Canadian Imperial Bank of Commerce (CM) 2009 Q4 法說會逐字稿

All participants, please stand by. Your conference is about to begin. Good morning, ladies and gentlemen. Welcome to the CIBC fourth-quarter and year-end results conference call. To reduce audio interference within the board room and over the conference call line, please turn off your BlackBerry for the duration of the meeting.

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

Good morning, everyone, and thank you for joining us. The purpose of our meeting this morning is to review with you CIBC's fourth-quarter and fiscal 2009 results that were released earlier this morning. The documents that will be referenced on this call including CIBC Q4 news release, investor presentation and financial supplement, as well as CIBC's 2009 financial statements and MD&A, are all available on our website at www.CIBC.com.

In addition, an archive of this audio webcast will be available on our website later today, and CIBC's full 2009 accountability report will be available this coming Monday, December the 7.

Let me briefly review the agenda for this morning. Gerry McCaughey, CIBC's President and Chief Executive Officer, will deliver some opening remarks. Gerry will be followed by David Williamson, our Chief Financial Officer, who will provide a financial review; and Tom Woods, our Chief Risk Officer, will provide a risk management update. After the presentations, we will have a question-and-answer period that will conclude by 9:00 AM.

With us for the question-and-answer period are CIBC's business leaders, Sonia Baxendale and Richard Nesbitt, as well as other senior officers.

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. These statements may include material factors or assumptions that could cause CIBC's actual results in future periods to differ materially. 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 Gerry.

Good morning. Thank you for joining us today. Let me remind you that my comments may contain forward-looking statements. Today, CIBC reported net income for the fourth quarter of CAD644 million, and cash earnings per share of CAD1.59. Return on equity in the fourth quarter was 22.2% and earnings apart from items of note were CAD1.41 per share. These items of note included a gain from our structured credit runoff portfolio and mark-to-market losses through our normal course loan hedging activities. David Williamson will review these and other items of note that impacted our results in his presentation.

For fiscal year 2009, CIBC reported net income of CAD1.2 billion and cash earnings per share of CAD2.73. We recorded a strong Tier 1 capital ratio at October 31 of 12.1%, up from 10.5% a year ago.

2009 was a year of progress for CIBC on many fronts. Against the backdrop of a recessionary economy, our core businesses performed well. We managed down our structured credit and other runoff portfolios and our capital position at year end is as strong as it has ever been, while we have strengthened the area of risk management.

This progress has positioned CIBC to be strong through the duration of the cycle. While there is still uncertainty about the strength of the economic rebound and what regulatory reform may emerge for financial institutions globally and in Canada, we are prepared for this uncertainty through our focused efforts over the last two years to build capital and overall balance sheet strength; reposition our whole cell bank; and further invest in our retail franchise, which has long been the bedrock of our business.

While making significant progress in these areas, we have supported our clients during an extremely challenging period in Canada and around the world, enhancing our reputation as a leading financial institution and a strong supporter of the Canadian economy.

Turning to our business results, CIBC Retail Markets performed well during the quarter, with net income of CAD474 million and revenue of CAD2.4 billion. For the second consecutive quarter, we had solid revenue growth in personal banking, business banking and wealth management. Loan losses were lower, reflecting lower write-offs and bankruptcies in cards, as well as lower provisions in small business and commercial banking. We continue to invest across our retail business in support of our focus on the client experience and making it easier for our clients to bank with us.

Sonia Baxendale is with us today to answer any questions you may have on our progress with Retail Markets.

In Wholesale Banking, revenue was CAD483 million and net income was CAD154 million. Excluding items of note, Wholesale Banking net income was CAD124 million, down from CAD179 million in Q3.

While Q4 market conditions were not as favorable as Q3, for 2009, overall, Wholesale Banking exceeded its financial objectives set at the end of 2008, which was to deliver annual income between CAD300 million to CAD500 million from its continuing business through the economic cycle.

In summary, Wholesale Banking had a good year in 2009 and is well positioned for whatever market conditions we might face in 2010. Richard Nesbitt is available this morning for questions and can expand on the key risk-controlled growth opportunities he sees to augment our Wholesale Banking strategy in 2010 and beyond.

During the quarter, we also continued to manage our structured credit runoff portfolio. The net activity from our structured credit runoff business in the fourth quarter resulted in a net after-tax gain of CAD58 million following a gain of CAD65 million last quarter. David Williamson will cover our progress in this area in his presentation.

While investing in our Retail and Wholesale businesses, we have effectively managed our expenses. In 2009, we exceeded our expense target for the fourth consecutive year, which, for the last three years has been to hold our expenses below annualized Q4 '06 levels. Since we set our strategic target of a median NIX ratio in 2005, we have reduced this ratio from over 70% to just over 57% in 2009 on an adjusted basis. Through the first three quarters of 2009, we were tracking to our median target. Going forward, we will support further NIX improvement by maintaining a focus on expense control while growing revenue in targeted areas where we have competitive capabilities and market opportunities that can generate sustainable earnings.

In summary, CIBC took important steps forward in 2009. We strengthened our balance sheet, invested across our core businesses for future growth, reduced our structured credit exposure, and effectively managed our expenses. As a result of this progress, CIBC is well-positioned heading into 2010. In our Retail business, we expect further growth in mortgages, cards and other credit products. We also expect higher demand for investment products as consumer confidence improves.

While this will support revenue improvement, we do expect our loan losses to remain elevated as long as higher unemployment levels prevail. In Wholesale Banking, we also expect industry conditions to improve as long as the economy continues to stabilize. In this scenario, we expect renewed demand in areas of traditional strength for CIBC, such as investment banking and M&A and to expand our efforts in other key risk-controlled activities, such as corporate lending, securitization and foreign exchange.

In closing, I would like to thank all CIBC employees for their contribution over the past year, to serving our clients, shareholders and communities, and our shareholders for their continued support.

Let me now turn this over to David Williamson, our Chief Financial Officer for his financial review. David?

Thank you, Gerry. I'm going to refer to the slides that are posted on our website, starting with slide 5, which is a summary of results for the quarter.

We reported earnings per share this quarter of CAD1.56 or CAD1.59 on a cash basis. Our items of note for this quarter listed on the top right of this slide totaled CAD0.18 per share. Our cash EPS excluding these items was CAD1.41 per share. I will summarize each of these items of note briefly.

During our fourth quarter, our structured credit runoff business generated a gain of CAD0.15 per share. I'll provide additional insights into this performance in a few moments.

Also in the quarter was a loss of CAD0.07 related to the negative valuation adjustments on our exited and other runoff businesses.

The next item of note was a loss of CAD0.06 per share due to mark-to-market adjustments on credit derivatives included in our corporate loan hedging program. The loss was caused by improved credit conditions in the quarter, which resulted in narrowing of credit spreads.

The final item of note this quarter was a gain of CAD0.16 per share related to positive tax adjustments, largely due to the revaluation of future tax assets. Excluding these items of note, results for the quarter were helped by higher spreads and volumes in retail markets, higher treasury revenue, continued expense discipline and lower loan losses and were hurt by lower wholesale banking revenue. As Gerry mentioned, we reported a strong capital position this quarter with a Tier 1 ratio of 12.1%.

The next slide provides a summarized statement of operations on a reported basis, showing net income for the quarter of CAD644 million.

Let me turn now to a summary of structured credit runoff activities for the quarter. We had our second consecutive quarter of net gains, with a gain this quarter of CAD85 million versus a gain of CAD95 million last quarter. Similar to last quarter, this gain is best explained by referring to the five items shown on this slide. These items are largely offsetting, reflecting the positioning of the structured credit book to dampen earnings volatility.

First, we had pretax income of CAD322 million from reductions in our CVA balances on financial guarantors. This resulted from an improvement in the mark-to-market value of certain underlying assets, partially offset by a slight deterioration in the credit spreads of financial guarantors.

Second, we had gains on our unhedged, non-US RMM positions of CAD43 million, which was driven by a gain on the sale of certain assets and on improved valuations on other positions, partially offset by a loss from the impact of improved valuations of underlying assets related to unmatched purchased credit derivatives.

And third, unhedged USRMM positions had a gain of CAD15 million, which was driven primarily by amortization.

These gains in the quarter were partially set by the two remaining factors shown on this slide. The first item is losses on purchased credit derivatives on loans receivables of CAD208 million. These assets were included in held-to-maturity last quarter and have been reclassified loans and receivables this quarter in accordance with the new GAAP rules that were recently issued. The impact of this change on earnings was insignificant, but I thought I should highlight the change in classification of these assets out of held-to-maturity to avoid any confusion.

As discussed last quarter, these underlyings were accounted for on an accrual basis, whereas the purchase protection is fair valued. Therefore, when asset values get better, these holdings generate a loss. This inverse relationship acts to moderate the earnings volatility of our overall structured credit holdings. The second item is other losses of $87 million, which included expenses associated with our structured credit holdings and the Cerberus note liability which generates losses when the market for underlying assets improves.

Turning now to our business results, starting with Retail Markets on slide 8. Revenue for Retail Markets this quarter was CAD2.38 billion, up CAD15 million or 1% from last year, and up CAD37 million or 2% from the prior quarter. Personal banking revenue of CAD1.6 billion this quarter was up CAD138 million or 10% from last year. We experienced wider spreads and sold volume growth led by deposit growth of 44% year-over-year. Personal banking spreads were up year over year due to favorable pricing and wider prime/BA spreads on lending products, partially offset by the lower interest rate environment affecting deposit spreads and lower net prepayment penalty fees on mortgages.

Turning to business banking, revenue of CAD348 million this quarter was up CAD11 million, or 3% from last year, as improved customer rate changes were partially offset by the impact of lower interest rates on deposits.

In aggregate, our Canadian personal and business banking divisions continue to build momentum with growth of CAD25 billion in funds managed year over year, helping to increase revenue by CAD149 million, which, excluding the 2007 Visa gain, represents a new high.

Slide 11 highlights the results for our wealth management businesses. Wealth management revenue of CAD337 million this quarter was down CAD26 million or 7% from last year. The market driven decline in asset values and lower spreads due to a low interest rate environment were only partially offset by higher trading commissions from increased new issue activity. However, Q4 represents the second successive quarter of revenue growth for wealth management and the highest revenue level for the year. In addition, the wealth management business continued to show positive momentum with its third consecutive quarterly increase in assets under administration.

FirstCaribbean revenue of CAD160 million was flat from the fourth quarter of last year, as narrowing spreads, lower volume, and the impact of a stronger Canadian dollar, were partially offset by higher securities revenue. Other revenue was down CAD107 million this quarter versus last year due to lower treasury revenue allocations.

Retail Markets net income this quarter was CAD474 million, down CAD98 million from last year. The provision for credit losses was CAD362 million, up CAD131 million from last year, but down CAD55 million from the prior quarter. The year-over-year increase in credit losses was driven primarily by higher write-offs and bankruptcies in the cards and personal lending portfolios, a topic that Tom Woods will discuss in his remarks.

During the quarter, we changed our accounting methodology for cards reserves. We no longer maintain a specific allowance for cards, but rather we include the entire reserve amount in general. We restated prior quarters for consistency.

In addition, commencing this quarter, interest income on credit card loans is only accrued where there is an expectation of receipt. Previously, interest income was accrued until credit card loans were written off upon becoming 180 days in arrears or when notified of a customer bankruptcy. This change did not have a significant impact on the quarter's results. Both of these changes moved CIBC closer to current industry practice.

Non-interest expenses for the quarter were down CAD14 million from last year as we continue to be focused and disciplined in managing our costs.

Slide 15 shows our net interest margins. On the bottom row, you can see that total retail net interest margin was up slightly from the prior quarter as favorable pricing more than offset the lower interest rate environment.

Turning to Wholesale Banking on slide 16, revenue of CAD483 million this quarter was helped by the net gains in and structured credit runoff that I outlined earlier in my remarks. As noted in the slide, revenue adjusted for the impact of structured credit was CAD380 million. If we were to exclude all of the items of note related to Wholesale Banking, revenue for this quarter was CAD458 million, down CAD114 million from the prior quarter on the same basis.

Looking at the individual lines of business, starting with Capital Markets, revenue was CAD253 million compared with CAD325 million in the prior quarter, due to lower revenue on our fixed income trading, foreign exchange and equity derivatives businesses. Corporate and investment banking revenue of CAD146 million was down CAD75 million from the prior quarter, driven by lower revenue in US real estate finance, core merchant banking and corporate credit products, partially offset by higher advisory revenue.

Other revenue of CAD91 million was up CAD100 million from the prior quarter, primarily due to lower mark-to-market losses on corporate loan hedges, as credit spreads continue to tighten but at a slower rate than in the prior quarter. These improvements were partially offset by negative valuation adjustments. Wholesale Banking net income was CAD154 million this quarter. Excluding structured credit, net income was CAD96 million.

If we were to exclude all of the items of note related to Wholesale Banking, net income for this quarter was CAD124 million, down CAD55 million from the prior quarter on the same basis due to lower revenue and higher loan losses, partially offset by lower expenses and a lower effective tax rate.

Turning now to our total expenses and performance versus our target of holding 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. Furthermore, as Gerry mentioned, we continue to track to our strategic target for the median NIX ratio within our industry group. Thank you for your attention. At this point, I'll turn it over to Tom Woods.

Thanks, David. Let's start with slide 42 on credit risk; specific loan loss provisions in the quarter were CAD408 million. And the quarter-over-quarter improvement of CAD82 million was mainly due to lower losses in cards, as well as in corporate and commercial lending. Gross impaired loans increased by CAD243 million this quarter, mainly relating to five US borrowers, primarily in the real estate and financial sectors.

Slide 43, our US commercial real estate finance business has CAD2.4 billion of drawn loans and CAD256 million of undrawn exposure. In 2009, we took loan loss provisions of CAD102 million for the full year, including CAD51 million in Q4. Gross impaireds are CAD279 million and net impaireds CAD189 million. We believe provisions in 2010 for this business will be below those recorded in 2009. Although predicting losses in this space is challenging, as it will depend on a number of factors, including first, the general economy and the impact on lease upgrades, rental prices and sale prices; second, the capability and willingness of project sponsors to inject equity; third, the availability of government support in certain sectors; and fourth, the flexibility of other lenders where we were involved in restructuring negotiations.

As you know, conditions in this market as a whole deteriorated, but our portfolio, which consists of 140 loans averaging less than $20 million per loan has the following positive features -- it's geographically diversified, but with approximately 40% of the portfolio in the Northeast and only 7% in the Southwest; it's diversified by sector with 28% retail, 19% multi-family, 18% hotel, 16% multi-use and 8% office.

Our US leveraged finance runoff book has CAD400 million in drawn loans and CAD622 million in undrawn exposures. In 2009, we took loan loss provisions of CAD36 million, including CAD4 million in Q4. Gross impaireds are CAD60 million and net impaireds are CAD19 million.

Current indications are that provisions for 2010 in this book will be down from 2009.

Our European leveraged finance runoff book has CAD894 million in drawn loans and CAD162 million in undrawn exposure. In 2009, we took loan loss provisions of CAD78 million, including CAD12 million in Q4. Gross impaireds are CAD99 million and net impaireds CAD39 million. We may have some additional provisions in 2010 in this book, but at the moment we do not expect them to be material.

Turning to slide 44, our cards' net credit loss rate in Q4 was 6.3% versus 7.1% last quarter. Net credit losses were down CAD24 million due to lower write-offs and bankruptcies. The account management initiatives that we began deploying in the summer of 2008, which I have discussed on previous webcasts, have helped reverse the loss trend in this portfolio. While loss levels are still elevated, delinquency rates appear to have stabilized and we are optimistic that the early actions we took position us well going forward.

Slide 45, our coverage for credit losses continues to be strong, where we have 38% of specific allowances as a percentage of our gross impaired. As you can see here, our coverage ratio is above the Canadian bank average.

On our credit metrics, we continue to have a through the cycle loan-loss target range of 50 to 65 basis points. In 2009, the ratio was 80 basis points, or 71 basis points excluding the impact of securitization.

Our current outlook for 2010 for loan losses is for better performance in our wholesale and personal loan books and stable performance in our cards portfolio for the year as a whole, although we see better performance in cards from the elevated Q3, Q4 run rate.

Turning to market risk, slide 46 shows the Q4 distribution of revenue in our trading businesses. In Q4, all but six trading days or 91% of the time had positive revenue, down slightly from 95% of last quarter but well improved from 50% in the fourth quarter of 2008.

Slide 47, our Tier 1 ratio was 12.1% at October 31, up from 12.0% at the end of Q3. The increase was mainly due to earnings net of dividends and capital issued through our dividend reinvestment plan, partially offset by the impact of a change in regulatory treatment for our securitized credit cards, which we now treat similar to our on balance sheet cards portfolio.

In addition, in the quarter, we updated a number of our Basel II credit parameters. These updates reduced our Tier 1 ratio by 26 basis points this quarter. However, we believe that the Basel II parameters we will be updating in Q1 will have a positive impact on our Tier 1 ratio.

The Tier 1 drag in Q4 from the parameter update was partially offset by a benefit due to reductions in risk weighted assets in our structured credit and corporate loan portfolios, reflecting improvement in market conditions there.

Thank you. I'll now turn it back to John Ferren.

Thanks, Tom. We'll open up the phones for questions now, and if I could ask you just to limit your questions to one or two at a time and requeue, we will try to get through as many as possible. Thank you.

(Operator Instructions). There are no questions registered at this time, Mr. Ferren.

Okay. Well, thank you for joining us this morning. If you have any questions later in the day you can contact our Investor Relations department. Thank you and have a great holiday season, everybody.