Canadian Imperial Bank of Commerce (CM) 2009 Q2 法說會逐字稿

(Operator instructions) I would now like to turn the meeting over to Mr. John Ferren, Vice President of Investor Relations. Please go ahead, Mr. Ferren.

Good afternoon, everyone. Thank you for joining us today. This afternoon our management team will discuss CIBC's second-quarter results that were released earlier today. This conference call is being audio webcast and will be archived later this evening on CIBC.com. We will follow the usual format of some prepared remarks from CIBC's senior management team followed by a question-and-answer period.

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

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

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 reported a net loss for the first quarter of CAD51 million and a cash loss per share of CAD0.21. Earnings, apart from the items of note, were CAD1.44.

Our reported results for the quarter included mark-to-market losses and valuation adjustments in structured credit and other runoff-book. The bulk of these credit charges occurred early in the quarter. Conditions have improved significantly since then.

Our reported results also included mark-to-market losses on our normal course existing loan hedges. These are direct single name loan hedges that offset the risk of individual large corporate loans that we make on a regular basis as part of our ongoing business.

In other words, while these improving market trends in the second half of the quarter supported more positive credit expectations in our loan portfolios, they also result in a reversal of previously reported mark-to-market gains on the related direct credit hedges.

The reduction in previous gains is a positive for future expectations for our loan book. David Williamson will take you through these two items, as well as other items of note that impacted results for the quarter in his remarks.

Again, this quarter our capital position is another good news story. We reported a Tier 1 capital ratio of 11.5% through the end of April, up from 9.8% last quarter. Our total capital ratio improved from 14.8% to 15.9%.

The further strengthening of our capital ratio was supported by three main items. First, core business performance and management of our existing risk weighted assets in the business. Second, we had issuance of preferred shares and Tier 1 notes.

And third, very importantly, as mentioned on our previous webcast, CIBC has set aside significant risk weighted assets against our financial guarantor receivables, thus reducing the capital impact of potential future write-downs. This reduces the potential for any losses in future quarters significantly, since we have also set aside as of now $9.5 billion of risk weighted assets against our structured credit remaining portfolio.

That is already included in our April 30 Tier 1 ratio. This capital assignment will mitigate the impact of future losses that might occur if market conditions deteriorate. David Williamson will cover this in more detail.

In summary, our Tier 1 ratio of 11.5% continues to place CIBC as one of the strongest capitalized banks in North America. As well, we have extra capital set aside against our legacy structured credit portfolio, as I just described.

Our superior capital strength is prudent for current conditions, but importantly provides us with the capacity to take advantage of opportunities as market conditions are now improving. These opportunities are now becoming more apparent.

Turning to our business results, CIBC Retail Markets reported revenue of CAD2.3 billion, and net income of CAD390 million. Our results in our retail business are consistent with our strategic posture, which we have discussed previously, which is to balance growth with risk and expenses.

For the past two years, and particularly in the past year, we have restricted risk in our retail business, as we saw the potential for industry conditions and the economy to become more challenging. In doing so, we have chosen strategically in key risk areas to grow our retail business possibly below-market levels, while maintaining a strong risk approach and prudent management of expenses.

For instance, as you have heard from us many times in the past, we executed our shift from unsecured lending to secured lending in order to mitigate just such circumstances that we see in today's recession. Today our unsecured loan portfolio is less than half of the size that it was prior to that exercise, and a fraction of the size that it would have been had we grown it at market rates. We believe that bodes well for our performance throughout the duration of this recession, which could possibly be a long one.

Similarly in our cards business we have chosen to grow more slowly than our competitors. This is part of the strategic mandate of CIBC. We continue to grow the portfolio in key areas to bring product innovation to our clients, and continue to invest heavily in this business in order to ensure that we have the best-of-class performance on behalf of our clients. However, whether this means a possible share loss, that is a risk that we are willing to take against our requirements in terms of risk approach.

There are areas of the business in terms of credit cards where people are choosing to grow at much faster rates than we are. That is not the choice for CIBC, given that we also believe that the business must be robust in all areas, including our approach to risk.

We have taken a very careful approach to loan losses in general. This is clear when you look at our coverage ratio relative to gross impaired loans, which is higher than any of our competitors. We believe this is a prudent approach and positions us very well in the current environment, and that we are favorably positioned to see the benefit of this approach through the credit cycle.

At the same time we believe that the risk versus growth mandate that we have been executing as part of our retail business strategy will ease as pressure in our structured credit portfolios abate, overall industry conditions improve, and we do see some improvement in unemployment and other economic indicators.

To this end we continue to invest significantly across our Retail Markets franchise in all operating areas. While we are being very, very careful in the area of risk, we are continuing to invest in the business from a viewpoint of our ongoing operations, our branch network, and improvements in any areas of technologies and customer service that will make CIBC the most robust retail market franchise in the industry.

Our retail, distribution network, advisory and product capabilities are an area that we continue to invest in significantly. These investments are supporting our clients and positioning our retail business to take advantage of future growth opportunities, particularly as market conditions and the economy improve. Sonia Baxendale will review initiatives to further enhance our retail business in her remarks.

In Wholesale Banking revenue was CAD546 million and net income was CAD200 million, excluding items of note. Following a strong first quarter this was the best performance for Wholesale Banking since the third quarter of 2007. The risk control and core business strategy the business set forward is starting to yield positive results.

Our Capital Markets business built on a strong first-quarter performance by reporting its best revenue quarter since Q1 of '07. And Corporate and Investment Banking reported its best result since Q4 of '07. We are continuing to invest in these businesses through key hires, even as we refocus on our core strengths and enhance our risk management activities. These activities are aligned with the Bank's strategic imperative of consistent, sustainable performance over the long term. Richard Nesbitt will comment further in his remarks.

During the quarter we continued to reduce exposures in our structured credit runoff business, completing four transactions that reduced notionals and also future earnings opportunities -- and also future earnings volatility. Work continues at the end of last quarter and into this quarter.

As David Williamson will describe, in our losses for Q2 almost CAD200 million of those losses were attributable to deterioration in possibly the weaker part of our non-residential real estate structured credit portfolio, our CMBS portfolio.

As we approached the end of the quarter we had disposed of a portion of that portfolio, and in this quarter we have disposed of the balance. This balance was disposed of this quarter at a price above the end of last quarter's marks. David Williamson will cover that again.

In addition, normal amortization reduced the notional amount of our purchased credit protection with financial guarantors by CAD100 million during the second quarter. David will review our current positions and progress in this area, including the significant capital assignment that remains to cover the potential future losses in his remarks.

In the area of productivity we continue to make progress. Total expenses for the second quarter were CAD1.64 billion, down from CAD1.79 billion a year ago. This expense level is also better than our baseline target of CAD1.78 billion.

During the quarter 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's core business performance was solid in Q2, given the prevailing economic environment, as well as our cautious risk approach.

We had good wholesale momentum, excellent cost discipline. In retail we continued to invest in our business through branch expansions and expanding our retail product volume. We had a very strong Tier 1 ratio that was significantly higher than last quarter. We had an excellent gross impaired ratio. And we do have in terms of our overall results a higher than normal tax rate, which did affect them.

As we look forward, we are continuing to exercise a very careful risk posture. We do believe as conditions improve that this risk posture will pay off in a fast recovery for CIBC as the economy recovers. And in addition, we will be better positioned to take advantage of future opportunities, given that we are currently over capitalized as a result of our caution about the marketplace, as well as our caution in relation to our structured credit portfolio.

As the marketplace and the economy, hopefully, improves and our structured credit portfolio issues ebb, we may be able to put a portion of that capital to work in expanding our businesses in a variety of areas, where up until now we have exercised extreme risk control.

Given this, we believe that we are very well-positioned in the current environment, and confident that we have the capacity to take advantage of growth opportunities that will arise in the future.

Now let me turn the meeting over to David Williamson for his financial review.

Good afternoon everyone. My comments also contain forward-looking statements, and I would remind you that actual results could differ materially. I am going to refer to the slides that are posted on our website, starting with slide number 5, which is a summary of our results for the quarter.

We reported a loss for the quarter of CAD0.24, or CAD0.21 on a cash basis. We had several items of note this quarter listed on the top right of the slide, totaling CAD1.65 per share. And therefore our cash EPS, excluding these items, is CAD1.44 per share.

As Gary mentioned, our Tier 1 capital ratio continues to be strong, and at 11.5%, CIBC is one of the strongest capitalized banks in North America. During the quarter our Tier 1 ratio benefited from the issuance of CAD1.6 billion of innovative Tier 1 notes, and CAD525 million of preferred shares.

Now we will summarize each of the items of note briefly. We had losses of CAD475 million or CAD0.85 per share on the structured credit runoff business. The next few sides will cover this in more detail.

Next, we had CAD168 million or CAD0.30 per share relating to the negative impact of the narrowing of credit spreads on our corporate loan hedging program. As credit conditions improved towards the end of the quarter, we reversed some of the gains we have reported over the past several periods.

We had valuation charges of CAD100 million or CAD0.17 per share on positions in our exited and other runoff businesses relating to certain trading and available for sale positions.

Next, we had CAD57 million or CAD0.15 per share of tax expense, mainly related to the write-off of future tax assets due to lower future statutory tax rates.

We had a provision for credit losses related to the general allowance of CAD65 million or CAD0.11 per share. This is primarily related to large corporate lending and credit cards, driven by the deteriorating economic environment.

Next is CAD49 million or CAD0.08 per share of net losses and write-downs on our legacy merchant banking portfolio, which is included in the Wholesale Banking Other line of business, as these holdings are managed separately from our core portfolio.

Finally, we have repatriation activity involving foreign subsidiaries. While this nets to a gain of only CAD0.01 overall, we have highlighted this item since it involves the netting of a foreign exchange gain of CAD159 million in revenue against CAD156 million of income tax expense.

Excluding items of note, first-quarter results were helped by higher revenue in our Wholesale Banking businesses. As Gerry noted and Richard will comment on in a moment, this improvement occurred broadly throughout the various businesses within Wholesale Banking, and represents good performance from continuing operations, especially in light of recent efforts to reduce risk within these businesses.

We were also helped by continuing expense discipline, but were hurt by higher loan losses, lower retail spreads, and lower treasury revenue.

The next slide provides a summarized statement of operations on a reported basis, showing a net loss for the quarter of CAD51 million, driven by items -- sorry, driven by the items of note I just walked through.

Turning now to a summary of structured credit runoff for the quarter. Losses in Q2 totaled CAD475 million or CAD0.85 per share, down from CAD708 million or CAD1.27 per share in Q1.

The first line shows the credit valuation adjustments in the quarter of CAD657 million that we took due to continued deterioration in the mark-to-market value of certain underlying assets and the credit quality of financial guarantors. Specifically, one area of weakness in our non-USRMM holdings is commercial mortgage-backed securities. Marks and CVA on our CMBS portfolio was approximately CAD190 million of our total structured charges -- structured credit charges this quarter.

Approximately half of our CMBS notionals were sold just prior to the quarter end, and the balance post quarter end, at prices favorable to the April 30 marks. Therefore at this point, the structured credit CMBS portfolio is now fully divested.

I stated in prior webcasts we have assigned substantial risk weighted assets against our remaining financial guarantor positions, which acts to dampen the impact of CVA charges on our Tier 1 ratio, and effectively establishes a capital cushion against our remaining exposures.

We had total write-downs of CAD90 million or CAD0.16 per share from our unhedged US residential mortgage market and non-US residential mortgage market portfolios.

The last line on this slide, other runoff of CAD277 million includes the benefit from purchased protection on held-to-maturity securities, where the underlying exposure is accrual accounted, but the protection continues to be marked-to-market. A gain on the Cerberus note is also included, as this note continues to provide us with protection against the declining value of our US residential mortgage market holdings.

During the quarter, as Gerry mentioned, we undertook a number of transactions to further reduce our exposure to structured credit. Specifically, we completed four transactions that had the effect of either reducing the size of our remaining structured credit runoff holdings, or reducing the future earnings volatility associated with these positions. Specific details of these transactions are included in our press release. And if you have any questions, either Ron Lalonde or I will be pleased to address them during the Q&A.

Slide 8 is a summary of our financial guarantor protections purchased against our US residential mortgage market exposure. In US dollars this slide shows that we have $3.1 billion of credit protection from three remaining counterparties, which now has a fair value of $2.7 billion. We have taken cumulative credit valuation adjustments of $2.3 billion, and therefore have a remaining net fair value of $449 million, as shown in column D. In addition to this balance, we have a remaining value of $391 million shown as the difference between columns A and B.

The total remaining exposure of $840 million is protected by the investment from Cerberus, which had a fair value of $276 million at the end of Q2 for a net remaining exposure of under $600 million.

This represents a maximum Tier 1 capital exposure of 20 basis points, assuming the value of all underlying positions fell to zero and that we have zero recoveries from the financial guarantor.

The impact on Tier 1 is reduced to nil if we assume a 10% recovery from financial guarantors, even in the scenario where the value of the underlying positions fall to zero.

Slide nine outlines the counterparty protection provided by financial guarantors for the underlying assets are primarily CLOs and corporate debt that are not related to the US residential mortgage market.

Looking at a total remaining exposure, as shown at the bottom right of this slide, our net receivable from guarantors was $1.6 billion at April 30, after a cumulative valuation reserve of $2 billion.

We had total risk weighted assets against this portfolio already included in our April 30 Tier 1 ratio of approximately $7.9 billion. If we had to write-off the entire $1.6 billion the impact would be approximately 63 basis points. If we recovered 15% of our gross receivables from financial guarantors in this portfolio, the impact on our Tier 1 ratio would be approximately 25 basis points.

Turning now to our business results, starting with Retail Markets on slide 10. Revenue for Retail Markets this quarter was CAD2.25 billion, which is down from Q2 of last year. Personal banking revenue of CAD1.4 billion, was down CAD10 million, or less than 1%, from Q2 of last year.

While we experienced solid volume growth across most of our key products, lower spreads resulted in a slight decline in revenue. Personal banking spreads were down year-over-year due to the low -- lower interest rate environment and lower prepayment penalty fees, but were helped by wider prime/BA spreads. Given the current state of the economy, we continue to be careful in managing our credit quality and rate of growth.

Turning to business banking. Revenue of CAD312 million was down CAD16 million or 5% from Q2 of last year due to lower spreads as a result of the lower interest rate environment. This was partially offset by higher volumes in deposits, GICs and midmarket lending.

Slide 13 highlights the results of our Wealth Management businesses. Revenue of CAD297 million was down CAD83 million or 22% from Q2 of last year. Weaker equity markets have resulted in a decline in asset value-based fee income and lower trading commissions.

FirstCaribbean revenue of CAD204 million was up CAD82 million or 67% from Q2 of last year, mainly due to the impact of a weaker Canadian dollar and lower securities losses. Also Q2 of the prior year included an CAD8 million loss on the Visa IPO adjustment.

Other revenue primarily consists of treasury allocations, which were consistent with Q2 of last year, and were down from unusually high levels in Q1 due to lower gains on sales of available for sale securities.

Retail Markets' net income was CAD390 million, down CAD126 million or 24% from the prior year. The provision for credit losses was CAD403 million, and is up CAD194 million from last year. The increase in the provision was driven primarily by higher write-offs on the cards and personal lending portfolios. Tom Woods will provide additional details on this topics in his remarks.

It is worth noting that our provisions in Retail Markets included CAD39 million related to an increase in the general allowance, an item that the other Canadian banks exclude from their business unit results.

Noninterest expenses were down CAD76 million or 6% from last year, as we continue to be focused and disciplined in managing our costs.

Slide 17 shows our net interest margins. On the bottom row you can see the total Retail Markets net interest margin was up 2 basis points quarter over quarter. Excluding the combined impact of FirstCaribbean and treasury, our core Canadian retail net interest margin was down 5 basis points versus Q1. This is due to spread compression resulting from the impact of declining interest rates on our deposits business, partially offset by the effect of wider prime/BA spreads on our lending businesses.

Total Retail Markets' net interest margin was down 41 basis points versus the same quarter last year. Excluding the combined impact of treasury and FirstCaribbean, our core Canadian retail net interest margin is down 25 basis points. This decrease was due to the same reasons that I outlined for the quarter over quarter decline.

Now turning to Wholesale Banking. Negative revenue of CAD241 million in Q2 was driven by losses in structured credit runoff. As noted on the slide, revenue adjusted for the impact of structured credit is CAD229 million. If we were to exclude all of the items of note related to Wholesale Banking, revenue for Q2 was CAD546 million, up CAD128 million from the prior quarter on the same basis.

Looking at the individual lines of business, starting with Capital Markets, our revenue was CAD318 million compared with CAD307 million last quarter. This is driven by higher revenue in fixed income trading and from equity new issues.

Corporate and Investment Banking revenue of CAD200 million was up CAD44 million from Q1, driven by the higher revenue in our US real estate finance business and our core merchant banking portfolios.

Lower M&A and advisory revenue were offset by higher revenue from equity new issues. As Gerry noted, this was the best quarter for Capital Markets and Corporate and Investment Banking since 2007.

Other revenue was negative CAD745 million in Q2, and was driven by the items of note related to Wholesale Banking that I outlined at the beginning of my remarks.

Wholesale Banking net income was negative CAD373 million in Q2. If we were to exclude all the items highlighted as items of note relating to Wholesale Banking, net income for Q2 was CAD200 million, up CAD91 million from the prior quarter 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 a reasonable comparison. As you can see, we are far ahead of our objective due to continued expense discipline.

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

My comments may also contain forward-looking statements and actual results could differ materially.

With respect to credit risk on slide 44, specific loan loss provisions were CAD329 million or 83 basis points of net loans and acceptances. The quarter over quarter growth of CAD82 million was due to, first, an increase of CAD32 million in provisions for business loans, and second, an increase of CAD49 million in provisions for consumer loans, with cards accounting for CAD28 million of the increase.

Gross impaired loans increased by CAD138 million this quarter to CAD1.26 billion. Increases were primarily related to our US and international portfolios. The coverage ratio of impaired loans by specific allowances remained the same at 62%. And as Gerry said, this is the best ratio amongst the Canadian banks.

On slide 45 we provided additional information this quarter to make our disclosure more comparable to other banks. The chart breaks that our specific loan loss provision for cards into two parts. One is the net credit losses consisting of write-offs due to bankruptcies and write-offs of accounts delinquent 180 days or more. The second component is the change in the specific allowance on the balance sheet, factoring in our view of future expected losses from delinquent accounts.

Our cards net credit loss rate in Q2 was 5.6%, up from 4.8% last quarter. As we have discussed in our webcasts for the last several quarters, we have deployed several account management initiatives in this area. While controlling the dollar value of losses, this has also constrained outstandings growth, which has a tendency to increase today's loss rate in percentage terms, but will ultimately lead to lower dollar losses.

News that could prove to be encouraging, although not a certainty, is that 30 day delinquency rates stabilized during the quarter.

At the top of slide 46 we provide a comparison of CIBC's net credit loss ratio versus the ratio of the three other banks who provide similar disclosure. At the bottom of slide 46 we have also normalized all four banks' ratios, assuming constant quarterly balance growth starting in Q4 last year. Now these are hypothetical calculations only, but help us compare loan loss rates across banks that have had different rates of growth in outstandings.

Turning to market risk, slide 47 shows the Q2 distribution of revenue in our trading portfolios. In Q2 all but one trading day, or 98% of the days, had positive revenue, up from 76% last quarter and well up from 53% in Q2 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's end.

On slide 48, our Tier 1 ratio was 11.49% at April 30, up considerably from the 9.82% at the end of Q1. While structured credit charges reduced our Tier 1 capital in the quarter, this was offset by a reduction in our risk weighted assets. This reduction was primarily due to reduced credit exposures reflecting the impact of loan repayments during the quarter, and the weaker US dollar at quarter end.

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

My remarks may also include forward-looking information and the actual results could differ materially.

Personal and business banking performed well in the second quarter, while our Wealth Management business continued to experience market-driven headwinds. Personal and business banking had solid funds managed growth. Funds managed increased CAD26 billion or 8.6% year-over-year. Growth has been driven largely by increases in deposits and secured lending balances.

Total Retail Markets revenue of CAD2.3 billion was comparable to Q2 a year ago. However, we did see the impact of the declining interest rate environment, and in particular, equity market volatility. This was most reflected in Wealth Management, which had revenue declines over the same period a year ago.

We have been prudently keeping expenses flat in this market environment, while at the same time continuing to invest in both our branch network and our products' capabilities. In terms of our branch network, we opened or expanded 14 new locations in the second quarter in markets that provide long-term, high growth potential.

You will note from previous calls that these openings are part of our five-year, CAD70 million branch investment commitment. We also added Sunday banking to 22 more branches across the country, and now have a total of 37 branches offering Sunday banking hours to our clients.

At the same time, we are continuing to expand our competitive product offering. Over the past quarter we took a leadership position in advising our clients on the new tax free savings account products, providing them an opportunity to understand how TFSA fits into their overall financial plan. We are pleased with this success of our efforts in this area, which is supported by the fact that registered deposit market share grew in excess of 300 basis points over the quarter.

This past month we also launched a new high interest savings product, and early results are extremely positive, within excess of CAD1.5 billion in just over two weeks.

And in a few days we will be relaunching our highly successful checking and credit card promotion to acquire new clients to the Bank.

Let me now turn to our lending portfolio. Our CAD170 billion personal lending portfolio consists of credit cards, lines of credit, loans and mortgages. Today 86% of our lending portfolio is secured. Mortgages represent 80% of our secured portfolio, of which -- represent 87%, of which 80% are insured. The vast majority via CMHC. The average loan to value on this small uninsured portfolio is 60%.

Real estate secured lines and loans represent the remainder of our secured lending portfolio. Like our mortgage portfolio, average loan to value is in the 60% range, with utilization on secured lines at less than 50% of available limits.

Unsecured lines of credit and credit cards represent 14% of our total lending portfolio, with cards accounting for 8%. In credit cards we continue to implement account management tactics to address portfolio risk. And as we have previously mentioned, we have slowed our growth in response to the market environment. This quarter cards outstandings were flat to Q1.

As a result of the mitigation actions we have taken, our credit card portfolio is well-positioned and is performing as expected at this point in the economic cycle. Further, credit card delinquency rates have been flat over the past three months, while bankruptcy rates have trended higher this quarter.

Moving forward, we are planning flat to low single digit growth rates as a result of our actions to ensure ongoing high credit quality. While this will impact market share, our cards' profitability remains strong.

In lines of credit and loans this quarter's 3.1% growth is comprised of 3.5% in our secured portfolio with 2.2% growth in our unsecured lending portfolio. Mortgage assets have also increased moderately during this quarter. While mortgage rates are at historical lows, we continue to anticipate flat to low single digit growth rates for the remainder of the year, in-line with the overall industry.

Business banking continued to deliver year-over-year growth, with economic factors beginning to slow the pace of growth in both deposits and loans. While the current economic climate has driven a moderate increase in the number of risk rating downgrades, overall credit quality of the portfolio remains strong with minimal losses expected. We continue to be receptive to new business opportunities.

In addition, during the second quarter we introduced plans to implement a revised business banking operating model, which enables us to better align our sales forces, leverage our existing infrastructure, and simplify our processes to better serve and grow our important business client segment.

In summary, our focus continues to be on mitigating risk in the near term, while investing in our core operations of personal and business banking and Wealth Management in order to achieve CIBC's overall objective for consistent and sustainable earnings.

Thank you. I will now turn over to your Richard Nesbitt.

My comments may also contain forward-looking statements and actual results could differ materially.

I will review the quarterly performance for our Wholesale Banking business and provide an update on our business strategy. When we introduced our strategy last year we committed to an aggressive repositioning of our Wholesale Bank. This process is well underway. In 2009 we have focused on areas of strength, and the result has been stolid, high-quality earnings for the Wholesale Banking business. We have achieved this performance through core client-focused activities that are aligned with CIBC's risk appetite and to its objectives of consistent and sustainable earnings.

We have a net income after-tax target for our continuing businesses of CAD300 million to CAD500 million annually, using economic capital of CAD1.5 billion. Our earnings targets were carefully chosen to be achievable without reaching beyond our desired risk profile or outside of our core business for returns.

In Q2 we saw healthy revenue growth and development of a strong pipeline of client opportunities for the future. This growth, combined with the continued decline in our expense base, generated positive results for the quarter.

Our capital markets businesses, which is comprised of cash equities, fixed income currencies and distribution, and derivatives of strategic risk had another strong quarter. We have made several key personnel additions in order to focus on our client activities. We are also building our capabilities in the electronic delivery of capital markets products. Revenues in these businesses increased over a strong Q1.

In our cash equities business through the first four months of 2009 we lead the industry in equity trading market share by value executed and trades executed on the TSX in calendar 2009. We also saw strong equity new issue activity that boosted our revenues.

Our fixed income and global derivatives businesses continued to deliver solid revenues, with strong trading income and new issue activity.

Our corporate investment banking businesses, which are comprised of investment banking, corporate credit products, US real estate finance, and our core merchant banking, also posted increased revenues over Q1. The changes we made during last quarter refocused our corporate lending and our investment banking activities are well advanced.

Investment banking revenue -- revenues were flat, with higher fees from equity new issue activity offset by fewer opportunities in our M&A advisory businesses.

In corporate credit product, which is an expanded lending capability that we established earlier this year, revenues were higher in Q2. We believe that this capability will be a growing source of consistent, risk controlled revenue for our firm.

To conclude, our results in Q2 demonstrate that we are making steady progress towards achievement of the business and financial goals we established last year. During the first two quarters of 2009 net income after-tax for our continuing businesses exceeded CAD300 million, which gives us confidence that we will achieve our annual target of CAD300 million to CAD500 million.

I will now turn our call back to John.

Operator, I guess we are now ready to take questions on the phone.

(Operator Instructions). Robert Sedran, National Bank Financial.

Gerry, I've got a question for you on the capital side. In the context of the mitigation that you get from the risk weighted assets associated with the structured products exposure, the runoff exposure, why is -- doesn't it strike -- or should we think of 11.5% as to high of a ratio, given the risk profile of the rest of the firm?

In other words, the structured credit stuff seems to take care of itself, and 11.5% is for what is essentially a retail bank in Canada with a more plain vanilla Wholesale Bank as well.

I'm curious to hear your thoughts on what the appropriate level of capital is. Then you have also mentioned a fair bit about -- or you mentioned deployment or opportunities a couple of times. I am wondering if you could narrow it down just in terms of -- are you planning on acquisition opportunities? Are you planning on lending? Which segment are you thinking about? Where do you see the opportunities for deployment of some of this capital?

I will try to make sure -- there is a couple of things there, and I will pause after I have answered them and just see if I have covered it.

I think in my remarks, and you did pick up in my remarks that under normal conditions, and I did qualify that by saying as our visibility increases in the area of structured credit and our concerns ebb. And we're still trying to be very prudent there because the turnaround in the markets and all the rest of it wasn't that long ago. So we are still -- although our improvements are not all market-driven, we believe that the quality of what is left in our structured credit portfolio is much, much better than what was there two years ago or one year ago or six months ago.

But the fact of the matter is that we are trying to monitor what we believe is the crossroads between the quality of our portfolio and our expectations for what stress levels it could withstand, and what the stress that will be thrown at it is in terms of the economic conditions.

So when I did try to say in my remarks was that things do appear to be improving. And as things improve, and our visibility around our structured credit improved that it is possible and probable that we are very heavy -- heavily capitalized here. And 11.5% under most circumstances would be deemed to be a very high capital ratio, and we would hope to be able to deploy some of that towards opportunities that we are seeing now, and we believe we will see in the future.

So you then asked -- so I think I have said to you that we do see the scenario whereby the statement you made that we would -- and again, it is never an absolute, but on a continuing basis that we would start to work with that thought process of 11.5% is high. In February the higher the better. Under normal circumstances I think that it would be a very high level to operate at. As the world gets a little bit closer to normal, we would gradually consider easing that level. At the same time keeping an eye on any internal risks we have and external risks.

So as we consider easing those levels, you said where might you put that? First of all, I do believe that we have, because of our very strong risk posture and a mandate that has been Bank-wide, I do believe that we have constrained the levels of growth in the risk areas of our retail business significantly.

As I mentioned earlier on, the example that I used was in our area of unsecured loans. We were dissatisfied with the characteristics of risk that were involved here several years ago, and we went to a tremendous distance towards reducing the risk there. Not just in reducing levels of growth and culling the portfolio, but we cut it in half, which is reasonably unheard of compared to any of our competitors.

We were more than willing for many quarters to take loss in share in order to have the right risk posture. We believe that was prudent, because in terms of unsecured lending overall to the Bank we look at our total ratio of combining with our overall cards business. And given that we have, we believe, the best systems available and the best expertise available in cards, as a total ratio of unsecured lending for our Bank, we chose to be less weighted in unsecured loans and to be -- and to continue to work with our cards business. But we have in the area of cards also been restraining risk to lower than industry growth rate for a significant period of time.

During an economic downturn as unemployment rates start to turn up, we believe that while it is very important to the economy and the consumers that we continue to support the economy, growing within a difficult environment like we have had today is something that we have continued to do. But we have not thought to grow at industry growth rates, which in cases of certain competitors, have been high single or double digits.

In our case, we are continuing to grow, but in low single digits. And that is a very specific choice that is risk mandated. As things improve, with our capital position and the capital buffer that we would have in the event that the economy did have a bounce downwards after an initial period of growth, we would be able to expand the growth capacity of our retail business, we think more so than certain of our competitors, given that we have been quite constrained.

However, that is something that is highly dependent upon our view of the ongoing risks in the economy, because our risk posture is -- at CIBC it has been our top priority for several years, and it continues to be that way.

In the area of looking beyond that, where you asked about -- so there is lots of room when we ease up a bit on our risks in terms of our ongoing businesses, and particularly our retail business, to grow at faster rates, and that would require some capital.

In our other areas that you talked about, I think you were talking about, are you interested in buying institutions. Our preference in the marketplace, and it is not exclusive, but we have looked at institutions, but not beyond our normal market scan that we have been doing for the last four years.

We have engaged in continuous institutional visits to find out what is going on in the marketplace in terms of both the US and foreign institutions, and to make sure that we are aware of opportunities that are available. And we continue to believe that the opportunities are in buying assets, not institutions at this time.

The reason for that is that is that -- or in asset formation. And the reason for that is where we have the underwriting capability it is far more predictable outcome and easier to adjust our risk through the purchase of assets or the extension of asset formation, rather than the purchase of institutions.

So the opportunities that we are seeing in the marketplace are, number one, we do have as Richard Nesbitt has mentioned earlier on in several of his presentations, we have split off our focus in our wholesale business in terms of making a completely separate business unit in our large corporate lending from our investment banking business.

We still work very closely together, however, the large corporate lending business right now is an area that CIBC World Markets has been underweighted in, particularly in certain sectors. It is also an area of where there is great need in the Canadian economy for institutions to be flexible. And it is also an area where we have particular interest in moving in certain areas to either acquire assets or engage in asset formation with institutions that we have not previously dealt with.

The opportunities there are, I think, very robust. There are certain parts of the marketplace that recently have tapered off in terms of the potential for acquisition or formation because, and this is good news for the economy, because issuance of bonds and equity have picked up dramatically. That is very healthy for the economy. We are very pleased, and we are participating in that particular phase right now.

But we do believe that the banks, and particularly the banks in Canada, are in a very, very unique situation where we are having a secular change in the economy and in the granting of credit at a large corporate level. That is because foreign institutions by and large are reducing their exposure to the Canadian economy. There is also a significantly reduced availability of things like securitizations and ability to distribute credit. And what that leads is the larger banks to fill that gap.

We believe, and have been positioning ourself, for a significant period time that at the right moment filling that gap is something that will have not only cyclical but strategic importance on a secular basis for CIBC. We have been spending a fair bit of time and effort in ensuring that we have the right liquidity horizons. We have probably engaged in more term funding in terms of the off-market term funding capacity that exists in the last several months than we ever had in the past.

We have gone far beyond what we needed to do on a prudential basis. And the reason why we have done that is because we do perceive that there is a gap in the marketplace for term funding of assets and granting term funding. And it is something that we want to have the capacity to fill, because at this time the marketplace in Canada, as I say, is unique in that there are significant providers of capacity who are exiting. Conditions are reasonably good in terms of arriving at prices that, while they provide reasonable spreads, are still by historic standards low on a nominal basis. And to take advantage of the fact that low nominal rates at higher spreads is a good balance for both the borrower and lender.

So the opportunities there, we think, are very robust. And that we tend in that direction, rather than looking at institutional acquisitions. We are not ignoring institutional acquisitions, but we do believe that at this time it is just a clearer opportunity in terms of asset formation and asset acquisition. And it is also something where there is a much clearer need for us to operate in a market where we are dominant, and where most of our core businesses are in Canada, the asset formation and asset acquisition is more of a contribution than institutional acquisition.

Does that answer your question?

I think it more than answers my question. It is certainly a lot to digest at the end of a long day. So I think I will re-que. Thank you.

Michael Goldberg, Desjardins Securities.

In the first quarter, as we discussed, your treasury revenue was depressed, reducing your total net interest revenue by -- in the order of about CAD200 million. What happened with treasury revenue in the second quarter? That is my first question.

And my second question is, what line was the CAD159 million of pretax repatriation reflected in? Thank you.

Hello, Michael. David Williamson speaking. So on a treasury question, you are right, on the -- a couple of factors to address on treasury revenue, treasury earnings. Last quarter we signaled that the gains on sales of available for sale securities were abnormally high, so that came down this quarter. That affected treasury revenues.

Again, as we positioned last quarter saying that that was the likely outcome. As far as the treasury's impact on net interest margins, the last quarter what we said was that the -- what was on the frequently asked questions was the decline in net interest margins was due to two factors from treasury -- less favorable positioning and higher funding costs.

So Gerry spoke to the funding cost. That is still the same factor. The positioning did improve, but was offset, and frankly more than offset, by a different factor which was the -- in Q2 the results in treasury were adversely affected by hedge ineffectiveness. So something you are familiar with, and something that the rules around hedge effectiveness being tighter over time. But primarily economic hedges effective from an economic perspective, but hedging something that is in an accrual account against something that is marked-to-market. So noise, accounting noise as opposed to economic results though was a factor in Q2.

So if I adjust though for the hedging effectiveness, what would you say the impact was on treasury revenue? I mean, roughly speaking with the numbers I have done, it looks like it may have been about CAD70 million better than the first quarter.

Aggregate treasury revenues?

Just the net interest portion.

The net interest portion -- no, you shouldn't be seeing that kind of an improvement. So why don't we hook up after the call and I will take you through it. But that is not where you should be getting to.

Okay.

On the other point you raised where the FX bit would be, so it is in the foreign-exchange other than trading. Again, that is a CAD159 million item.

If that is the case, then it looks -- you know, your FX other than trading was -- let's see, just a second. Let me get to that page. It wasn't -- okay, so your FX. Hold on a second. Okay so it was -- so that is built into the CAD243 million FX revenue this quarter.

That's right.

Thank you.

Ian de Verteuil, BMO Capital Markets.

I have a relatively simple question on page 7 of the supp-pack. If I were to remove all the unusual items that you detailed, it looks like the [delim] made a couple of hundred million plus in the quarter. I was wondering if Richard could talk to the sustainability of that. I think very much to the direction you have given us in the past was sort CAD75 million to CAD100 million a quarter.

It is Richard. We set the target late last year because we knew that, given all of the changes that had happened, people were going to be wondering about what is the business going to look like going forward. We have constructed the business around that CAD300 million to CAD500 million target as well. What has happened of course is that there has been a significant amount of bond financing and equity financing that has positively affected that number, for this quarter anyways. And I hope it continues.

In addition, with the expansion of our lending capabilities, by separating them from the investment banking, we are starting to see very early positive impact from that as well. So I don't think it is too early for us to reconsider that target, but I think we are in -- we have some good -- what do you call them, tailwinds behind us in the marketplace right now that is making us -- helping us to achieve at least towards the higher end of that target.

Am I right it is sort of CAD220 million of after-tax earnings, if I remove the six items of note?

Yes, about CAD200 million, CAD200 million.

Steve Therriault, BAS-ML.

A question for Tom Woods. Tom, you highlighted that managed card loss rates in the quarter from slide 45 it looks like about -- call it maybe 5.8%, 5.9%. If I do a simple calculation on a reported basis, I get a loss rate of closer to 7%. So a couple of questions. What accounts for the big difference there?

And secondly, should we be more or less concerned or indifferent if the higher loss rate product remains on balance sheet? I guess just to finish up, should the focus really be done on managed loss rate in the card book? Thank you.

It is really just a question of the way the accounting works. We look at it, and most businesses look at it, based on managed, because ultimately it all flows through back in terms of the consolidation and securitization revenue.

The old calculation, I guess, and I will look for Brian the expert on this matter to help me here, factors in a much higher percentage of what we call the change in allowance calculation, where the managed, because there is a component of securitization in there, you don't have to from an accounting point of view include the change in the allowance. That is why on the slide we broke it out to be comparable to the other banks.

(technical difficulty) The way most people look at it is the NCLs, which look only at write-offs and bankruptcies, as opposed to trying to factor in a prediction of what future delinquency rolls and the write-offs would be.

Jim Bantis, Credit Suisse.

One of your adjusted items is the merchant banking losses, yet they have been recurring now for three consecutive quarters. And I am wondering if you can give us a little bit of color and on how this legacy portfolios are going to perform in the balance of the year, and maybe the size of it, and why you feel this is an nonrecurring item? Thank you.

It is Richard Nesbitt. I will start and then David could fill in whatever I leave out. We had a policy of looking -- certainly looking at the portfolio since Q4 of last year in a way that tried to reflect the impairment that was happening in the marketplace.

That is based on the -- there is a lack of liquidity in these positions, and so there was -- there has been a thorough analysis of them to try to approximate a value based on indices and other available data, like the value put on them by the sponsors.

You notice that from Q4 those losses have declined. They were larger in Q4 than they were in Q1, and they were larger in Q1 than they are in Q2. I like that trend myself. And they were -- and the positions now represent approximately the legacy merchant bank, about CAD740 million.

So right now the positions are relatively illiquid. So you really need to see an improved economic environment in order to get a determination of what the true value would be in terms of a sale context.

Got it. Richard, are the bulk of these losses still unrealized or realized?

Absolutely, the bulk of -- I would say -- I think they are all unrealized. They are all unrealized, yes.

Great. And CAD700 million roughly is what the remaining portfolio is?

A little over CAD700 million -- about CAD740 million.

Got it. Thanks very much.

There are no further questions registered at this time. I would like to turn the meeting back to Mr. Ferren.

Thank you everyone for joining us. I know you have had a long day. And if you have any further questions, please contact our Investor Relations Group. Thank you.