Canadian Imperial Bank of Commerce (CM) 2008 Q3 法說會逐字稿

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

Thank you, good afternoon and thank you for joining us today. The purpose of our conference call this afternoon is to discuss CIBC's third quarter results released earlier today. The call is being audio web cast and will be archive later this evening on CIBC.com. This afternoon CIBC Senior Management team will discuss our third quarter results and provide an update on CIBC's business priorities. The Investor Presentation for today's discussion is available on our website. Following the formal remarks there will be a question and answer session and I would ask that you limit your questions to one or two and then requeue so we can get to as many of you as possible.

Before we begin, let me remind you 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, 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 third quarter results. Following my remarks, our Chief Financial Officer, David Williamson and our Chief Risk Officer, Tom Woods will provide the financial and risk overview. Sonia Baxendale will then cover the Retail Markets business and Richard Nesbitt will discuss world markets. This morning CIBC reported net income for the third quarter of $71 million and cash earnings per share of $0.13. Our results this quarter were impacted by charges in our structured credit business, although to a lesser extent than in previous quarters. Earnings a part from these charges and other items noted in our press release were $1.65. Our loan losses and expenses remain well controlled and our Tier 1 capital ratio, after accounting for write-downs this quarter, remains strong at 9.8%. In addition, we today issued a preferred share issue, which have added to our July 31, Tier 1, would put us at approximately a 10% Tier 1.

This quarter the largest portion of our structured credit charges are due to higher credit valuation adjustments recorded against our US$8.89 billion total receivable from financial guarantors. Through July 31, we have recorded cumulative charges of just under US$6 billion, against this receivable, which of course have already been reflected in our Tier 1 capital ratio calculation. Given affect to these charges, the remaining receivable from financial guarantors is $2.9 billion. While the impact of this remaining exposure has not been reflected through our charges to earnings, it has been reflected in the risk-weighted assets used to calculate our Tier 1 ratio. This is because Basel II rules assign elevated risk-weighting to our financial guarantor counterparties when we downgrade their internal risk-weighting.

We have downgraded our internal risk-weighting for our financial guarantors and therefore it is important to note that any future charges we may take against the US$2.9 billion, would have a leveraged reduction in risk-weighted assets and this would therefore, dampen any negative impact of future charges on our Tier 1 capital ratio. David Williamson will touch on this in detail in his remarks. In this light, our 9.8% ratio, 10% with our preferred, remains one of the highest among the North American Banks. In addition, it is very resilient to future CVA charges against our existing receivables for the reasons that I have given you. David Williamson and Tom Woods will provide further analysis of our capital strength in a moment.

Turning to our business results, CIBC Retail Markets reported net income of $572 million up 12% from last quarter and down 4% from a year ago. Excluding Visa gains and losses, revenues were up 3% from last quarter and down 2% from a year ago. In light of the more difficult market conditions than a year ago, particularly for our retail brokerage business our retail business had solid performance in quarter. In core retail banking, revenue was down 2% from a year ago due entirely to lower treasury revenue allocations. We continue to achieve strong year-over-year volume growth, particular in cards and deposits, while maintaining market share in what continues to be a highly competitive marketplace. In the area of personal lending, our market share has stabilized after a period of decline in recent years, while we shifted our portfolio mix toward secured lending and a lower risk point.

For the second consecutive quarter, we had growth in our unsecured personal lending volumes, though we are taking a very measured approach to credit given the current environment. Credit quality for our retail loan portfolio overall remains strong and solid. While retail loan losses were up $22 million from last quarter, this was affected by strong growth in our cards portfolio and an increase in provisions from the expiry of previous card securitizations. Sonia Baxendale will comment further on our retail performance and priorities in her remarks.

CIBC World Markets reported a loss of $538 million for the quarter. This included structured credit charges of $596 million down from $1.67 billion last quarter. Results outside the area structured credit were better than Q2 but down from the third quarter of last year. Many areas of our wholesale business continue to be impacted as expected by much lower industry activity than a year ago as well as our desire to maintain a conservative risk posture in this environment. Our corporate loan portfolio continues to perform well, with the reported loan losses at $7 million for the quarter. Activity continues to reposition our World Market's business for a more sustainable performance in the future. Richard Nesbitt will comment further on our World Markets business performance and priorities in a moment.

Let me now provide an update on our actions to reduce risk within our structured credit run-off business. In the area of US sub-prime exposures hedged by financial guarantor, we reduced notional exposures hedged by ACA by US$436 million this quarter through the termination of credit derivative contracts. In addition, normal amortization of sub-prime and other exposures hedged by ACA and other financial guarantors contributed to a further US$292 million of notional reductions.

As of July 31, our total remaining exposure to US sub-prime assets hedged by financial guarantors is US$2.84 billion. It is important to note that this exposure assumes all assets go to zero and all counterparties fail and then go to zero in value. With respect to non-sub-prime assets hedged by guarantors we took charges in the quarter of US$768 million. Most of this charge was attributable to the widening of financial guarantor to our credit spreads as opposed to deteriorating value of the underlying. Over 85% of this portfolio consist of CLOs and corporate debt securities, which despite the continued deterioration in credit market conditions during this quarter continued to be valued at $0.90 to $0.94 on the dollar respectively and whose credit quality continues to be highly rated. We also reduced exposures during the quarter that were hedged by counterparties other than financial guarantors. In our intermediation correlation and flow trading books we unwound US$1.5 billion of bought and sold protection for a total reduction in notional of US$3 billion.

Developments within the financial guarantor industry over the past few weeks, have generally been encouraging and positive with several corporations announcing results in terms of restructurings and/or [tear-ups] and several comments by rating agencies generally being in the positive area. We are actively managing our structured credit positions and continue to assess all opportunities to reduce contingent risk in this portfolio. In the area of productivity, we continue to make steady progress. Expenses for the third quarter were $1.73 billion down 5% from a year 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 restructuring activities. We continue to exceed that target through the first three quarters of 2008. Our focus remains on adjusting our infrastructure support activities, in light of recent business divestitures. Our opportunities to maintain expense discipline in these areas should result in continued progress against our productivity targets over the next several quarters.

In the area of balance sheet strength, CIBC remains very well capitalized. Our capital rates at the beginning of the year, along with ongoing capital discipline resulted in a Tier 1 capital ratio of 9.8% at the end of the quarter and 10% giving affect to our preferred issue today. This is well above our target of 8.5%. As I stated earlier, this figure is lower than it would be otherwise as a result of higher RWAs, as a result of internal downgrades and RWAs set aside for the receivables from our financial guarantors. Our capital position is strong and prudent and will remain an area focus during this period of uncertain market conditions.

In summary, CIBC made further progress in the third quarter to addressing its challenges with respect to structured credit and getting back on track to deliver consistent and sustainable performance. While a number of business are currently facing a challenging market, they are well positioned to take advantage of improving positions as they occur, as well, work is ongoing to ensure that not only are they going to be well positioned but better positioned than they have been in the past so that as conditions improve, our performance will also improve in line and better than conditions.

Now, let me turn this 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'm going to refer to the slides that are posted on our website, starting with slide five, which is a summary of our results for the quarter. At the top right, you can see the items of note included in our results this quarter. On a reported basis, we generated cash earnings per share for the quarter of $0.13. I will provide more detail on structured credit run-off activity shortly. Excluding the items of note, our results this quarter of $1.65 cash earnings per share were helped by higher volumes in Retail Markets and lower expenses but were hurt by lower treasury revenue and higher loan losses. Our Tier 1 capital ratio was 9.8%, as Gerry said and continues to be one of the highest among the North American Banks. The next slide is a summarized statement of operations, on a reported basis. The largest impact on results this quarter was for charges related to our structured credit positions. These positions, along with UK based leverage financing, are now recognized separately as run-off activities, led by a focus team with a mandate to manage and reduce the residual exposures. Slide seven, provides details of the $885 million in net pretax losses relating to our structured credit run-off activities. These losses resulted primarily, from further deterioration in the value of underlying and the credit quality of financial guarantors due, in general, to continued weakness in the US residential mortgage market. Slide eight, is a summary of our financial guarantor protection, purchased against our US residential mortgage market exposure.

In US dollars, this slide shows that we have US$7.7 billion of credit protection, which now has a fair value of US$6.5 billion. We have taken credit valuation adjustments to date of US$4.7 billion and therefore have a remaining net fair value of 1.8 billion. This quarter, US$113 million of notionals were amortized through the maturity or normal pay down of positions. The counterparty shown as Roman numeral six has an aggregate underlying of 1.9 billion with a fair value of 1.8 billion that have been terminated. These balances need to be deducted from this chart when determining future earnings at-risk. With this adjustment made, if the value of all the US residential mortgage market assets and all the value of protection from the financial guarantors both held fell to zero the maximum remaining exposure would be US$2.84 billion.

Slide nine shows how our exposure to the US residential mortgage market has declined over the past four quarters and provides details of the two components of the residual exposure I referred to in the previous slide. This next slide outlines the counterparty protection provided by financial guarantors where the underlying assets are primarily CLOs and corporate debt that are not related to the US residential mortgage market. The far right column shows the fair value of the protection with each counterparty, which totals US$2.4 billion at the end of Q3. Against this balance, we have taken aggregate credit valuation adjustments to date of US$1.3 billion. The increase in CVA recorded during the quarter on these positions was US$768 million. This resulted from an increase in the fair value against these holdings and continue deterioration in the credit quality of the financial guarantors. This quarter we experienced amortization of notionals of US$179 million, through the normal pay down of positions. While we have seen amortization in past quarters the impact was far greater this quarter, especially when we combine it with the amortization I noted earlier in our USRMM positions.

This next slide highlights that our Tier 1 ratio is affected by the combined impact of the write-down of CVA that go through earnings and the high level of risk-weighting assets attributed to the residual financial guarantor exposure. Under Basel II, our internal credit ratings on the financial guarantors have resulted in substantial risk-weighted assets being recognized against the counterparty exposure. It is important to recognize that if higher CVA charges become necessary against the US$2.9 billion of counterparty exposure it will result in a release of these risk-weighted asset balances. This would mitigate the impact of those charges on the Tier 1 ratio by approximately 50% of what would otherwise occur. This is not a new phenomenon but becoming more pronounced due to the low ratings we have assigned to the financial guarantors and the resultant build of related risk-weighted assets to the current level of US$12 billion.

There are a number of slides I covered in some detail last quarter that address other elements of our structured credit run-off positions. Changes in these areas have not been significant and therefore I don't intend to specifically address those slides this quarter. However, we have included the same slides in the appendix updated as of July 31, and we would of course be pleased to address any questions on those slides during the Q&A period.

Turning now to our business results, starting with Retail Markets, our revenue was $2.36 billion, down $31 million or 1% from Q3 of last year. Continued strong volume growth and the gain on sale of the remaining Visa shares are off set by lower treasury revenue allocations.

This slide shows the components of our retail revenue in a format consistent with prior quarters. This quarter, I intend to aggregate those product lines so I can speak to the key drivers of retail banking, wealth management and FirstCarribbean revenue rather than the individual business units. On the slide, I have combined our results of our core lending and deposit business lines into what I will refer to as retail banking. This includes personal and small business banking, Imperial Service, mortgages and personal lending, cards and our Retail Markets other business lines. One important point of note is that year-over-year results for each of these businesses were affected by internal funds transfer pricing allocations. Our internal funds transfer pricing system provides a liquidity payment to business units that source or provide funding and charges a liquidity cost to business units that use funding. This factor explains the revenue decline for a user of funds, such as mortgages and personal lending and the revenue increase in a supplier of funds, such as personal and small business banking. These charges and payments net close to zero on retail banking on both on a quarter-over-quarter and year-over-year basis. Given internal funds transfer pricing does not significantly affect year-over-year results for retail banking, my commentary will focus on results excluding this factor.

Revenue of $1.67 billion was down $34 million or 2% versus Q3 of last year. We experienced strong volume growth across our key retail product groups. Retail banking spreads were down slightly year-over-year as continued competitive pricing for deposits, the effect of shifting our portfolio to secured lending and lower mortgage refinancing fees are partially off set by better mortgage pricing. Card's results benefited from the $24 million gain on the sale of our remaining Visa shares and overall banking results were hurt by the lower treasury revenues this quarter a portion of which are allocated back to retail and appear on the other line. Treasury revenues were down from a very strong Q3 of last year due to a very difficult market this quarter. In addition, there were fewer opportunities for revenue this quarter as we have reduced limits given the more volatile environment.

Turning to slide 14, we have experienced strong volume growth in our lending and deposit businesses. In cards, we continue to hold the number one market position in both outstandings and purchase volumes. We continue to see improvement in unsecured lending, which is up for the second consecutive quarter, although we continue to have a measured approach to growth in this area given our risk posture and the current environment. Our market share has improved in cards and consumer deposits from last quarter and is stable on residential mortgages and personal loans.

Slide 15, highlights the results of our combined wealth management businesses, included here is our retail brokerage and asset management business lines. Revenue of 392 million was down 29 million or 7% from Q3 of last year on lower new issue and trading activity due to continued volatility in capital markets.

In addition, revenue in the asset management business was lower as mutual fund flows shifted into shorter term funds. FirstCaribbean revenue was 165 million up 32 million or 24% from last year. About half the increase is due to a lower internal charge related to the cost of acquisition. Excluding the 4 million Visa gain, the remaining increase is due to growth and loan volumes, improved spreads and higher fees off set somewhat by the impact of the stronger Canadian dollar. Retail Markets net income was $572 million down $24 million or 4% from the prior year. The provision from credit losses were $196 million up $29 million or 17% from last year. Tom Woods will discuss this topic in detail in his remarks so I won't add any comments here. Non-interest expenses were $1.38 billion, down $29 million or 2% from Q3 of last year through continued expense discipline.

Turning now to CIBC World Markets. As discussed Q3 revenue was hurt by additional losses and structured credit but to a much lesser extent then in Q1 and Q2 of this year. Excluding the affect of structured credit run-off, Q3 revenue of 275 million was up 29 million from Q2 amid a continuing challenging market environment.

Looking at the individual lines of business, starting with capital markets, revenue excluding structured credit run-off was $184 million versus $159 million in Q2. Within capital markets fixed income on currencies revenues was up from Q2 partially off set by weaker performance in global equities. Investment Banking and credit products revenue of $134 million was up $32 million from Q2. Q3 saw higher mark-to-market gains on corporate loan hedging activity and Investment Banking revenue was lower in Q3 primarily due to lower M&A and advisory revenue and slower equity new issue activity consistent with the general market environment. Merchant banking results were up from Q2. We continue to expect moderate levels of earnings for the remainder of the year.

Turning to World Market expenses, Q3 expenses of $266 million were down $92 million from Q2 due to lower litigation and severance expenses and lower performance related compensation. All of these factors led to a World Market's net loss for the quarter of $538 million excluding the impact of structured credit losses net income was $58 million up 35 million in Q2.

Turning now to our total expenses in our performance versus our 2008 target. Our target is to hold expenses flat relative to annualized fourth quarter 2006 expenses. We have made adjustments as noted on the slide to assure a reasonable comparison. As you will see we continue to run ahead of our objectives through continued expense discipline.

Thank you for your attention. At this point, I will turn it over to Tom Woods.

My comments may also contain forward-looking statements and actual results could differ materially. Slide 52, credit risk, specific loan loss provisions in the second quarter were $202 million or 46 basis points of net loans and acceptance. The quarter on quarter increase of $28 million was due to increases of $14 million in each of Retail Markets and World Markets. World Markets specific loan loss expense was $11 million in the quarter. New provisions were up from the second quarter and the third quarter also included lower levels of reversals in the large corporate portfolio than we experienced in the second quarter.

Retail Markets specific loan loss expense was $191 million in the quarter. Cards provisions were up due to a combination of higher volumes, the establishment of an allowance for securitized balances that came back on balance sheet at maturity and slightly higher loan loss rates. That was partially off set by lower losses in personal loans. Steps taken to manage the slightly higher cards delinquencies are yielding favorable results and both delinquencies and provisions for credit losses are expected to return towards more normal levels in Q4. Net impaired loans decreased to $294 million at the end of Q2, with all of the quarter-over-quarter decrease coming from the consumer portfolios.

Turning to market risk, slide 53, this shows the Q3 distribution of revenue in our trading portfolios. In Q3 67% of trading days were positive up from 53% last quarter but down from 75% in 2007. The trading revenue here does not include the reductions in mark-to-market value of our structured credit value assets as this analysis is carried out only at each month end.

Slide 54, as Gerry said, the Tier 1 ratio was 9.8% or 10% pro forma today's preferred share issue. Our capital position remains amongst the strongest of the North American Banks and provides substantial cushion in the event we have further structured credit charges. Capital decline during the quarter as structured credit write-downs were partially off set by internal capital generation. The Tier 1 ratio was also negatively affected in the quarter by an increase in risk-weighted assets, as several of our financial guarantor counter-parties were downgraded. As Gerry and David mentioned earlier, the increase in RWAs related to our financial guarantor counterparties, as they have been downgraded, reduces the potential impact of any future valuation adjustments on our Tier 1 ratio.

I will now hand it over to Sonia Baxendale, Head of Retail Markets

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

The fundamentals of Retail Markets are solid. We had strong volume growth and maintained market share. Starting with credit cards, outstandings grew 12% year-over-year primarily due to premium card volume growth. New account growth is strong with increasing volume being sourced through our internal bank channels cross sell initiatives. This quarter our newest premium cards, Visa Infinite Gold and Aventura are were rolled out to existing qualified clients. We are also increasing new client acquisition of Infinite cars. Credit quality remains strong. Residential mortgages continue to perform at industry growth rates with balance growth of 12% year-over-year. In the short-term, revenue is being impacted by lower prepayment break fees as a result of increase client retention rates from prior years. With the softening in the housing market, we expect mortgage growth to decline to low to mid single-digits in 2009. Having said that, our originations activity so far is only marginally down from last year.

In lending, our asset growth continues to show good momentum. While year-over-year market share is down slightly, we are flat year to date as unsecured balances have grown over the last two consecutive quarters. Personal balances are up 10% year-over-year, which is the strongest growth in three years. New balances continue to exhibit good credit quality with overall loss rates stable.

In business banking, our operational initiatives to improve credit processes under enhanced lending risk policies are starting to generate increased business as small business client balances have stabilized after a significant period of decline. Deposit accounts and GICs had a strong quarter. Personal deposit balances grew 9% year-over-year and 8.7% on GICs. As a result, our combined personal balance market share increased.

Our bonus savings promotional offer was successful in increasing balances and we are retaining the majority of these balances after the conclusion of the program. In addition, this quarter we added the highly successful Aeroplan feature to our unlimited checking account. Clients can now earn monthly Aeroplan miles by consolidating their day to day banking transactions with CIBC in addition to receiving a welcome bonus mileage offer. Initial results have been extremely positive, with new accounts open up significantly over the same period last year.

Mutual funds continue to be impacted by volatility in global equity and fixed income markets. As investors continue to be cautious, mutual fund flows are primarily into short-term funds. As a result, in Q3 mutual funds net redemptions were $154 million. These results place us in seventh position overall in the industry, year to date, up from thirteenth position for 2007, and increasing our market share by 6 basis points year-over-year and 11 year to date. 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 are key to continued growth and conversion to long-term product.

In retail brokerage revenues are down 6.8% as a result of continued volatility in the capital markets and lower new issue activity. In distribution overall, we continue to make progress in our strategy to improve client access and experience in all of our channels. We opened three new branches this quarter, announced expanded operating hours and additional branches opening Saturday and Sunday and in July we expanded our Montreal telephone banking contact center, adding capacity to make an additional 1 million outbound sales calls to our clients in French and English.

In summary, Retail Markets is performing well. Volume growth was strong and we maintained or increased market share in key business areas.

Thank you. I will now pass the microphone to Richard Nesbitt.

Thank you, Sonia. My comments may also contain forward-looking statements and actual results could differ materially. I will review CIBC World Markets quarterly performance and provide an update on our efforts in 2008, to rebuild our business to focus on our strongest activities. I will also describe our high level priorities for building World Markets franchise over the next three years. As detailed earlier, World Markets recorded a loss of $538 million in the quarter. Adjusted for structure credit, net income was $58 million. As was the case throughout the industry, market and business conditions remain difficult throughout the quarter. While we saw some improvements in Q3, this sluggish business environment resulted in flat or negative revenue growth across our primary lines of business.

In fixed income and currencies revenues improved slightly from the previous quarter. Foreign exchange continued its strong performance, and fixed income trading revenues also improved slightly. This was due to increased retail activity and participation in the government new issues. Revenues were down in our global equities business with the market for new -- equity new issues operating at a slow pace across the industry.

In real estate finance, as I mentioned in last quarter's call, we are intentionally operating about half of our revenue generating capacity due to the ongoing uncertainties in the commercial real estate market in the United States. We continue to monitor industry condition in this market and how we participate in it. We did have a revenue gain in the quarter resulting from our role as co-lead manager of a $1.2 billion offering in commercial mortgage back securities. In Investment Banking, while market conditions had an impact on the number of opportunities, we continue to receive some strong advisory mandates. For example, World Markets was appointed as financial advisor to the Board of Directors of EnCana on the reorganization and spinoff of its oil sands assets and refinery asset interest. We were named financial advisory to Teck Cominco on the pending acquisition in Fording Canadian Coal Trust. This transaction is valued at $11.5 billion and includes our role as co-lead arranger and joint book runner for $9.8 billion and bridge and term loans to support the transaction. We were appointed financial advisor to Saskferco, on its $1.6 billion sale of a nitrogen fertilizer plant to Yara International, a Norwegian chemical company. We are lead manager on a $288 million, a financing by H&R REIT and as sole underwriter of US$150 million offering by Central Fund of Canada Limited. That's a quick look at our performance in the third quarter.

I also want to provide a brief update on progress made during the quarter on implementation of our new strategy for World Markets. Our strategy focus on the mission we established earlier this year. And our mission is to bring Canadian capital market products to Canada and the rest of the world and also to bring the world to Canada. This is what the professionals in our business do every day. Implementation of the strategy is divided into two components. First, the ongoing repositioning of our business that will continue throughout 2008. Second, continuing to intensify our focus on our clients so we can deliver on our mandate as a premier Canadian based investment bank.

Last quarter I described many of the initiatives taken to reposition the World Markets franchise. This work is necessary to focus on the considerable strengths we have in our primary lines of business and there are four continuing business in World Markets, investment corporate and merchant banking, global equities, fixed income and currencies, and real estate finance. The fifth activity is the run-off of assets from businesses we have terminated such as structured credit. In Q3, we completed a detailed bottom up review of these continuing businesses. As a result of this review we moved quickly on a number of initiatives involving our trading room and infrastructure activities. We are terminating or reducing activities that are inconsistent with our mission and goals or where the rewards do not justify the risk. We are investing in activities that reinforce our renewed mission and goals and provide an acceptable risk of return. For example, we are terminating certain Euro based derivative activities, which are unrelated to our mission. We are reducing the size of CIBC's asset back conduits programs. We are reducing our infrastructure in London, New York and Asia. We reduced the number of employees in World Markets announcing the elimination of over 100 positions in May.

Overall, with the exit or sales of businesses since the beginning of the year, our staffing levels had been reduced by 40%. In our continuing businesses, there has been a reduction of 14%. Finally, we have made a significant number of new hires that deepen our senior management and leadership capabilities in key areas. It is critical we complete this rebuilding work quickly so we are in the best possible position once the conditions improve. We need an effective transition from repositioning the franchise to building the business. For the medium term our goal is to organize ourselves so we continue to deliver outstanding service and value to our clients. To achieve this, we have developed a plan to focus on our strongest client relationships. These relationships are clearly some of the best in the industry. We want to solidify our reputation in the marketplace by making them even stronger.

To conclude, this has been a difficult year for our business and industry. While we have completed a lot of work to rebuild our business, there is more to be done. Over the medium-term, our success will be measured by our ability to generate consistent earnings across the full business cycle. I'm confident we are on the road to achieving this goal and deliver on the mandate to CIBC and its shareholders. I will turn the call over to John.

Thank you, Richard. And operator, I guess we are ready to take questions on the phone now.

(OPERATOR INSTRUCTIONS). Our first question is from Jim Bantis of Credit Suisse.

Just a couple of questions. When I look at the trading revenue, Richard, the past couple quarters have basically been non existent and I can recognize that the conditions are tough and there has been retrenchment. I want to get a perspective on what the capabilities of what the trading revenue could be going forward under your new plan and incorporating some of the retrenchment from your other businesses. What we are seeing from other banks, whether it's Canadian or US, despite the conditions they are still producing medium sized or significant trading revenues. I want your flavor on that and secondly, looking at slide 13 which was the retail market slide. Lower treasury revenue and mortgage refinancing fees were cited for the decline in 2% revenue, if you were to adjust for these items what would the revenue be and would it be consistent with the volume that Sonia was referring to.

It is Richard first. I will take the first question first and then I will pass it onto the second question. -- we haven't really talked about the individual splits of the business going forward. If you wanted to take a look at what we think we can do going forward total economic capital assigned to World Markets is approximately 3 billion, approximately half of that is for our ongoing business and the other half is for run-off activities. If you recall, the bank wide -- through the cycle target is in excess of 20%. We would expect CIBC World Markets to be able to consistently produce stable earnings to get that 20% threshold on the capital we are using in our continuing business which is about half that 3 billion. Under improved market continues we would expect to be able to do better than that and somewhat higher than normalized results you see in Q3. That's about as far as we have gone in terms of answering that question.

Do you feel you have gone as far as you can in entrenchment ? Do you see more businesses to close? See it continuing in more of a downward cycle before a

We have gone through all of our businesses now. We had a -- we had business plans done by each of our businesses and the ones we had intended to close or terminate, we have terminated. The ones we have intended to keep, the four I talked about here, we have kept. I think that process is complete. Although we have pulled back -- of course, we have reduced our risk posture as well as our use of resources during this period of market instability along with the rest of the players in the industry.

Got it.

I will take the second part of your question regarding the treasury results. I won't specify the amount of the decline in treasury revenues but I will give you a sense of the quantification to a degree or give you a sense of the magnitude. First off, you refer to slide 13, where the allocation from treasury affects retail through the other line. You will see that decline from $149 in Q3 of last year to $106 in Q3 of this year. I say that all of that and more was in relation to treasury revenue allocations. When you look at the decline quarter-over-quarter of $34 million, that's obviously more than taken care of by the decline in treasury revenue. I guess I would say when we are talking about declines and treasury revenue, to give you a sense that Q3/07 was a particularly strong quarter for returns on the treasury front. It is all in relation to interest rate positioning. And in this quarter not surprisingly it is a tougher market to successfully take views on interest rate markets and given the volatile market we have reduced limits that reduces the ability for our treasury team to generate profits. A comparative reduction in treasury revenues. That's where it shows up in other and it's more than compensates for the difference between those two years.

Got it. Thanks, David. I will requeue.

I think Sonia might wish to add a comment.

Just to add to that, when you take all of that noise out, the year-over-year revenue in retail would have been about plus 3%. The positives being primarily cards, deposits, GICs in particular. The areas that were a greater challenge were brokerage and mutual funds. Those that were far more impacted by the environment.

Sonia, when you are referring to the plus 3 percent that is included of wealth management and First Caribbean.

Not First Caribbean but Wealth Management

Our next call is from Brad Smith of Blackmont Capital.

The approach taken from the fair value determination, particularly in the non residential, US mortgage bucket in the credit swaps, the $2.4 billion?

Brad, I will speak to that. You are now on slide -- so we are on the same page here -- you are speaking to slide 8, I guess that would be, right, where we are looking at -- said, you said 2.4. You are looking at slide 10, the non USSRM.

I was looking at your shareholder report. The fair value calculation there, yes, that's right. I'm trying to get a sense for what your inputs are for that valuation for these different -- not for the hedge valuation -- like for the value adjustment but for the actual fair value of the underlying.

Okay. All right. I'm with you. When -- just as Tom referred to the process we do monthly by the nature of these assets. These are call them level 3 assets where you can't look to market observable pricing. The pricing is broker quote process. Once per month we go into the markets and get indications of pricing. I know it is the basis upon which we get a sense of the marks or the fair value as you put it of the underlying.

Can you update that for August then? I take it that these are for July if you are doing it monthly. What is the aggregate number?

We haven't been releasing the intra month periods. Even if I wanted to, I couldn't because we have to get to the month of August. That process wouldn't unfold until some time after Labor Day.

Just to be clear all of those are level 3 and they are all -- you go into the market to get quotes to make them?

That's right.

Thanks.

Our next question is from Michael Goldberg of Desjardins Securities.

I have a couple questions. First of all, in connection with the impact of the increase in risk-weighted assets that shows this. It is slide -- you basically got the counterparty exposure elevated by about a 400% risk-weighting here. Can you tell us under Basel II, what is the maximum risk-weighting that these types of exposures could go to?

Quite a substantial amount. Under Basel II it could go to 1250. So quite a substantial amount. These ones are at roughly 400%.

Secondly, can you -- you may want to get back to me on this off line but one of the things I was trying to figure out was the ineffective hedges on earnings this quarter, in other words, the ACS3855. Can you give me some idea of what that impact on earnings was?

This is the impact -- ineffective hedges, on that fund, Michael, I would have to get back to you. What we will do is to the extent that when we discuss it, you and I if you tell me that figure will be to the benefit of the participants, we will post that onto our frequently asked questions. Anything that comes out of that that we think would be of interest to the broader audience, we will post that on the frequently asked questions.

I will tell you why I ask. From discussions I have had previously, it seems to be a number of other data items that you do release, the numbers that I get suggested, actually to the earnings in the latest quarter, I just wanted to confirm that.

That will require follow-up. If that's the case, we will make sure it is posted so you have the details.

Thank you.

Our next question is from Sumit Malhotra of Merrill Lynch. Please go ahead.

Good afternoon. Couple questions for David and Tom. Firstly, on the counterparties, on the hedged exposure, the bank has been relatively conservative here in using market quotes throughout 2008 on both the under lying and counterparties. Staying with that principle of conservatism, can you talk to perhaps the use of realized deals in the market or transactions that you have seen with some of our counterparties and how using marks of that level would differ from the levels you see in the July data today?

Let me make a couple of comments and the rest of my team can follow-up. What we have done is used broker quotes for the underlying and current credit spreads for the mono lines and we have a couple of advantages. With the mono lines it is a highly volatile space. Current spreads do give the market views at that point in time as due to volatility a current indication, that is a good thing to have. Second thing and this is one of the main points of value I guess for us and hopefully for those who follow the bank. By using current market spreads on the mono lines, it gives a very good sense of what we will likely be doing with our credit valuation adjustment.

During the quarter you and anyone else who is tracking the bank can get a sense of what the CVA status would likely be during the course of the quarter. That's a mechanism that can be tracked and I think is helpful for both the parties. So we are going to always sort of defer to that type of approach, use the market credit spreads, the best bell weather given all the data in the market as to what the view is for the appropriate provision against those receivables. If what you are saying as far as restructuring activities or those types of activities, we have one counterparty where we did kick over, if you will, off of credit spreads to what we think we will realize on that position. I would say that would be the only change we would make to our practice, the benefits that I outlined on current credit spreads have enough merit, we would stick with that. If we get to a point there is a restructuring or have a view of what our ultimate recovery would be that's when we would kick over to using that as a basis for determining the provision just like we did with that one counter party some months ago.

Just to be clear on that, obviously with certain of our counterparties, it would seem that the final two days of the quarter certainly were a key driver in helping those credit spreads come along. My point would be if you get the view here, as these things go through restructuring, that you or any kind of negotiations that you are under going that the amount you will actually collect from the counterparties would be a lot less than those spreads are indicating, given the conservatism the bank has employs all year in marking the book, that would be a better way to go in my view anyway?

That's a fair point. If you get -- I guess my comment is -- it is such an advantage to use the market indicated rate. They don't require or allow for judgment on our part. To your point, there is no doubt that proper accounting would be if we got to a point where we really thought on the knowledge we have that our recovery would be less than what the post spreads were leading us to, we would be forced and it would be appropriate to make sure we take the right conservative position.

Very quickly here on lending related credit. You mentioned the credit cards. The other up tick seemed to be in business services. If someone could let us know what is happening there and what exactly this category encompasses and secondly, on the real estate finance in the US, looks like $1.9 billion commitment outstanding. Your impairment trends look very good. Any kind of update on watch list or formations you are seeing there so the business services in the US real estate finance?

Business services is a very broad category and we and the other banks go by SIC codes. As it happens this quarter we had a couple small provisions there in the hotel and other services areas. Now, hotel, you might not think of being business services but that's the SIC code for that. We had a couple of transactions in the US that we have taken, what we think are prudent provisions there. That is the up tick there and this is a business we are not actively engaged in any longer. We don't have big positions but two of them that we had were there.

The US real estate finance, we got a summary in the MD&A, maybe to elaborate on that a little bit. This is a business we continue to feel very good about, notwithstanding the press that you see on US commercial real estate. The reason we feel good about it -- I will let Richard add if he likes -- the properties we have are very diverse. About three quarters of them were entered into after June ' 07. These were post correction. Virtually all of the loans are relationship driven versus competitive driven. That's a fact that our team has been in place since the mid ' 90s. We have you say about $1.9 billion, loan to values are very low. That is a function of the relationship. They are typically in the low 60s. Maybe I will stop there and see if that's enough there.

That's helpful. Thanks very much.

Our next question is from Mario Mendoca of Genuity Capital Markets. Go ahead.

David, this isn't so much of an indictment of the accounting, along the lines of your discussion with Sumit, the reasons why those credit spreads collapsed in the last couple of days is because the feeling was companies were going to get into the agreements, the monolines would get off some of the exposure. It would seem that taking recoveries this quarter on a couple of the monolines. I think you would agree that there were probably a couple recoveries this quarter of previously taken provisions that it seems convoluted to do it that way. Given that that was the main reason why the credit spreads came in in the first place. I understand that you are focused on the credit spreads. Do you agree it seems strange to take the recoveries in given the reason why the credit spreads came in?

Well, it is strangely enough actually. On the last day of the month of the quarter we actually took a hit on spreads, a big one. So it is --

I'm talking about on the sub-prime side.

Actually pretty universal. It was -- so -- but I mean I guess the best way to answer that is you can get -- you look at the spreads on and relative to the ratings and you can see some very abnormal kind of situations but it is frankly the spreads have proven to be the one kind of objective barometer of all the collective views of all of the people in the market think this could play out. There is a tendancy where event will happen, some will be taken off watch or put on watch and the spreads may not move in the same alignment. When you get into restructuring and capital injections and so forth, again, it causes from a fundamental perspective say that would cause you to want to do more or less provisioning but the problem with introducing that kind of judgment, as it is judgment, and the other problem is it detracts from the process we have now where you and others can say at the end of the quarter, this is where I think this is roughly where the bank will be and the rational for it as opposed to a judgment tal over lay. If restructuring got to the level or we had a pretty good sense of what our recovery would be, we would shift and we have done that before with the one counterparty. If we had a view as a result of being involved in restructuring and so forth that we had too much on our books so to speak, conservatism would drive us to make an adjustment.

Could you let us know if the bank is willing and perhaps even actively trying to negotiate with some of the key monolines like the SCA, is that something that is ongoing?

We haven't -- I can make a couple of comments. We haven't indicated the names of any of the monolines. I need to be cautious about any comments regarding the plays on the different monolines. The one thing we are speaking about credit valuations and such, we do some of the aberrations are we have -- especially this quarter we have -- we took fairly big CVAs on monolines that are AAA and recently affirmed AAA. That speaks to the comment concerning conservatism.

I was asking if you were discussing terminating any of these agreements with any of the monolines. If you can't answer that, you can't answer that.

No, as far as activities regarding restructuring and so forth, there were discussions under way. We can't speak to that.

Let me wrap it up with one other thing. On the non sub-prime, you have given us good disclosure on the ranges of first loss protection and all of that stuff. If you go back -- this is something I have been confused about for a while -- it seems really hard to imagine that there can be a 10% valuation adjustment mark-to-market charge. On that, say $25 billion notional, given how much that first loss protection. I understand you going to broker quotes and broker quotes are what they are. It seems inn conceivable with those types of first loss protection that there could be any charges there at all, there could be any market value adjustment at all. I guess what I'm asking is is there something we don't understand about that notional amount specifically, on the first loss? Is there any reason why brokers, the ones providing the quotes don't put a value on that first loss protection? Is there something that we don't understand that would give rise to that 10% charge or 10% valuation. On the surface, common sense tells you there shouldn't be any valuation adjustment on that. Could you help clarify?

I think the first answer is you are right. Universal support for your comments that these quotes are going to places that I think are hard to justify and it speaks to a couple of things. First, the chart you refer to and the data you refer to is on page 14 of MD&A. We have provided quite a bit of information there for a couple of reasons. Fundamentally the underlying is performing fine. The level of subordination as such, you are absolutely right. The current level of mark is surprising and hard to justify. But it is determined on the basis of supply and demand. The upshot being there is low levels of equity and we mark off of the basis outlined and that's resulting on the 10% haircut on these. You are right. It is surprising. Hence, we put that data into the MD&A so people can see the level of subordination and help them get to the position you have concluded. I guess in answering your question, there isn't anything that you are missing that we are aware of that should cause you to change your fundamental perspective.

That's ultimately the question. Is there anything we don't know that somebody else, like the broker quotes, does that would justify the market?

Nothing that we are aware of that is being missed and hence, we are trying to maximize the exposure so we can reach the best possible view.

You understand why it is confusing.

Absolutely we do and the marks, as you know this quarter moved and again there is no -- it is -- there is no reason for us to see that kind of shift and again other than supply and demand and that is what how we value these.

That's helpful. Thank you.

Our next question is from Ian de Verteuil of BMO Capital Markets. Please go ahead.

Tom, the spike in loan losses on the card book, can you tell us how much of that is due to the recapture of the big securitization?

We haven't gotten into that granularity. If you look at the 110 provision we took in cards in Q3 versus the 68 last quarter. That's a 44 delta. About half of it was due to volume and the other half was split pretty evenly between the securitization coming back on and both in absolute terms and relative terms and rate increases. The rates would be well less that be a half, less than a third as well.

When you say rates, you mean the delinquency rate --

I'm sorry. I mean higher delinquencies which translate into higher provisions and slightly higher bankruptcies.

Second question relates to the point you made Tom and Gerry as well. To the extent there is more charges on the USSRMM and non USSRM exposure, that you expect to get back a chunk of it on the RWA side. I'm clear on that. If, for example, on your USRMM, on your single largest position, the monoline number 5, where you have a fair value of $1.9 billion and $800 million of the year so you have a $1 billion that is owed, if you were to write that entire thing off, your RWAs would drop by $500 million, is that how I should think of that?

Let me answer in the general and certainly, David jump in here. You can't give an answer just based on this because we use internal ratings but conceptually, when we downgrade companies, in affect what we have done is built up a RWA assignment and when we subsequently write-down the underlying and hence the receivable, the receivable as an asset is lower, hence the amount of our RWAs we need is lower as well. So if we were to write-off any particular counterparty on that list -- it would depend on the rating -- but we would no longer need any RWAs because we would have no receivable on our books.

Right. So again, for one that is rated CCC, one would think you have a huge multiplier on that.

Absolutely.

If you wrote off a 1billion in a CCC name, as you say the receivable wouldn't be there anymore.

Exactly.

So the multiplier wouldn't be there.

Correct. The multiplier, in the case of an internally rated CCC, as David said before is 12.5 times. It is very large. That's the point Gerry tried to make --

Why is it only 50% then? Shouldn't it be -- if you take a $1 VA hit and tax affect it, it is 70% of that number, shouldn't you get a multiple of that on the RWAA front, not a fraction?

I'm sorry. You do get multiple of that. If you have a CCC with a receivable of a $1.

Right.

You have RWAs of 12.5 times that.

Right but I think Gerry said in his comments that for every VA charge I think you said you got half of it back on the RWAs. It seems to me a bit multiples, not fractions.

Gerry here and if you look at our table, it would depend on our internal ratings, your counterparty 5 that you were looking at, as you can see, there are a variety of ratings beside that counterparty from are BBB minus which is a low level investment grade, all the way to the CCC that Tom saw. So clearly, when you work back, since the nets receivable here is the 1.873 billion minus the 870 million. That means the net receivable is about a $1 billion. Clearly we are not internally rating it at a level of 1250. At 1250 is when there is no value left whatsoever and you would be running it off at a 100%. Roughly if you work out 1250 times 8% it comes to a 100% capital allocation.

Got you.

So clearly our internal rating is sum amalgum of the BBB minus, the B2 and CCC. If we were at 12.5 this one alone would have gotten 12.5 billion of risk-weighted assets. Since that's the total of what we have, that obviously could not be the case. If you took something in the vicinity of the average risk-weighting -- I will not get into each of these counterparties -- you know we have approximately the total exposure is $2.9 of net receivables and the RWA allocation is 12 and change. There is lots of puts and takes in here. That would allow you to come to something like a four factor. I'm not telling you that that's the factor for this. If you use our macro numbers and derive a factor, a fourth factor would not be too bad. I think what you are trying to get at is if the fair value was $1,873 and the VA is $807, the net receivable is $1 billionish. If you use the 400% means we have $4 billion of RWA assigned against that.

Right.

If that gets written off, several things happen. The first is that you would have a net charge assuming a 30% tax rate -- again I'm not telling you what the tax rate is. I'm using the assumption -- you would have a net charge that would filter to of capital of $700 million, okay?

Exactly.

You would have a relief in your Tier 1 capital of the $4 billion of RWAs, they would disappear as a result of the write-off and if you look at the net capital affect -- again at 8% -- you would have $320 million of capital relief in your Tier 1. So that's why you come to somewhere in the vicinity of 50% impact. Does that add up for you?

That adds up perfectly.

Okay.

Very good explanation. Thanks, very much.

Thank you. Our last question is from Darko Mihelic of CIBC World Markets. Please go ahead.

Thank you. My question is rather simple and straightforward. My question has to do with the expense base at CIBC. I guess this question is from Gerry. Looking at your slide 24 on expense objectives. You are ahead of it. I was just wondering when I still look at it however, you are not near the median for the productivity ratio. We have only had three banks report so far. By my numbers it looks like you will not be at the median. Wondering if you can give us any idea of if about $1.7 billion expense base is an appropriate one to think about for CIBC going forward in light of some of the head count reductions we have had at World Markets.

There are two things that we have the median mix as a strategic objective and it has been established before because it is an Evergreen objective and because the competitors move, so shall we too move. There is also a reasonability to the median. There is a variety of ways to get to the expense target. In recent years we had several programs and those programs I think we were fairly successful in meeting the targets. Our expense targets today are mainly derivations of two things. Number one, if business activity has declined in certain areas and therefore we feel there is an opportunity to right size expenses against reduced business conditions, we would do that. But more importantly, what in the next while we are going to be pursuing is the fact that we have exited a number of businesses that had a fair amount of infrastructure support behind them. When you exit the businesses you don't automatically have all of the infrastructure reductions come in simultaneously, because some of it requires moving two plants to one city in order to combine them for a purpose of technology and that sort of thing. Basically what we have been doing in recent times, is we have been absorbing all of the inflationary impact of cost increases and rents and other areas and holding our expenses flat or better to the target that we set, which was Q4 of ' 06.

Our intention is through an ongoing program of expense discipline, with the big focus on right sizing infrastructure in light of business exits. Our view is that we are going to be targeting to keep our expenses on the flat side and we believe that where we are lagging today is on the revenue side overall for the bank in terms of getting on side from a median NIX viewpoint. Expense discipline will mean that every revenue dollar of increase will be that much more productive but we do believe to hold the line on expenses is our strategy now and we have been fairly successful at it and make sure that we have our revenue approaching industry growth rates or, in the case of the last year, some areas in the industry have shrunk and we would like to make sure we are not shrinking more of those areas. As long as it's appropriate for our risk appetite because in some areas our risk appetite is not the same as the industry, it's flat. The short answer is there are continuing opportunities as a result of business exits and the trailing expense savings that we can get from infrastructure. That's not the primary area in terms of getting ourselves to our strategic target. It is a necessary but not sufficient condition to hold expenses flat. The key element there is to grow our revenues and to catch up with the industry.

Thank you. That's a good answer.

Thank you. There are no more questions at this time. I would like to turn the meeting back over to Mr. Ferren.

Thank you everyone for joining us and we look forward to future discussions. Thank you

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.