 2007, is to hold expenses flat to the fourth quarter of 2006, excluding FirstCaribbean and our restructuring activities. We are exceeding that target through the first half of 2008 and are confident that we will continue to deliver further progress by the end of the year.

In the area of balance sheet strength, we continue to be very well capitalized. As we raised C$2.9 billion of common equity in January to provide a capital cushion against a potential decline in market conditions. This action, along with ongoing capital discipline, has enabled us to maintain a Tier 1 capital ratio of 10.5%. And as I said earlier, that's after taking into account the writedowns in the quarter.

Our Tier 1 ratio remains well above our target of 8.5% and continues to be the highest amongst the major Canadian and U.S. money center banks. So, in summary, the charges in structured credit had a significant impact on our results this quarter. However, we did have solid business performance in many areas, as well as continued expense and capital discipline and a high level of transition and restructuring activities.

Let me now comment on the ongoing activity related to previously announced business exits, structured credit run-off, risk management and the refocusing of our World Markets business. Our primary area of focus has been in making the necessary changes to our business mix to ensure that we are in the right businesses, in the right way and managing the right risks. As part of this process, we exited certain businesses that did not fit with our strategy and desired risk profile. In January, we closed the sale of our U.S. investment banking equities and U.S. leveraged finance business to Oppenheimer. These businesses did not fit with our risk return hurdle.

During the second quarter, we continued to provide infrastructure support and managed remaining positions related to our U.S. run-off activities. Also earlier this year, we exited our leveraged finance business in London. This business was performing well through the current environment but carried with it potential further risk, which is beyond our challenge levels through the cycle. We also have a separate team managing the run-off of our structured credit business where are U.S. mortgage exposures were originated. As we have told you previously, we were committed to exiting this business and managing down our exposures as quickly as we can. We have intentionally separated this activity and designated separate leadership under Ron Lalonde to provide added focus and minimize disruption to our core ongoing World Markets business.

During the quarter, we made good progress in this area. We reduced our correlation and flow trading books by C$30 billion and unwound related hedges of the same amount, for a reduction in notionals of approximately C$67 billion. The positions we sold were relatively low risk and liquid. And therefore, we were able to exit them at a price that was close to their carry value. In doing so, we decreased the potential for tail risk in this overall portfolio. We also sold several of our U.S. mortgage exposures that were hedged by ACA and reduced other credit derivative positions. In total, we reduced credit derivative notionals in our trading book from C$152 billion to C$84 billion this past quarter. David Williamson will discuss this further in his presentation. With our remaining positions, we continued to look at pricing different stress scenarios, so that we can assess the value of opportunities to exit.

We also made progress this quarter towards enhancing our risk management capabilities. Our objective here is to ensure that all our risk management activities are updated to reflect not only industry best practices but also the evolution of the marketplace that we have seen over the past several months. Our risk management review covers three areas. First and most important, is ensuring we're in the right businesses. This has led us to a series of actions, I just spoke about, where we are exiting noncore business areas in World Markets that do not have a history of risk controlled earnings growth.

Second, we are enhancing risk management capabilities within the business. Risk management starts with the right front office capabilities. Particularly within World Markets, we need the ability to react quickly to changes in the environment. Therefore, we are creating a risk function within world markets to provide a realtime assessment of risks and work closely with our businesses on new strategy and product development. This group will partner closely with our corporate risk management function but will not have any override rights relative to the central risk management group.

Third, we are adapting our risk management function to the evolving financial markets risks that are present. Under the new leadership of Tom Woods, we have completed a full assessment of our risk management department and identified specific areas for enhancement. These include strengthening our talent base, simplifying our risk management structure, increasing senior management forums for debate of risk issues and strengthening underlying processes, such as stress testing and reporting. Tom Woods, our Chief Risk Officer, will provide further details on our risk management progress in his remarks.

In World Markets, our review of the business has extended beyond exiting certain businesses and tightening risk control. Under Richard Nesbitt's leadership, we have engaged in a bottoms up assessment of our entire World Markets organization. Our objective is to ensure that plans for our core and profitable world markets businesses are aligned with our clients' needs and CIBC's strategy of consistent and sustainable earnings. As part of our overall refocusing of World Markets and our stated priority to improve CIBC's productivity, we announced this week plans to eliminate 100 positions in CIBC World Markets.

Combined with other reductions year-to-date, this will reduce staff levels within World Markets by more than 15% by the end of 2008. This reduction does not include the 600 employees transferred to Oppenheimer with the sale of our U.S. investment banking and related businesses. Our goal through this work is to refocus World Markets on core Canadian client businesses with linked activities in the United States, United Kingdom and Asia. Richard Nesbitt will talk more about the work underway here in a moment.

In summary we were active in the quarter on many fronts and made progress in many areas. Our strategic imperative continues to be consistent and sustainable performance over the long term. This strategy had delivered strong results for CIBC over the past two years and we believe it will again in the future. Now, let me turn the meeting over to David Williamson, our Chief Financial Officer, for his financial review. David?

Thank you, Gerry. Good afternoon, everyone. My comments also contain forward-looking statements and I would remind you that actual results could differ materially. I am going to refer to the slides that are posted on our Website, starting with slide five. It's a summary of results for the quarter. At the top right, you can see items of note, which generated the loss per share of C$3.00 for this quarter. I'll provide more details on structured credit run-off activity shortly, which is the largest of the items. The other large items can be described as follows.

A C$50 million or C$0.09 per share charge resulting from an amendment to the calculation of credit valuation adjustment or CVA, for our derivatives positions with counterparties other than financial guarantors. This adjustment result in a more consistent basis for calculating CVA for all of our derivative positions, after a move last quarter to a CVA for financial guarantors that is now driven by current market spreads versus historic default rates. Next, of the payment of a C$500 million dividend from our U.S. subsidiary to Canadian parent bank, resulted in a relief of a portion of the foreign exchange losses that have accumulated within other comprehensive income or OCI. This item does not affect total shareholders equity, as it represents only a movement between OCI and retained earnings via a charge to the income statement of C$21 million after tax or C$0.05 per share.

The C$26 million or C$0.05 per share of higher than normal severance, we have separately identified with this item, is the cost associated with the reduction in staffing levels in World Markets that Richard Nesbitt will cover shortly in more detail. The Visa loss aggregates two divergent factors. Visa's final allocation of shares to Canada resulted in CIBC receiving more shares than we had initially anticipated. However, the IPO was completed at a lower price than originally expected. The net result of these two factors is a C$22 million or C$0.05 reduction in the combined gain CIBC and FirstCaribbean had initially recorded in Q4 of 2007.

It's worth noting, Visa shares are still held with a combined unrealized gain of C$70 million at quarter end. Given these shares have a sale restriction for three years, this unrealized gain is not being recorded in either income or OCI. Excluding the items of note, our results this quarter were helped by higher volumes in Retail Markets and good expense performance. But were hurt by a challenging environment for World Markets and retail brokerage and lower treasury revenue. As Gerry noted, our Tier 1 capital ratio at 10.5% is the highest amongst the major Canadian and U.S. money center banks.

The next slide is a summarized statement of operations on a reported bases. The largest impact on results this quarter was for charges related to our structured credit positions. These positions, along with leveraged finance, are now recognized separately as run-off activities, led by a focused team with a mandate to manage and reduce the residual exposures.

Slide seven provides details of the C$2.5 billion in net pretax losses relating to our structured credit run-off activities. These losses resulted primarily from the further deterioration in the credit quality of financial guarantors and the U.S. residential mortgage market in general. In addition, you will notice the line item on the slide for net losses on disposals, as we took actions during the quarter to reduce our exposure. Specifically, we exited certain positions with the notional amount of C$1.5 billion that were protected by ACA, at prices we believe were favorable relative to likely future values. The run-off team also exited our flow and corelation trading books, reducing notional exposures by C$30 billion and unwound related purchase credit derivatives, for a total reduction of C$60 billion in credit-driven notionals. The net cost to exit these trading books was approximately C$18 million, which is included in the structured credit charge this quarter. In aggregate, trading related credit derivatives declined by C$67.8 billion this quarter.

Slide eight is a summary of our U.S. residential more than market exposure that is hedged with financial guarantors. In U.S. dollars, this slide shows we have $7.9 billion of credit protection, which now has a fair value of $6.2 billion. We have taken credit valuation adjustments to date of $4.7 billion and therefore, have a net fair value of $1.6 billion. After the additional provision we took this quarter of $1.8 billion, if the value of all the U.S. residential mortgage market assets and the value of all the protection from financial guarantors, both fell to $0.00, the maximum remaining exposure, as shown on the slide, would be $3.2 billion.

Turning now to a summary of our exposure to the U.S. residential mortgage market that is not hedged. After the writedowns we've taken to date, including an incremental provision this quarter of $114 million, the net exposure is now down to $105 million. Mitigating this exposure, we have subprime index hedges with a notional of$300 million, a fair value of $197 million, and therefore a remaining value of C$103 million. Given current market conditions, we may take action to unwind some of these hedges. We have counterparty protection provided by financial guarantors where the assets are not related to the U.S. residential mortgage market.

Given the quality of the underlying assets, this portfolio continues to perform well even during the difficult market conditions we experienced in the second quarter. The far right column shows the fair value of the protection we have with each counterparty, which totaled $1.8 billion at the end Q2. Against this balance, we have taken aggregate credit valuation adjustments of C$502 million, which include $390 million taken this quarter for a net fair value of $1.3 billion.

This next slide shows our unhedged structured credit exposure that is not related to the U.S. residential mortgage market and is now contained with within our run-off book of business. This disclosure also provides information that has been recommended by the financial stability forum. Excluding for a moment the third party sponsored asset-backed commercial paper conduits, our net exposure here is $1 billion. The notionals are listed down the left-hand side of the charts and are as follows. $346 million of AAA rated CLO's, which supported by European based senior secured levered loans. $337 million of corporate debt, with a fair valve $308 million.

Next, is $201 million of CMBS's in FirstCaribbean, rated between A2 and AAA with a fair value of $199 million. And $159 million of unhedged warehouse non-RMBS assets with a fair value of $84 million. Total charges taken to income in Q2 in relation to these holdings, was $61 million and includes losses taken to exit positions. For clarity, I should mention we also have our real estate finance business unit that originates commercial loans and mortgages and sells commercial mortgages and does CMBS programs. At this point, our CMBS positions is less than $5 million, so effectively nil. And all loans and mortgages are performing. This business unit is performing well and is an ongoing business within World Markets and therefore, their positions are, of course, not included in these slides.

Turning now to our third party asset-backed commercial paper conduits. In Canadian dollars, we hold par value positions of C$358 million, and non-bank asset-backed commercial paper subject to the Montreal Accord, and C$26 million in investments and conduits that are not parties to the Accord. In addition, subsequent to quarter end, we purchased an additional amount of non-bank asset-backed commercial paper with a face value of C$94 million. Losses of C$144 million were recognized in the quarter against these combined positions. In addition, we provide liquidity facilities of C$266 million to one of the conduits within the Accord. However, we believe a draw on this conduit is highly unlikely. We also provide liquidity facilities of C$632 million to parties outside of the Accord.

This next slide outlines our Canadian conduit positions that are part of our run-off activities. The reference portfolio consists of diversified indices, corporate loans and bonds. These conduits are in compliance with our collateral posting arrangements. And as the chart shows, that post to collateral well in excess of current market exposure. Great North Trust is sponsored by CIBC and the remaining conduits are parties to the Montreal Accord. The final element of our run-off activities is European leveraged finance. We currently have C$851 million of levered loans and unfunded letters of credit and commitments of C$374 million. None of these positions are impaired.

Turning now to our business results, starting with Retail Markets. Revenue was C$2.2 billion, down C$70 million or 3% from Q2 of last year. Excluding the Visa IPO adjustment, revenue was down C$50 million or 2% from the same period a year ago. In personal small business banking, revenue was C$540 million for the quarter, up 8% versus Q2 of last year. Deposit balances were up 5% and spreads improved. Revenue for Q3 is expected to increase with two additional days in the quarter. And a seasonal increase in mortgage activity should drive higher internal sales commissions.

Imperial Service is the group covering the mass affluent customers in our branch banking network. Revenue was C$239 million for the quarter, up 3% versus a year ago. Deposit balance growth and a slight improvement in spreads, were partially offset by soft market conditions that reduced trading volumes. Revenue for Q3 will benefit from the longer quarter and higher sales commissions from the anticipated seasonal increase in credit products. Retail brokerage revenue of C$264 million was down C$30 million or 10% from Q2 of last year, as more challenging market conditions drove lower transaction volumes and new issue activity. Annuitized revenue continues to grow, as annuitized balances were 4.9% over Q2 last year. Q3 performance is highly dependent upon developments in market conditions. Cards revenue of C$415 million was impacted by the Visa IPO adjustment. Excluding this, revenue was 7% higher than Q2 of last year, as balances were up 14%, offset somewhat by higher funding costs. The growth in balance represents the highest year-over-year growth since 2001 and the majority of this growth is coming from our premium card segment, which offers a lower loan loss experience. We continue to hold the number one position in both outstandings and purchase volumes. And we continue to see strong growth in purchase volumes, which were up 7.8% over the last year. We expect higher cards revenue in Q3, as a longer quarter and seasonally higher volumes will help revenues. Mortgages and personal lending revenue was C$302 million, down C$54 million or 15% from Q2 of last year. Mortgages revenues decreased 6% from Q2 of last year, mainly due to higher funding costs, partially offset by volume growth. Despite the highly competitive market, we continue to mainly taken our market share, as residential balances continue to show strong growth and are up 13% from a year ago. Personal and small business lending revenue was down C$44 million, or 24% from Q2 of last year, mainly due to higher funding costs. Total personal balances were up 6% year-over-year, driven by continued growth in our secured portfolio, which was up 15% year-over-year. We saw modest growth in the unsecured and small business portfolios this quarter, after 11 consecutive quarters of declines in these portfolios. The outlook for mortgages and lending revenue is for modest improvement in Q3. FirstCaribbean revenue was C$122 million in Q2, down C$28 million or 19% from Q2 of last year, mainly due to a stronger Canadian dollar and the effect of the Visa IPO adjustment. Other revenue of C$124 million, was down mainly due to a lower treasury revenue. Retail Markets net income after tax was C$509 million, down C$108 million from the prior year. Excluding the Visa IPO adjustment and the tax recovery in Q2 of last year, net income was down C$11 million or 2% from Q2 of last year.

Let's now turn our attention to CIBC World Markets. Revenue in Q2 was significantly affected by credit valuation charges on credit protection purchased from financial guarantors, although to a lesser extent than occurred in Q1. This quarter also included mark-to-market losses related to our exposure to the U.S. residential mortgage market and charges related to third party asset-backed commercial paper. Excluding the impact of structured credit run-off, Q2 revenue of C$246 million is down C$174 million from Q1 due to less favorable market conditions.

Looking at the individual lines of business. Starting with capital markets, revenue was up from Q1 due to lower credit valuation charges and lower losses from our unhedged exposure related to the U.S. residential mortgage market. Excluding structured credit, revenue was C$159 million versus C$208 million in Q1. Within capital markets, fixed income and currencies had lower performance this quarter, primarily in the area of interest rate derivatives. This was partially offset by improved performance in global equities, where the weaker results in Canadian equities was more than compensated for by improved revenues in equity structured products.

Investment banking and credit products revenue of C$102 million was down C$181 million from Q1. Q2 revenue was lower due in part to the sale of our U.S. investment banking and related business in January of 2008. In addition, Q2 saw substantially lower mark-to-market gains on corporate loan hedges, as investment grade credits spreads stabilized during the quarter. Investment banking revenue was lower in Q2, primarily due to lower M&A and advisory revenues, as well as slower equity new issue activity.

Merchant banking results were down slightly from Q1's already low levels. We had gains in distributions of C$28 million, offset in part by writedowns and funding costs of C$23 million. We expect low levels of earnings for the remainder of the year. Other revenue of C$40 million was up C$59 million from the prior quarter, which included a C$70 million loss on the sale of our U.S. investment banking and related businesses.

Turning to World Markets expenses. Q2 expenses of C$358 million are up C$7 million from Q1, due to higher litigation and severance compensates, partially offset by lower performance related competition. During the quarter, World Markets recorded a severance expense of C$26 million and it is expected that the ongoing annual expense savings will exceed this amount. World Markets reported a net loss of C$1.6 million. Excluding the impact of structured credit losses, net income was C$35 million.

Turning now to our total expenses and our performance versus our 2008 target. Our target is to hold our expenses flat relative to annualized 2006 fourth quarter expenses. To ensure a reasonable comparison, we have excluded expenses relating to FirstCaribbean, the U.S. restructuring, our structured credit run-off activities and other items of note this quarter. As you can see on the slide, we are running ahead of our objective through continued expense discipline. Thank you for your attention. I'll now turn it over to Tom Woods.

Thanks David. My comments may contain forward-looking statements and actual results could differ materially. Slide 54, credit risks. Specific loan loss provisions in the second quarter were C$174 million or 41 basis points of net loans and acceptances. Quarter over quarter increase of C$3 million was due to C$17 million of increase in Retail Markets, partially offset by C$14 million decrease in World Markets.

World Markets reported a net recovery of C$3 million in the quarter. We have several reversals in the quarter and new provisions were down from the first quarter. Retail Markets, specific loan loss expense was C$177 million. Cards portfolio provisions were up due to slightly higher seasonal losses and volume growth. Net impaired loans decreased to C$315 million at the end of Q2. The decrease from the previous quarter was largely due to the sale of one loan in World Markets U.S. portfolio, as well as decreases in several of our Canadian portfolios.

Turning to market risks, slide 55, shows the Q2 distribution of revenue in our trading portfolios. In Q2, 53% of trading days were positive, up from 50% last quarter but down from 75% last year. Trading revenue here does not include the reductions in mark-to-market value of our structured credit assets, as we do this work only at each month's end.

Slide 56, the Tier 1 ratio was 10.5%. The impact of structured credit writedowns was partially offset by internal capital generation and reduced risk weighted assets, including the affects of receiving off the approval and reducing the BASEL II floor factor to 90%, which helped the Tier 1 ratio by 24 basis points. And as Gerry said, at 10.5%, our capital position remains among the strongest of the North American banks. And on that metric, number one among the money center banks in North America, and provides substantial cushion in the event we have further structured credit charges.

I'd like to spend a few minutes now talking about risk management at CIBC. Since I became Chief Risk Officer, we've launched a number of initiatives and made several changes to the way we oversee risk. The overarching objective we have is to build a risk culture that is aligned right across the business, not just in the risk management department and that it be sustainable in good times and bad. To this end we have made -- we have four main areas of focus. Those are on slide 57. Risk appetite, risk governance, risk organization and risk reporting and transparency. Let me spend a moment on each of these.

We started with formalizing our risk appetite statement, which will provide the basis for establishment of individual business line risk limits and guidelines. Our risk appetite is consistent with our overall business strategy, which as Gerry said, is to provide -- is to focus on our core franchise and deliver consistent sustainable earnings without the kind of volatility we've experienced recently. Specifically, our objective is to be a AA rated bank and to be seen by investors and other stakeholders as a low risk Canadian bank with high quality earnings.

To get there and stay there, we will be monitoring our progress against a number of metrics, including backward-looking metrics such as earnings and share priced volatility versus our competitors. And more importantly, several forward-looking metrics, including four that we've used for several years and reported externally. The Tier 1 ratio, earnings per share growth, the loan loss ratio and our retail/wholesale business mix. We'll also have targets on other metrics, such as the buffer of tangible common equity to economic capital, trading VAR as a percentage of tangible common equity, . maximum stress test losses will tolerate and our funding liquidity horizon.

In developing a risk appetite statement and indeed in reassessing everything we do in risk management, we have engaged our senior business line people, the Risk Management Committee of the Board, and our full Board. We've also used outside advisors to ensure we're up to date on the emerging best practice among the top performing financial institutions globally. On the topic of risk governance, an important initiative has been the changes we've made to the senior management committees that oversee see our risk positions. And approve new product launches and significant new trading strategies. We have expanded membership on these committees and are providing enhanced discussion material, including more extensive scenario analysis and stress testing.

Having said all of this, I have would have to say that our willingness to embark upon many new initiatives with elevated levels of risk is low at the moment, given the challenging market conditions we continue to face. Organizationally, we've made several important changes, as Chief Risk Officer, I'll be going from having 11 people reporting to me down to six including: consolidating all of our corporate credit risk staff under one person, combining market risk management with counterparty credit risk and traded credit risk under a newly created position staffed by a senior person we've just recruited externally. Another senior external hire we've just made, reporting to me, will oversee credit portfolio management. With the current incumbent moving into a new important role, resourcing the risk committee reporting I mentioned a moment ago.

The head of our retail credit risk group was appointed to his role late last year from our credit card risk management group. Meaning that overall, we'll have a substantially new and very experienced risk management leadership team. In addition, as Richard Nesbitt can elaborate on, he's performed a small group within CIBC World Markets to provide supplemental risk management oversight within the business. And as Gerry said, this group will not have override rights relative to the central risk management group but will, we believe, further enhance the alignment and accountability in our wholesale business for risk management.

Finally, risk reporting and transparency. This is the underpinning of sound risk management governance. Although, our reporting from the front lines and from our analytical groups is very good in most respects, we need to synthesize it better for decision making by senior management and discussion with the Board. As we make further progress in each of these four areas of focus, I'm confident we can develop our risk management capabilities to the point where they're a competitive advantage and help us achieve our broader set of goals to deliver more consistent financial results.

Thank you, Tom. My remarks may also include forward-looking statements and actual results could differ materially. This quarter was one of consistency and solid performance for Retail Markets. Loan loss performance was again well contained. This is a reflection of the actions we have taken over the past 24 months in partnership with risk management.

Our credit cards business delivered strong results and we continue to be disciplined in the area of expenses. Across Retail Markets, the fundamentals of our business are tracking well, particularly with respect to balanced growth and new sales. Revenues in certain businesses, such as retail brokerage and mutual funds were adversely impacted by the market environment. That being said, we see this as very much a market-related impact versus any systemic issues in those business areas.

Let me briefly comment on our performance by business line beginning with credit cards. Credit cards outstanding grew 13% year-over-year, primarily due to premium card volume growth. We also continued to experience strong new account growth, as a result of effective in-branch cross-selling to existing banking clients and new client acquisition through direct sales activities. As I mentioned last quarter, our overall portfolio credit quality continues to perform well. Our loan loss rate has decreased year-over-year. Mortgages performed at industry growth rates with balanced growth of almost 13% year-over-year. We have seen good progress in terms of both originations, as well as continued improvement in mortgage retention rates.

In lending we had continued modest improvements as a result of initiatives to improve acquisition and account management. Our total personal lending balances were up by 7.3%. We improved sales activities in our unsecured portfolio, while maintaining a strong focus on credit quality. Deposit accounts and GIC's also continue to perform well. Personal deposit balances grew 9.3% and GIC, 5.7%. We are focused on enhancements to our deposit offer. Yesterday, we launched an improved student banking offer. And in the coming weeks, we will be launching additional new features on our checking account products that will provide incremental value to clients who consolidate their day-to-day banking transactions.

Mutual fund net sales in Q2 were C$613 million. In Q2, investors continued to be cautious and mutual fund flows were primarily into short term funds. In addition, we received four fund awards in April, recognizing mutual funds that excel in delivering consistently strong risk adjusted performance relative to their peers. In retail brokerage, revenues were down 10% due to continued volatility in the capital markets and a significant decline in new issue activity. And in distribution, we made further progress on our strategy to enhance client accessibility in all of our channels.

On April 3, we announced 13 new locations, as part of our strategic plan to build, relocate and expand over 70 new branches across the country. We expanded our Montreal telephone banking center outbound capabilities in support of continued sales activity. And we are expanding our Sunday hours pilot to more branches this summer. We are strengthening our business banking by increasing our advisory capabilities through more robust and specialized training; enhancing the client experience through improvements to credit processes; and through the developments of targeted offers to high growth client segments.

So, in Retail Markets overall, our focus on leveraging our core strengths in delivering strong advisory solutions to our clients continues to generate business growth through consolidation and attraction of new clients. This focus, combined with prudent risk management strategies and a continued disciplined approach to cost management, provide us with a solid business foundation. Thank you. Richard?

Thank you, Sonia. My comments may also contain forward-looking statements and actual results could differ materially. So, I'll review CIBC World Markets' quarterly performance, provide an overview of our strategic direction moving forward and offer some observations on my first three months as CEO of CIBC World Markets. As detailed by David earlier, World Markets recorded a loss of C$1.6 billion. Excluding the impact of structured credit losses, net income was C$35 million. Excluding structured credit, overall revenues declined C$174 million from Q1.

As was the case throughout the industry, market and business conditions remained difficult through most of the quarter. These conditions were a major contributor to the flat or negative revenue growth we saw across our four primary lines of business. In our global equities business, revenues were up slightlywith our equity in commodity structured products improving versus Q1. In fixed income and currencies revenues, were overall down. A bright spot was foreign exchange, where we had another strong quarter.

In real estate finance, we are intentionally operating at about 50% of our revenue generating capacity due to the ongoing uncertainties in the commercial real estate market in the United States. In our investment, corporate and merchant banking area, the liquidity crunch had an impact on the number of equity new issues and advisory opportunities. The strong pipeline that had carried into Q1 as a result of a robust conditions earlier in 2007, slowed during the second quarter. Despite the difficult market conditions, we were involved in a number of significant advisory deals, which underscores the strength of our Canadian franchise.

Key mandates included - acting as sole lead on British Columbia's C$500 million, 30 year bond transaction,lead agent for a C$200 million, 10 year bond deal for Union Gas,.placement agent on transactions involving US$350 million in convertible debentures for AbitibiBowater, book runner on the C$125 million Calloway REIT convertible debenture offer,a joint book runner on the C$357 million Aeroplan Income Fund and book runner and co-lead manager on C$250 million financing of debentures for Harvest Energy Trust. And these transactions were all good wins for us.

So, in addition to our focus on our clients, we're also continued to position our business for the future. In order to ensure that all of our employees understand the direction going forward, we have set a Missions Statement for World Markets. And that is, CIBC World Markets mission is to bring Canadian capital markets products to Canada and the rest of the world. And it's also to bring the world to Canada. To illustrate this mission we -- for example, we distribute Canadian fixed income and equity products from all of our Canadian offices, as well as our offices in New York London and throughout Asia. We also advise major international companies on mergers and acquisitions, for example, Rio Tinto on its acquisition of Alcan. So, this mission describes what most of our employees do every day across World Markets.

In addition to the primary business that carry out this work, we'll also be selectively involved in other activities, provided that they are consistently profitable, risk controlled and well managed. So this is a very client-focused strategy. And our goal is to be the premiere client-focused investment bank in Canada. Each of our operating businesses has now completed a review with me of their activities to ensure they're consistent with the World Markets mission and strategy. This process has helped in number of decisions. We are investing in businesses that offer good returns and strong future growth. And at the same time, we're exiting or reducing businesses that no longer offer a strong return, or acceptable risk profile or strategic fit.

This is a major transition and it's going to take several more months to complete. And it's something we must continue to manage aggressively. Doing so, will allow us to transition as quickly as possible to our most important long-term task. Growing a World Markets business that delivers outstanding service and value to our clients and consistent financial returns to our CIBC shareholders.

As a result of this business review, we announced earlier this week, we are eliminating 100 positions across World Markets. And these are a mix of management and administrative positions. The total number of positions in World Markets has been reduced by about 15% since the beginning of the fiscal year. This includes the impact of changes to our business earlier this year, for example, the exit of our European leveraged finance business and the exit of our structured credit business. It does not include the impact of our sale of U.S. businesses to Oppenheimer earlier this year. These most recent reductions resulted in severance charge of C$26 million in Q2 and we expect the annual savings to be greater than that amount. World Markets will now have approximately 1,100 employees and four primary lines of business.

So, I want to conclude my earlier -- my remarks with some early observations during my first three months as CEO of CIBC World Markets. This is clearly a strong franchise, with a legacy of talent and strong client relationships. As we realign our focus, there is a major opportunity to build this business. This requires a disciplined approach to delivering value to our clients and internally, it requires effective leadership and management, risk control and profitability. I've been encouraged by the attitude and commitment of the professionals in our firm during a difficult time in the industry. And I'm looking forward to working with this team as we continue to build our leadership position in the market place. I will now turn it back to John.

Thank you, Richard. Operator, we're ready to take questions on the phone.

(OPERATOR INSTRUCTIONS) The first question is from Shannon Cowherd from Citigroup. Please go ahead.

Since the valuation adjustments were done based on the CDS spreads of the guarantors or the counterparty, is it fair that it's not really indicative of the guarantor's ability to pay? There might be some writeups on these valuations adjustments?

The move to using a credit spread is really just to make sure we're using the market view of the credit quality of each of these guarantors. In the past, what we used was historic rates of default. So, we feel that by going to credit spreads as a measure of credit quality, it is a better barometer and better basis for calculating credit valuation adjustment. And the -- what you may be referring to but I'm not 100% sure, is during the course of this quarter, we've now made a move on the credit valuation adjustment, and that we're booking on the derivatives that aren't the financial guarantors. And again, with a view of moving that methodology to be more in sync with looking at credit spreads.

Okay. And I have another question. Based on slides eight through 11, if there is continued deterioration in underlying assets or the guarantors, could there be an additional writedown of about C$5 billion?

Bear with me one second, I'll get to those slides. That was -- of you could, remind me what slides you're looking at?

Eight through 11.

Eight through 11. So depending on, for example, eight, by all means, what we've got on slide eight is a -- that's the real estate hedge position. So, that slide does show that we've got in effect a total potential exposure of C$3.2 billion. 50% of which is a difference between the notional amount of C$7.9 billion and the fair value. Right? So, you could have another, roughly C$1.5 billion charge there if the value of the underlying continues to erode and say goes right to C$0.00. And then you've got another C$1.5 billion in the far right column, which is the amount of protection we're looking to the financial guarantors for and if they were to fall away, or that protection totally went to C$0.00, there would be another C$1.5 billion there. So to your question, yes, the financial guarantors -- on this particular slide for example, if the financial guarantors failed completely on this slide, slide eight, there would be C$1.5 billion of incremental exposure. And that would be true of any slide where we have financial guarantor support. So again, if you went to slide 10, which is non real estate exposure, that also is backed by financial guarantors, and they are in the right hand column, is a current fair value of C$1.8 billion. We have reserved, as you said using the credit spread methodology, we reserved C$500 million. So our net exposure there is C$1.3 billion, if all the financial guarantors were to fall away.

Okay, thank you.

You're welcome.

The next question is from Brad Smith from Blackmont Capital. Please go ahead.

All right. Again, my question deals with the CDS portfolio. I was just wondering, in looking at the sub pack on page -- the purchased option under credit derivatives, we actually see on 31 the reduction of about C$30 billion there. The fair values come down by just over C$1 billion. My question is, what caused the risk weighted amount rise by almost C$3.8 billion, when the hedge amount and the credit equivalent are coming down? It sort of suggests that there's a shift in the mix of the counterparty credit.

So, Brad, it's Tom Woods. So, the risk weighted amount -- you're referring to slide 32 are you?

Yes, it's C$8.4 billion now, up from C$4.6 billion. Yes. Actually, above, Tom, the credit equivalent amount, which kind of suggests that the remaining counterparties are perhaps not rated. Is that the correct interpretation?

Yes, Brad, it is the -- so just for others, it's slide 32, under the Q2 '08 purchased options. The C$8.4 billion was very seriously affected by the Basel II impact on the downgrades of the monolines.

Right.

That's why the RWA's are up.

So that's the reason for the -- for that?

That more than offset the reduction in notionals.

Okay. And -- okay. So that's great. I had one other question, just if I could. The C$1.84 billion fair value on slide 10 that we were just looking at, I believe that is up about $1 billion from the end of the first quarter. And that's roughly a 4% development rate. I am just wondering, what's your expectation for that development rate in that non U.S. RMM exposure? Do you think that's going to go up by 4% a quarter or was there something particular in this quarter that caused it to almost double?

Yes, Brad I can speak to that. You're right. The last quarter that valuation was about C$885 million if memory serves and we're now at C$1.8 billion. So, one thing is that Q2, was a particularly tough quarter, around March was a tough time. The overall indices have come back in this space, but you know this probably better than I, so the underlying indices have come back. But these instruments here are not as liquid, by a fair stretch, relative to the indices. So as the indices have bounced back from the low point in March, we saw these track down with indices through that period, but not get the same bounce back. And we think that's primarily as a result of the illiquidity of these instruments. We get valuations by calling for price points and we think that the case is that they certainly rolled them down with the market and they're less likely to post bids that are -- that have rebounded. So it's really I think relative to -- a liquidity issue relative to the indices.

Thanks so much.

You're welcome.

Thank you. The next question is from Michael Goldberg from Desjardins Securities. Please go ahead.

Thank you. What is the purpose of the risk management group in World Markets if it has no override authority? And will this group be involved in pricing decisions?

Hi, it is Richard. So, the purpose of this group is really to be on top of risks as they happen on a realtime basis day by day, and to assist the line managers in assuring that they're looking for the changing nature of risk. A trade that is put on at one point in time may change completely with external events, even though the risk parameters don't change or the risk limits don't change. And I want our people to be very much on top of the changing nature of the risk. In terms of pricing decisions, no, they are not going to be involved in pricing decisions. But they will be very much involved in any new initiatives that we have, working with Tom Woods' risk management group to ensure that any new initiatives are fully vetted.

Michael, it's Gerry here. When we talk about no override, you've got to remember that the central risk management group for governance purposes and all of the usual processes that are in place in all the banks, sets the limits. And that's the group that's under Tom Woods and you've heard what he has said about the actions that he has taken within the central risk management group. What Richard is talking about is how he manages within those limits. And I can assure you that the group working under Richard, if they wish to manage at a lower level than those limits because of, as Richard said, the evolving risks, that group working with Richard Nesbitt most definitely has the capacity to manage risk at a lower level than the central limits that are set by Tom Wood's group. And that's what Richard is trying to do. He's trying to have a more acute and rapid allocation within the business of risk, working within and with no override rights of the firm's governance as to overall risk limits that are set centrally.

I asked about risk override and pricing together because as much as we like to avoid risk, if get paid for risk, that;s okay. The problem is when you take risks but you don't get paid for it. So, this is what I'm really getting at. Can you speak to that? And that can be within the normal operating parameters. So, what I'm really getting at is how will you -- how will this group ensure that products in World Markets properly get rewarded for risk that's being taken?

Do you mean that they properly get rewarded in terms of we allocate our resources to the most profitable and on a risk return basis? Or do you mean, we eliminate businesses that don't have acceptable risk return profile?

Well, what I mean is that you ensure that products are priced properly for the risks that are being taken.

Yes, that's actually very good point. I think you're right. Some of the activities that investment banks have been involved in in the past throughout the industry have not had an acceptable return relative to the risk that they've taken. So the way we've started to get at that and I think there's always more work to be done, is we have gone through each and every business now, as of the end of May, each and every business activity that World Markets is involved in. And as a result of that, certain of those activities that we were still involved in, even after the exits of certain business, certain of those activities we are exiting or reducing or repricing. I think that's a line manager's job, to ensure that we're getting the proper return for the risks that we're taking. And it's also the line manager's job to ensure that we get out of businesses where we're not generating the proper risk return profile. And we've done quite a considerable amount of that in the last two quarters.

Okay. Maybe I can follow-up on that offline afterwards. I have another question. Can you explain the reason for the dividend paid by the U.S. sub to the parent bank?

Brian, do you want to do that?

Certainly, Michael. It's Brian responding here. We paid the dividend from the U.S. basically reflecting the changing business nature of our U.S. operations. After the sale of business to Oppenheimer and that transaction we no longer need as much capital in the region of the U.S..

Is there any technical impact in moving the -- just from AOCI to -- is it to retained earnings that -- as a result of the payment of that dividend?

There is no other technical implication other than to say that it does flow through the tax line on the P&L on its way to the retained earnings.

Okay.

Thank you. The next question is from Ian de Verteuil from BMO Capital Markets. Please go ahead.

Sonia, when I think about CIBC Retail Markets, there's been a lot of changes over the past few years. You have largely exited the unsecured lending business. You've done a lot of work on trying to build a business. I'm really having a difficult time seeing how -- give me your comments on how -- share is good and you're holding your own. How it seems as if you have meaningfully underperformed your peers this quarter, in a quarter with pretty good loan growth and a quarter where your loan losses are actually down, the pretax earnings are down. What's the growth rate of the business as you think about it going forward?

Okay, Ian. Well, I think there are a number of factors that go into this. I would say we had strong volume growth in our cards, our mortgages and our deposit businesses. We had good expense management and we had positive loan losses, as you described.

A few factors that negatively impacted us. One, if you look at our lending business, which as you've described, we've had good strong growth in our secured balances but we have had far less than market growth in our unsecured. So that mix shift over the year has certainly had an impact to us in terms of our spreads. We've had higher funding costs in this particular period through internal transfer pricing. And we've had -- we've been challenged in the business lending area. So we have been growing at less than market in that area.

Add to that environment that has negatively impacted, and I think this would be industry-wide, retail brokerage and mutual fund revenues. That's -- those are the factors that would cause us to be where we are. But I would emphasize that in cards, deposits and mortgages, I would say the growth is quite strong. And in the other areas that I've referenced, they're either market-driven or we have initiatives in place to work towards narrowing that gap, most specifically, in lending, both personal and business.

If Canadian loan growth, which has been double digits, slows to single digit, what do you think you can grow your business at?

Well, I think it is reasonable to expect that we would be coming into line with the industry. So, we would be in mid-single digits.

Thank you.

The next question is from Darko Mihelic from CIBC World Markets. Please go ahead.

Thank you, I have maybe a question here for Tom Woods. Tom, have you actually filed any claims with the monoline? And if you have, have they paid?

The answer to that is, no to the first question. The second question is not applicable.

Okay, thank you. And a question again, maybe getting back to Sonia on the retail side. I wanted to drill down a little more into some of the revenue line items and understand what the possibility is for a spring back. When I look specifically at mortgages and personal lending, when you mention that you have industry growth rates of 13% but revenues drop by about 15% in that line of business, I just want to understand how much could you get back on the funding side, perhaps? Or maybe if you could just run me through how badly affected you've been by margins in that business and why you continue to run it at such high growth rates and yet margins are declining so fast?

Well, there's a couple of pieces to it, so let's separate, Darko. If we separate mortgages from lending. So on the mortgage front, a couple of additional factors, which are positive in terms of the business but mortgage fees from customer penalties are also down. So, if you're looking at trying to reconcile where we are as our retention levels have improved. So retention levels going up is a good thing over the longer term. The other factor is, as the mortgages are maturing, they're being replaced by lower margins. So certainly, on the mortgage front, there is some repricing of the portfolio given the change in environment. On the lending side, I would say that there's certainly some opportunity as we gradually increase our unsecured lending sales and as we increase our business lending. Both of which are fairly high margin businesses that we have been significantly lagging the market in. So, those would be two factors. On the funding cost side, I might maybe refer that to Tom in terms of our expectations going forward.

Darko, in Q2, the retail business was affected by the way we transfer price. Typically, -- and this -- I don't want to get into too much complexity here. I'm happy to follow-up afterwards. But we transfer price basically partway between the cash curve and the swap curve. As you know the cash curve diverged quite a bit this quarter. As a result, the transfer pricing into World Markets assets -- or Retail Markets Assets, rather, was quite a bit higher. Typically, that comes back through an allocation to the extent treasury does not term finance, which it didn't, given the shorter term available in the marketplace. But that offset wasn't as high as, in effect, the penalty due to the widening spreads.

Since the quarter end, as you may know, spreads have come back, not to where they were a year ago but have come back somewhat over the last 30 days or so. So, I would say, as you look forward for retail NIM's generally there's the same three or four factors that you'd throw into the mix here. Prime BA, what's your call on that? Right now, it's pretty steady around 165, which is a historical norm. Don't see any reason to change that. How competitive the marketplace will be? You'd have your own view on that. I don't know that that's going to change very much.

On the positive side, funds that are rolling over are being financed at slightly better rates, now that spreads have come back and absolute rates are down. In our case, we're likely going to be trying to extend term a bit, as the appetite in the market has improved. So, that would probably offset the lower absolute rates on the short end. So, I don't know that's there is a case for much change in NIM's overall.

Okay. I think that's helpful. And one last question maybe for Sonia. The deposit offers you're talking about, are they aimed at higher margin product or should we be looking at this as a way to defend what looks like being a decline in deposit market share?

It's a combination but they are aimed at higher margin.

Okay, great, thank you.

Thank you. The next question is from Mario Mendonca from Genuity. Please go ahead.

Good evening. A quick question. Sort of along the same lines as funding. What can you tell us about CIBC's funding costs relative to other Canadian banks throughout the quarter, near the end of the quarter and your outlook going forward? And any commentary you can offer us on whether the issues that the bank has experienced in World Markets are having a detrimental effects on the bank's capacity to compete with your peers in retail?

Well, maybe on the first and Mario, it's Tom speaking. Costs in the funding market on the short end are pretty flat almost out to one year. Once you get beyond one year, there is a bit of divergence. Through Q1, our spreads widened a bit but they've come back, actually quite nicely.

You mean Q2, Tom?

Sorry. In Q1 they widened. And towards the end of Q2, since the 17 of March, when the market changed, they've come back. Not completely but quite reasonably significantly.

But is the disparity relative to your peers such that the bank is at a disadvantage in retail now?

No, I wouldn't say it's a material disadvantage. I think when you look at NIM's in retail, the NIM's are up a bit Q2 to Q1 but that's because NIM's, as you know, are computed based on interest income. But when you consolidate that with non-interest income because of the transfer pricing and treasury reallocation back, that's where the retail business here had reduced revenue. So, did it materially affect retail? It's a question of degree. I wouldn't say "materially" but enough to affect the comparative revenue growth, I haven't worked it out, but probably a couple of points. So, it's not insignificant but it's not dramatic. And I think -- although I can't -- I don't want to give you guidance going forward. What I can tell you, and you can verify this in the market, the spreads of the banks, still out to one year, are pretty flat amongst each other and beyond one year have come in quite a bit.

And so CIBC's currently, beyond the -- and I see your point, beyond one year, CIBC's spread over call it Royal, TD, BNS, whomever; right now, you'd say is lower than where it was throughout most of Q2?

Yes, absolutely. And the banks are in a pretty narrow band right now. But certainly, lower than where they were at the beginning of Q2 and even really at the end. But certainly, quite a marked difference between the beginning of Q2.

Okay. And did you suggest that retail margins NIM were -- they were up sequentially this quarter, Q1 to Q2?

Well, yes. If you use the accounting definition of NIM, which is net interest income divided by assets, it was marginally up.

Marginally up.

But Sonia's point about higher funding costs, the way the math works on revenue is you have to add in the non interest income that gets allocated back because of our transfer pricing. And that was down quite a bit this quarter. So net-net, when you look at margins on a macro basis, if you just took revenue divided by assets, it was down in the quarter.

Could you help us understand margins better going forward by providing some disclosures? I think it -- CIBC might be the only bank that doesn't disclose the retail margin.

Well, we actually do -- we do disclose the NIM.

Retail?

Yes, we do, yes. It is on -- what's that -- slide 49. But I see your point Mario, which is think is a good one. That's the biggest part of the story. But -- and in Q2 it -- the non interest income component of the story was reasonably material. So, we can help you on that.

Thanks.

Thank you. This concludes the question-and-answer session. I would now like to turn the meeting over to Mr. Ferren.

Thanks, everyone, for joining us. If you have any further questions, the investor relations staff will be around for a while tonight. Thank you, and have a good evening.