Canadian Imperial Bank of Commerce (CM) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the CIBC first-quarter results conference call. Please be advised that this call is being recorded. (Operator Instructions). I would now like to turn the meeting over to Mr. John Ferren, Vice President Investor Relations. Please go ahead, Mr. Ferren.

Thank you. Good afternoon and thank you everyone for joining us. We're speaking to you this afternoon from Vancouver where CIBC held its annual general meeting this morning. The purpose of this conference call this afternoon is to discuss our Q1 results released earlier today. This call is being audio webcast and will be archived later this evening on cibc.com.

In addition to the Q1 materials posted on our website, the management presentations and audio archive of this morning's annual meeting are also available now on our website. This afternoon CIBC's senior management team will deliver some prepared remarks and will be available for a question-and-answer period following.

Before we begin, let me remind you that any 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.

Thank you for joining us. Let me remind you that my comments may contain forward looking statements, and actual results could differ materially. Following my remarks, our senior officers will provide an update on their respective areas.

CIBC has reported net income for the first quarter of CAD147 million and cash earnings per share of CAD0.31. Earnings apart from items of note that our Chief Financial Officer David Williamson will discuss shortly were CAD1.67. CIBC reported a Tier 1 capital ratio of 9.8% for the end of January. Giving effect to a preferred share issued that closed in early February, as well as an additional issue announced this morning, our Tier 1 ratio is 10.25%. This capital strength positions CIBC as one of the strongest capitalized banks in North America. This past quarter our Tier 1 ratio was reduced by approximately 29 basis points by incrementally assigning risk-weighted assets to our financial guarantor counterparties. This reduces -- this significant risk weighted assets already assigned to our runoff book provides CIBC with the capacity to consider emerging growth opportunities as potential for significant capital implications from structured credit losses decline and run their course.

Turning to our business results, CIBC Retail Markets reported revenue of CAD2.4 billion and net income of CAD562 million. Our retail business continues to make progress. In this environment we're focused on balancing growth with expense and credit discipline.

A good example of this balance is in our Credit Card business where we have been purposely growing below-market rates for several quarters. While our loan losses have increased within a range of expectations, our margins in this business continue to be strong, and we have taken actions on many fronts to ensure that we maintain the high credit quality of this portfolio.

In our personal lending business, our actions to reduce our unsecured lending exposure that date back several years are holding us in good stead in these slowing economic conditions. This prior action provides a good risk mix with our Cards portfolio.

Through 2009 we have plans to continue to invest across our Retail Markets business, particularly in our distribution network, as well as our advisory and product capabilities in support of our clients. Sonia Baxendale will review initiatives to further enhance our retail business strength in her remarks.

CIBC World Markets reported a loss of CAD413 million before items of note. David Williamson will take you through these items in his remarks.

Excluding items of note, World Markets had revenue of CAD418 million and net income of CAD109 million. The business continues to make progress against its strategy of reducing risk and refocusing on core strengths. While it is difficult to predict how industry conditions might play out over the course of 2009, World Markets is off to a good start for the year. Richard Nesbitt will comment further in his remarks.

During this quarter we continued to reduce exposures in our structured credit runoff portfolio. David Williamson will review our progress in the runoff book in further details in his presentation.

In the area of productivity, we continue to make progress. Total expenses for the first quarter were CAD1.65 billion, down from CAD1.93 billion last quarter and CAD1.77 billion a year ago. This expense level is also below our baseline target of CAD1.76 billion. We continued to realize benefits from the alignment of our infrastructure costs to business changes in the current environment, as well as general expense discipline.

In summary, CIBC made progress in the first quarter towards our priorities. While the economic outlook is uncertain, we are well-positioned at CIBC with our strong capital position, the investments we continue to make in our retail business, the actions we have taken to strengthen World Markets and the managing down of our runoff businesses.

Now let me turn the meeting over to David Williamson 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 number five, which is a summary of our results for the quarter. We reported EPS for the quarter of CAD0.29 or CAD0.31 on a cash basis. We had other items of note this quarter, which are listed on the top right-hand side of the slide, totaling CAD1.36 per share, and therefore, our cash EPS, excluding these items, is CAD1.67 per share.

Our Tier 1 capital ratio is strong at 9.8% or 10.1% adjusting for the preferred deal that closed on February 4, and as Gerry said, the preferred share issue that was initiated this morning will further act to strengthen this ratio.

Moving to the items of note, we had a loss of CAD708 million or CAD1.27 per share on structured credit. I will provide more detail on that topic in just a few minutes.

Partially offsetting this loss was CAD94 million or CAD0.17 per share, a positive impact from widening credit spreads on our corporate loan hedging program. We had CAD92 million or CAD0.13 per share of mark-to-market losses on hedging related to leverage leases. And next, we had CAD87 million or CAD0.14 per share of equity losses and write-downs on our merchant banking portfolio.

The third-party information that we use in valuing this portfolio is often somewhat dated, and therefore, beginning this quarter, actually beginning last quarter, we have made downward adjustments to the third-party values in order to appropriately reflect the current valuations. This has been accomplished by referring to comparable market indices. So this approach has increased the level of write-downs but is considered prudent given the rates at which values have declined in recent months.

The last item results from the repatriation of retained earnings from foreign subsidiaries. The impact is a pretax net foreign exchange loss of CAD48 million but an after-tax gain of CAD4 million or CAD0.01 per share. Excluding items of note, first-quarter results were helped by higher net revenues from treasury trading activities. Gains from the sale of available for sale securities were higher this quarter, more than offsetting lower quarterly results from interest rate related positioning. Compared to average quarterly net revenues in 2008 from these activities, Q1 of 2009 was helped by approximately CAD60 million.

In addition, results were helped by higher revenues within World Markets' continuing businesses and lower expenses. Results this quarter were hurt by higher effective tax rates, higher loan losses and weaker equity markets.

The next slide provides a summarized statement of operations on a reported basis showing net income for the quarter of CAD147 million.

Turning now to a summary of structured credit runoff for the quarter. Losses in Q1 totaled CAD708 million or CAD1.27 per share versus CAD479 million or CAD0.84 per share in Q4. We took credit valuation adjustments in the quarter due to further deterioration in the mark-to-market value of the underlying assets and the credit quality of financial guarantors, driving the CAD636 million you see on the first line.

The other items on the slide, including unhedged US and non-US residential mortgage market write-downs, Montreal Accord losses, expenses and other items totaled to a loss of CAD72 million or CAD0.13 per share for the quarter.

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 $3.2 billion of credit protection from three remaining counterparties, which now has a fair value of 2.6 billion. We've taken cumulative credit value adjustments of 2.1 billion and, therefore, have a remaining net fair value of 525 million as shown in Column D. In addition to this balance, we have a remaining value of 511 million shown as the difference between Columns A and B. This total remaining exposure of approximately 1 billion is protected by the investment from Cerberus, which had a fair value of 411 million at the end of quarter one for a net remaining exposure of approximately 600 million.

During the quarter we commuted contracts with another of our financial guarantor counterparties identified here as Counterparty III. We received consideration of USD97 million or 17% of the gross value of our mark-to-market claim against this financial guarantor.

With this level of recovery, the transaction was accretive to our Tier 1 ratio by 5 basis points due to the impact of releasing previously set-aside risk-weighted assets against the financial guarantor receivable.

Looking at the total remaining USRMM exposure as shown on the slide, we have already set-aside risk-weighted assets there were included in our January 31 Tier 1 capital ratio of approximately 2.4 billion. Therefore, even in a scenario where the value of all positions fell to zero and we had a recovery level of roughly 10% on the remaining financial guarantor contracts, there would be no further impacts on our Tier 1 capital ratio.

As noted, we settled with Counterparty III this quarter at a recovery of 17%. This follows our settlement with Counterparty IV in the prior quarter at a recovery of 20%. If, however, we recover nothing from the remaining financial guarantors and the assets in this portfolio fall to 0, Tier 1 impact is approximately 20 basis points.

Slide nine 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. In January we terminated $1.8 billion of corporate debt underlyings at their approximate current fair value. This position was previously hedged by the counterparty we have identified as VI. As a result of this transaction, $1.8 billion of the 5.2 billion of protection from Counterparty VI as shown on this chart became unmatched. In other words, we have retained the protection on the $1.8 billion that was terminated but eliminated the related underlying exposure. This excess protection will act to dampen future volatility in this portfolio.

Our net receivable from guarantors was US1.4 billion at January 31, and as Gerry mentioned, we had total risk-weighted assets already included in our January 31 Tier 1 ratio of approximately CAD6.7 billion against our non-USRMM exposure. If we had to right off the entire -US$1.4 billion of net receivables, the net impact on our Tier 1 capital ratio would be approximately 60 basis points. If, however, we recovered 15% against our financial guarantor contracts, the impact on Tier 1 is 30 basis points.

Turning now to our business results, starting with Retail Markets on slide 10. In 2009 we realigned the external reporting of our business lines to better reflect the management of our activities. In the following slides, I will discuss the key drivers of our Personal Banking, Business Banking, Wealth Management, FirstCaribbean and other businesses. For complete details of our financial reporting changes, please refer to our SFI and our Q1 report to shareholders both posted on our website. Our prior period information has been restated to reflect this change in reporting format.

Revenue for Retail Markets in Q1 was CAD2.42 billion, up slightly from Q1 of last year. Within our Canadian retail businesses of Personal and Business Banking, revenues increased due to volume growth, partially offset by lower spreads. Our Wealth Management business experienced declining revenues due to the impact of weaker equity markets. Personal Banking revenue of CAD1.46 billion was up CAD42 million or 3% from last year. We experienced strong volume growth across most of our key retail products.

Given the current state of the economy, we are carefully managing our credit quality, which we anticipate will bring our growth rates down from current levels. Personal Banking spreads were down year-over-year due to the lower interest rate environment and a decrease in mortgage refinancing fees but were helped by wider prime BA spreads.

Turning to Business Banking, revenue of CAD330 million was down CAD22 million or 6% from Q1 of last year due to lower spreads as a result of the lower interest rate environment and competitive pricing and deposits.

Slide 13 highlights the results of our Wealth Management businesses. Wealth Management revenue of CAD323 million was down CAD73 million or 18% from Q1 of last year. Weaker equity markets have resulted in a decline in asset value based fees income and lower trading commissions.

FirstCaribbean revenue of CAD180 million was up CAD54 million or 43% from Q1 of last year, mainly due to the impact of a weaker Canadian dollar. Other revenue was relatively unchanged from Q1 of last year as treasury allocations were consistent with the strong results achieved in the prior year.

In Q1 of the prior year, treasury revenues were strong as the result of successful positioning. In Q1 of this year, treasury revenues benefited from higher realized gains on available for sale securities, partially offset by higher funding costs incurred as we extended maturities and losses from positioning. While it is difficult to forecast treasury revenue from quarter to quarter, we do not expect this level of revenue to continue throughout the year.

Retail Markets net income was CAD562 million, down CAD98 million or 15% from the prior year. The provision for credit losses was CAD327 million, up CAD138 million from last year. The increase is driven primarily by higher loan losses in the Cards portfolio, a topic that Tom Woods will discuss in his remarks.

Noninterest expenses were down CAD48 million or 4% from last year as we continue to be focused and disciplined in managing our costs.

Now turning to CIBC World Markets. World Markets has also realigned its externally reported business lines to better reflect the management of its activities. We now have three business lines -- Capital Markets, Corporate and Investment Banking, and Other. Other includes legacy, merchant banking, exited businesses, structured credit and other runoff businesses and corporate loan hedging. Our prior period information has been restated to reflect these changes, and as I mentioned earlier, for more information on the realignment, please see the materials posted on our website.

Negative revenue of CAD368 million in Q1 included further losses in structured credit runoff. Excluding the impact of structured credit runoff, Q1 revenue of CAD333 million is up CAD201 million from Q4, mainly driven by higher Capital Markets revenue and reduced valuation adjustments in our trading books, partially offset by lower mark-to-market gains on corporate loan hedges.

Looking at the individual lines of business, starting with Capital Markets, revenue was CAD307 million compared with CAD11 million last quarter. The prior quarter results were adversely affected by valuation adjustments taken during the quarter. Excluding all items of note in the prior quarter, as highlighted in the press release, revenue was up CAD177 million, driven by higher revenue across all businesses, particularly in equity and interest rate trading. Corporate and Investment Banking revenue of CAD156 million was up CAD43 million from Q4. Corporate credit products and US real estate finance were higher as a result of improved pricing. Core merchant banking was higher as a result of less write-downs relative to the prior quarter.

Investment banking revenue was lower in Q1, primarily due to lower advisory revenue, partially offset by higher equity new issue revenue, resulting from the high-volume of new issuance amongst the Canadian banks.

Other revenue of negative CAD816 million in Q1 was lower than the prior quarter due to higher losses in structured credit runoff, lower mark-to-market gains on corporate loan hedging programs, and a CAD92 million mark-to-market loss on interest rate hedges related to the leverage lease portfolio, partially offset by lower write-downs in the legacy merchant banking portfolio.

Turning to World Markets' expenses, Q1 expenses of CAD267 million are down from Q4 due to lower structured credit and occupancy expenses, partially offset by higher performance-related compensation.

World Markets' net income of negative CAD413 million -- sorry, World Markets' net income was negative CAD413 million in Q1. Excluding the impact of structured credit runoff, Q1 income was CAD70 million. Excluding all items of note that I highlighted earlier, net income was CAD109 million, up CAD36 million from the prior quarter when stated on the same basis.

Turning now to our total expenses and our performance versus our target, which is to hold expenses flat relative to annualized fourth-quarter 2006 expenses, we have made adjustments as noted on the slide to ensure an appropriate comparison. And as you can see, we are now far ahead of our objective due to continued expense discipline.

Thank you for your attention. At this point I will hand over to Tom Woods. Tom?

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

With respect to credit risk on slide 52, specific loan loss provisions in the first quarter were CAD247 million or 56 basis points of net loans and acceptances. The quarter-over-quarter increase of CAD28 million was due to an increase of CAD23 million in consumer lending where Cards losses accounted for CAD16 million of the increase due to higher bankruptcies and write-offs. A number of actions are currently underway to manage the increase in delinquencies. These actions address the full credit management cycle from acquisition through account management and collections.

Personal lending portfolio's performance is stable, benefiting from actions taken over the past few years to improve the quality and security in this portfolio. The remaining CAD5 million increase was in our corporate and commercial loan portfolio.

Net impaired loans increased to CAD424 million at the end of Q1, an increase of CAD72 million over Q4. CAD42 million of this increase is in residential mortgages where collateral significantly reduces the expected ultimate loss.

Turning to market risk, slide 53, it shows the Q1 distribution of revenue in our trading portfolios. In Q1 76% of trading days were positive, up from 50% last quarter and from 50% in the first quarter of 2008. The trading revenue here does not include the reductions in mark-to-market value of our structured credit assets as this analysis is carried out only at each month end.

And finally on slide 54, the Tier 1 ratio was 9.8% at January 31. This ratio decreased during the quarter primarily due to one, structured credit charges; two, higher risk-weighted assets, primarily due to financial guarantor counterparties -- 29 basis points -- which provides additional Tier 1 protection against further CVA charges; and three, the expiry of OSFI's transition rules related to the grandfathering of certain deductions related to substantial investments.

After the end of the quarter, as Gerry said, we issued CAD325 million of preferred shares. Pro forma this issue, our Tier 1 ratio would increase to 10.1%, and pro forma the preferred share issue announced earlier today, our Tier 1 ratio would be 10.25%.

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

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

Retail Markets performed well in the first quarter, particularly against the backdrop of what was a challenging market environment as the deterioration in the broader economy is being reflected in certain areas of the business. Our Personal and Business Banking segments had solid balance increases, while Wealth Management and Credit Cards performed as one would expect at this point in the cycle.

The Credit Card business, as we have discussed previously, closely mirrors the broader economic environment. The unemployment rates and consumer sentiment in particular have a significant and early impact on bankruptcies, delinquency rates and purchase volumes.

That being said, our Credit Card quality remains strong and is performing as expected. This is a result of the early actions we took through the latter half of 2008 in anticipation of a weakening economic environment. We have managed credit limits for risk, including reducing limits for higher risk accounts. We have curtailed activities such as cash advances and balanced transfers that would attract higher risk balances.

Overall we have actively chosen to slow our growth in our Credit Card portfolio, which is consistent with our risk posture and, we believe, prudent in the current environment.

For example, our latest industry data from Q4 2008 shows that our growth rate numbers versus 2007 was approximately half the rate of the industry. The impact of slowing our growth has had an adverse impact on the loss rate but not on the dollar loss. As Tom has described, our losses are largely due to rising delinquencies driven by economic deterioration resulting in higher flow write-offs and an increase in allowances required to cover future expected losses.

Going forward we anticipate flat to low single digit growth as a result of our actions to ensure ongoing high credit quality. This will impact market share; however, Credit Cards' profitability remains strong.

In lending our approach has been one of controlled growth. This quarter's 3% growth versus Q4 comes primarily from growth in our secured portfolio. Our secured/unsecured lending mix has increased from 45% secured three years ago to 68% secured in the first quarter.

Additionally, over the past several years, we have prudently managed our combined Unsecured Lending and Credit Cards portfolio, characterized by modest growth while pricing for risk in this segment.

Mortgage assets are flat quarter-over-quarter as a result of both seasonality and the recent significant reduction in consumer demand. We expect this reduced demand in the housing sector to continue and our growth to be flat for the remainder of the year, in line with the overall industry.

We continue to have solid growth in deposits and GICs with balances up 3.6% on the quarter, 11.4% year-over-year. We also continue to have strong new checking account growth year-over-year, driven in part by our unlimited checking account relaunch with Aeroplan mileage and reward benefits.

Business Banking continued to deliver solid deposit growth on the quarter, up 1.7% and 7% year-over-year. In the current economic climate, we continue to work with our clients to provide credit for their businesses. Credit facilities were up 1.1% on the quarter.

Wealth Management market-driven businesses continue to be challenged by the volatility of the current market. Although industry wide mutual fund net redemptions continued in the first quarter, market share remains flat for CIBC.

In retail brokerage revenues were down as a result of continued volatility in the Capital Markets, resulting in lower trading commissions and lower revenue from fee-based products.

This quarter we continue to focus on delivering advice to our clients through the launch of new client seminars and by providing our employees with increased training and support. At the same time, we invested in our brand through our new advisory-focused marketing campaign called, It's Worth a Talk.

We also continued to invest in our distribution network to provide greater levels of access and service to our clients.

Moving forward, we remain focused on providing financial advice and support to our clients, while at the same time taking a balanced approach to revenue growth and risk, which we believe is prudent given the uncertain economic environment.

Thank you. I will now pass to Richard Nesbitt.

Thank you, Sonia. My comments may also contained forward-looking statements, and actual results could differ materially.

I will review CIBC World Markets' quarterly performance and provide an update on our business strategy. Let me begin with some comments on our performance in Q1.

Given that market and business conditions remain difficult across the industry, I would characterize this as a solid operating quarter. The performance of our Capital Markets, Corporate and Investment Banking businesses is an early signal that our firm and our clients are beginning to respond favorably to the focus we established in 2008. This focused emphasizes returning to our roots to leverage business activities and client relationships that have been strong over many years.

Against what was a challenging market in merchant banking, we took write-downs in our legacy portfolio. Our intent is to reduce this portfolio and other legacy positions as market conditions permit. As these positions are reduced, we will build on the momentum that we are beginning to see across our lines of business to create long-term consistency and sustainability in our operating results.

Our Capital Markets businesses comprising cash equities, derivatives and strategic risks, as well as fixed-income, currencies and distribution achieved their strongest result in over a year. Revenues totaled CAD307 million for the quarter with trading results particularly strong.

World Markets led the industry in equity trading market share by value executed and trades executed on the TSX in January.

Our investment banking activities also contributed steady results, teaming up with our equity capital markets group on a number of notable deals for the quarter. We were joint bookrunner on a CAD250 million underwriting of trust units for Penn West Energy Trust, and this is the first time Penn West has raised equity in the markets. We acted as an exclusive financial advisor to George Weston Limited on the sale of its US fresh baking assets in a transaction valued at CAD2.5 billion. We secured the mandate as sole underwriter on a CAD130 million equity underwriting for Central Fund of Canada. This is our fourth underwriting with CFC over the last year.

Our investment banking business is a high performing capability of our firm that will continue to grow in the future. In Q1 we advised on more deals worth more in value than any other M&A advisor. This is the eighth straight year we have led either the Bloomberg or Thomson tables.

In Q1 Geoff Belsher, an industry veteran with wide-ranging executive experience at major North American investment banks, joined us to lead this team. In fixed-income, currencies and distributions, steady foreign exchange results and improved trading revenues contributed to a solid quarter. This team participated in a number of notable transactions involving clients such as Nova Scotia Power, BC Ferries, Brookfield Renewable Power and Shoppers Drug Mart.

Now an update on an implementation of our business strategy in 2009. Our mission is to bring Canadian capital market products to Canada and the rest of the world and also bring the world to Canada. Implementation of this strategy is divided into two components. First, the repositioning and reorganization of our business has started at the beginning of fiscal 2008. Second, continuing to intensify our focus on clients so we can deliver on our mandate to be the premier Canadian based investment bank.

To implement the first component, we have exited or reduced high risk or nonperforming businesses. We continue to wind down or manage underperforming trading strategies. In addition, we have changed the structure of our business. This will ensure that we are positioned well to implement our new client-focused business strategy and are able to respond effectively to the dramatic changes occurring in our industry.

During Q1 we announced an expanded lending capability called Corporate Credit Products, which we believe will provide additional earnings capacity in the future. This group is led by Laura Dottori, who joined us in January, and will focus on building a consistent, risk-controlled and profitable lending business to better serve our Investment Banking and Capital Markets clients.

To conclude, our results in Q1 demonstrate the early stages of a return to risk-controlled stability in our financial performance. Our performance in the quarter is in line with our annual objective of achieving CAD300 million to CAD500 million in net income after-tax from our continuing businesses over a full business cycle.

I will now turn it back to John.

Thank you, Richard. We will go to the phone for questions now.

(Operator Instructions). Brad Smith, Blackmont Capital.

Just a very quick question with respect to the movement or the apparent movement in the securities portfolios between trading and available for sale. If you reference the balance sheet, it looks like there was a fairly large movement between those two portfolios, and I think that is confirmed in the cash flow statement.

But when I look to the securities note number three, I don't get further confirmation that there was a reclass of about CAD21 billion between available for trading and available for sale securities. Can you just confirm that that reclass was done and maybe talk a little bit about what securities were reclassed?

(multiple speakers). No, your question came right through. Yes, that was not -- that was some assets in relation to COBSCO. So they are assets that were not -- it was not a reclass. It was a buy and sale that they rolled off and repurchased at COBSCO.

Sorry, what is COBSCO I'm just not familiar with that?

I'm sorry. I apologize for that. That is yet another acronym. That is our offshore vehicle or operation in the Caribbean.

So there was a $21 billion sale of trading assets, and they were reacquired through the available for sale portfolio? Can you talk a little bit about what the assets actually were -- equities, fixed-income, anything like that?

They are fixed-income securities. And what -- and I have not got a lot of details as to the nature of those securities and the trade. So I would have to come back to you to provide additional details as to what was the nature of the move.

So what I would propose is we will have a chat afterwards, and to the extent that it is information that would be helpful for others, we will post it on the Frequently Asked.

Okay.

Actually, why don't I hand over to Brian O'Donnell, maybe we can just clip it just now. So Brian, could you speak up?

Sure. The nature of those assets are basically short-term government securities. They would be largely US dollar securities in our liquid asset pools. They were traditionally in our trading portfolio. As they mature through the quarter, as David said, we repurchased like securities, but we repurchased them in available for sale -- excuse me, available for sale portfolio. So it is similar securities rolled off the balance sheet, and we repurchased towards the end of the quarter.

And they are short-term?

Yes.

When you say short-term, is that less than a year or --?

Certainly less than a year. Closer to -- certainly less than six months, 30 to 90 days. These would be securities in our liquidity pools.

Okay. Thank you very much.

Michael Goldberg, Desjardins Securities.

You used to split the hedged credit valuation adjustment between USRMM and non-USRMM. So of the CAD1.14 total impact in the first quarter, can you tell me what that split would have been?

Yes, I can, Michael. For the -- we can split it out a couple of ways. So let me take the -- first off, there is 636 of credit valuation adjustment, so let's put it into US dollars. So it's in US terms it is 512. And the split on the CVA between USRMM and non-USRMM is 350 and 162 respectively. So the bigger CVA was in the USRMM side.

The non-USRMM was 162?

Right.

Okay. In non-USRMM if the underlying loans were on your balance sheet, what would the total amount of those loans be?

Well, the -- maybe ask for a bit of a clarification on that. Obviously the non-USRMM positions, the protection is about USD23.3 billion. The underlyings are of a couple of different natures, right? There is the cash loan basis, and then there is the synthetics.

So if we turn to the table on page 11 of the MD&A, that table sort of breaks out the underlyings both in terms of investments and loans and written credit derivatives. Am I on track with where -- the nature of your question?

So the protection, if you look on the table on page 11, the protections are there, and the column hedged by non-USRMM USD23,161,000,000. For the -- and then including the USRMM, it takes you down to 26.3. Anyway, that is the protection bit, and then the columns off to the left show the investment loans and the written credit derivatives or the underlyings, so to speak.

So let me just speak to one item that I mentioned in my prepared remarks which you can see on this table. And that was -- and maybe this is to what you are speaking, Michael. We, during the course of the quarter, sold some underlyings. You can see them here on this table. The last line is unmatched purchased credit derivatives of USD1.8 billion.

Yes.

So those -- now we have kept the protection, so it is still in the protection column. But it is no longer in the first three columns, which is the underlyings because the underlying position has been sold.

Right. Well, I guess just to back up a second, one of my concerns has been that the decline in value here, as you have indicated, is due to wider credit spreads, which often is I guess symptomatic of or can be symptomatic of deterioration in actual credit quality.

So what I'm trying to do is get some idea of what amount of the exposures you have would be nonperforming if they were on your balance sheet, and how much would those nonperformings have changed during the past quarter?

Okay. With this particular portfolio, the non-USRMM portfolio, and I can maybe hand over to Ron in a moment, it is not nonperforming. It is performing fine. The underlyings, the default rates are minimal. That is why we have said in the past we believe these underlyings will pull to par.

So if they were on our balance sheet and wherever I guess they would be on our balance sheet as the AFS or held to maturity or whatever, I guess the key point is they are performing.

So to your point, the fact that we're seeing marks and spreads can be indicative of concerns about credit, and there's no doubt that is partially definitely part of the issue. It can also just be illiquidity, and that is definitely part of the issue as well. But the underlyings continue to perform. Maybe Ron might -- (technical difficulty)--

Hello?

Just one second. We're having a -- we're at a hotel here. (multiple speakers) We are just getting things sorted out.

Okay. You should be able to hear me now. The underlyings are performing very satisfactorily.

How can we know that?

Because we monitor every asset that is underlying. So the structured portfolio, which, as you know, contains substantial subordination, require a fair bit of nonperformance in the ultimate underlyings in order to have any deterioration of the structured assets that we hold. But we monitor down to the actual underlying assets underneath those structures, and those assets are performing very satisfactorily.

That does not mean to say that there have been no downgrades in the underlying. But there have certainly not been anywhere near the degree of downgrades that would be required in order to compromise in anyway the performance of the subordinated structures that we own.

In view of the weakening business conditions, though, how can we actually be assured that there have not been impairments or moves toward the impairment when we don't see what the loans are and we don't actually know what would be performing or nonperforming?

Well, let me give you an idea of the stress testing that we do loan on this portfolio. So we have looked at constant default rates of approximately 25% over the remaining life of this portfolio. That compares to the worst historical experience that we have ever seen of being 20% default rate in a single year.

Now we also stressed the recovery levels on the underlying assets down to 50% versus what would be viewed as being normal of a 70% recovery on these loans and the worst historical experience of being 65%. Even under those stress conditions, we see minimal losses in this aggregated portfolio. So I think that gives you some measure of the type of stress analysis that we do on the portfolio.

Mario Mendonca, Genuity Capital Markets.

The increase in RWA, it would be good to have a better understanding of why that increased and how it increased. It sounds to me because credit spreads moved materially higher in the quarter for a lot of these counterparties, that was the reason for the increase in the RWA. Is that fair?

It is Tom Woods. Actually the RWA increase is due to downgrades of our internal rating system of these various financial guarantors. The credit spreads and models actually map into the CVAs. But when it comes to RWAs, it is an internal risk-rating approach, and we had some downgrades this quarter. That is why the bulk of that -- on my slide, I think it is 53, it is the Tier 1 ratio movement. You see 37 basis points. The bulk of that would be downgrades to financial guarantors.

In terms of dollar amounts, how much would that be?

You are looking at a little north of CAD4 billion on a base of I think I think it is 122, so a fairly significant increase. As we have said before and I think Gerry mentioned earlier, that does provide us protection in the event we do have CVAs in the future on them.

And on that topic, it would seem that this may be related to that termination you are referring to. But the valuation reserve to the mark-to-market, so taking that ratio as a valuation reserve to the mark-to-market, at Q1 '09 it's about 55%, and that seems like it's actually down from last quarter when it was about 58%.

So credit spreads -- and this is my interpretation -- credit spreads moved higher. You've downgraded a few, and that is what affected your RWA. But yet the valuation reserve to the mark-to-market declined. Am I misinterpreting this?

David, do you want to do that?

I could comment. I think overall two things happened. (technical difficulty)--

I cannot hear you.

All right. Can you hear me now? Okay. So I think I might be wrong but right in one particular area. Overall marks did get worse as did spreads for the monolines. So they both worsened during the course of the quarter. You know split mostly with it being marks and less the case with it being spreads.

Now in the case of the non-USRMM, you did have an inversion there where it looked like the spreads did -- the CVA came in as a percentage.

What is going on there is one of the counterparties commuted, and when it commuted on the USRMM side, so we get our USD98 million and us and many other counterparties fall away, thereby taking pressure off that counterparties. The upshot being that it then becomes a better counterparty for the non-USRMM side of things, and that did have an impact on the relative CVA we had in the non-USRMM side.

Okay. I think I understand that.

Do you understand that?

I do actually. It is just it was kind of a unexpected result.

It is a function of the commuting of one of the counterparties, and then that is why they are willing to commute and pay us the USD98 million. In so doing, it should make them a more viable counterparty for the remaining exposures.

The other comment I would make in order just to follow on Tom's comments before, just to build upon those comments, was that with that amount that has gone into risk-weighted assets, that is attributable, of course, to the net receivable that we have from those monolines.

So similar to the past, we have now, in effect, taken the hit up front. And to the extent that if there were further CVAs, further write-downs, that -- we have taken the RWAs in advance. We have taken the pain, so to speak, on the Tier 1 ratio, and that would be released against any future P&L.

So in total now, RWA includes how much related to the monoline receivables?

10 in aggregate.

It is a big number now? And that is a multiple of what, 4 or so, or maybe more than that now?

I would defer to Brian. What is the multiple now?

Approximately 4. You are right.

Ian de Verteuil, BMO Capital Markets.

A question just following up on Brad's question with respect to the move of the liquidity pools from trading to available for sale. Brian, if the term is as short as you say it is, it would not seem as if there is any difference in the accounting treatment because if those securities are so short in duration whether they were trading or available for sale, they would mature, so everything has to be trued up in the P&L.

So what was the reason to put it into AFS? Even if it was a geographic movement, why not just put it back into trading?

Hello? You guys have gone again.

It is Brian. I'm responding to your question. Sorry for the delay there.

Yes, the determination as to where those assets should be held really falls in a couple of areas. But primarily the fact that these are part of our liquidity pools that the intention really is to roll and keep the assets on our balance sheet as part of our strong liquid profile for the bank really leaves you to conclude that it is appropriate to have them in available for sale.

I should also say the risk-weighted asset treatment for them, I think this is part of your -- the starting part of your question as well, is quite similar between the two frameworks. So it was not a big move in risk-weighted assets one way or the other. So it probably measures that better with the nature of the other assets within the treasury book also. So those were some of the considerations we had.

But yes, I think you're right. Overall given the short-term nature, not a big difference in terms of the recognition of accounting income.

The second question is, I see that you guys have filed for an innovative deal. I have not seem CIBC do an innovative deal in a helluva long time. Can you talk to why -- what has brought you to the conclusion to look at innovative? Is it other than some tax issues changed with the Company with respect to some of the moves in these liquidity pools, or are those unconnected events?

No, not a tax change. I think really just we have not done an innovative Tier 1, and I guess we're the only bank that has not. It is more just a recognition it is an alternative vehicle. It is the pref focused on the Retail Markets and the innovative more focused on institutional markets. And our intent really here is just to open that door. We've just filed the preliminary prospectus, and what it does is just give us additional options to manage our capital position in the current market conditions and also for future growth.

Do you have a sense on size? Normally when people do these deals, it is somewhere between a CAD0.5 billion and CAD1 billion. Is that sort of the scale?

At this point we don't -- the first step is just to get the door open. We've filed a prospectus, and any future steps we would just have to look at what we think is appropriate and also how the market is placed.

Andre Hardy, RBC Capital Markets.

Two questions. The first, page 17 of your report to shareholders, which shows the US real estate finance exposures, can you remind us of why we should or should not worry about these US commercial real estate exposures?

Well, look, as I said before and just for those of you that may not have the document, we have got about CAD2.3 billion equivalent of security -- we have loans in our US commercial real estate business. And this has nothing to do with the structured credit business just to remind you. These are loans that we have originated ourselves from a team who has been in place for over a dozen years in the US. This portfolio is very well diversified by type of assets, i.e. hotels, retail, multifamily, offices by geography right across the US. We have got offices right across the US. By size we have got about 100 loans averaging about CAD20 million. The top 20 would average about CAD35 million. So there are no big individual loans. As I say, we originated them. On the vast majority of these, we actually have recourse to the principal, so these are very much relationship-driven loans.

Now having said that, that is not to say that in the kind of environment we are seeing, we will not have losses. We have not had a loss to date. 75% of these were done post the start of the subprime crisis. In other words, past the peak. Average loan to value when we did these was about 60%. Our best estimate now is loan to value is probably 75% to 80%. So it has obviously had some deterioration, and there will be more.

But having said that, the stress test we have run using some pretty severe assumptions, do throw up some losses. We're not disclosing what the actual loss predictions are, but I can tell you that based on even further declines in that market that we think are plausible, we don't see any material red flags at the moment. That is not to say we will not have losses. We will have losses. But we don't see those being particularly material right now. We will update you every quarter. But at the moment we think these are in hand, in large part because of the recourse that we have beyond the exposures that we have on our books.

That is a lot of data. Thanks for that. Anything on prelease in terms of how much of these buildings are leased?

I'm not sure I'm with you. Try that again.

One of the issues often in construction financing is the preleases are not high enough to then support cash flows. Do you require a very high percentage of these buildings being preleased before --?

Yes, I don't have the particular number here, but I do know in the segments where in the multifamily, for example, we do have quite high prelease requirements. That is just one part of our overall portfolio and the office and retail as well. So that has not been a particular issue.

Okay. I will move onto Cards. The increase in the loss rates have been very rapid in the last four quarters. Is there anything in particular in the book that is hurting you that you target as specific customer segment whether that be Ontario or Alberta or higher risk customers that is really hurting now, or it is just evidence of a broad-based deterioration in employment?

Not really. I mean the particular parts of Canada that are experiencing greater pressures are up a little bit more, but it is actually pretty consistent right across. Our premium accounts, which have traditionally performed extremely well, we are seeing a bit of weakening there.

You know, I point out the 590% number that I have in the appendix, and Sonia alluded to this in general terms. You know, it's a higher percentage in part because of our targeted restrained growth strategy. And some of the numbers we have done show that if we were to have grown over the past two to three quarters where we have reined back our growth at levels akin to the industry, that 590 would be down roughly 30 to 40 basis points.

So as Sonia said, I would caution you looking at that percentage rate, and I would focus more on the dollar numbers. We expect those to continue to grow somewhat through the rest of the year. But as we said, we have built-in what I would consider to be a fairly good reserve under the accounting approach we take with the increased allowances anticipating further write-offs based on our delinquency profile right now.

And as an outsider, obviously the unemployment rate is what I should track here, like further increases would logically lead to further loan losses, or you are saying that you have allowances for that?

Well, unemployment now is in the low to mid-7s. We have run stress tests up through 10. You know, I cannot give you a good answer in terms of if it went to 8 or 9, but certainly the allowances account for some degree of increase from the low 7s. If it were to get to 10 hypothetically, we would certainly see increases in that rate.

Okay. But you are not willing to share when that increase is?

I'm sorry?

You are not willing to share whether the tripping point is 8 or 8.5 or 9?

No, it is not a step function; it is gradual. But the steps we have been taking for the last nine months across the whole spectrum of account management collections and new clients, you know, are going to serve to mitigate that.

But if we were to see, let's say, 9, 10, you're going to see that rate go up. But there is no bright line between the unemployment rate and loan loss. It is going to go up, though.

Okay. Thanks.

If I could just add a couple of comments to that. Absolutely this tracks to unemployment, but I would also comment that we have taken a lot of actions as both Tom and I have highlighted on this portfolio that although we started in the latter part of 2008, the time to actually see the effects of those mitigating actions would not have taken effect at this stage.

So while I totally agree that if unemployment continues to increase, you will see some increased losses. You will also, though, see that mitigated by both credit limit decrease initiatives we have put in place, collection activities, other new acquisition changes that have been in place now for close to six months and have been increasing throughout the period.

Darko Mihelic, CIBC World Markets.

I actually have some real simple numbers questions. The first question is with respect to supplemental on page 35. It looks like quarter-over-quarter you have doubled your exposure to the US. I wonder if you can just comment on that?

I'm sorry, I don't hear anybody right now.

It is Brian O'Donnell. Page 35 tracks the exposure by geography in many of -- under our Basel definition of exposure. That's very much picking up the same trend in our portfolios that I talked about to Ian earlier. So that would reflect the movement of US dollar securities into available for sale portfolio. When they are in the trading book, they don't show up on page 35. Under an AFS, they do.

I understand. Okay. Great. Thank you. And one last question I guess on the same question that Andre was speaking to with respect to Credit Cards. We are -- I mean I do appreciate the disclosure on page 24, and it does look like early stage delinquencies rising. Sonia, are you seeing -- I mean it looks as though there's also an increase in the roll-rate going forward. Can you maybe explain the methodology of the reserving? How much reserves are you building for this, and how much are you expecting these delinquencies to go up getting past the 90 days?

It is Tom. I'm going to have to give you the same answer I gave to Andre. There is no formulaic -- well, let me back up a step. There is very much a formulaic approach to build the required end of period allowance, and that looks at each delinquency bucket and applies a formula. But I cannot give you a direct line to what unemployment or what monthly early stage delinquencies would have to be for that allowance to be bang on. The best estimate I can give you is it does factor in some further deterioration in the economy, but extreme deterioration along the lines that I said to Andre, you would probably see some or you would see some requirement for still additional increases in allowance. But there is some buffer built in.

Okay, understood. Thank you.

Sonia here. It also factors in increased bankruptcies for the remainder of the year as well.

An estimate of that or does it work off the current bankruptcy rate?

It works off of increased assumptions throughout the remainder of the year, again formulaically driven.

Brad Smith, Blackmont Capital.

Just a supplemental or follow-up to the earlier question I asked about that trading and AFS. I just want to be clear on the duration. Because I just took a look back at your note four in your annual report, and the less than one year duration in your trading portfolio was only CAD12 billion. So I was just curious how the transfer of CAD21 billion worked at the short end of the duration spectrum?

I mean the government securities, there were CAD16 billion of total trading securities less than one year, but still that is quite shy of the 21.

Yes, well that would have been the number as of October 31. And perhaps I gave you an example in terms of government securities, and for sure the majority of what we're talking here would fall into that category.

The liquid securities would also include some agency and bank paper, a very, very small amount of corporate, short-term corporate paper as well. But the vast majority would be government, government agency and banking paper.

But just to be clear, the duration is still less -- well, less than one year. So some longer duration trading assets were liquidated after the year-end pushed into the lower duration spectrum, then sold and repurchased as AFS securities?

You know, Brian, I think I am going to have to follow-up with you on this because I don't have really the benefit of what you are talking about at my fingertips.

Okay.

So I would like to come back to this if that is okay.

I would appreciate that. Thank you very much.

Thank you. I would now like to turn back the meeting over to Mr. John Ferren.

Thank you, everyone, for joining us this afternoon. Have a good day.