Canadian Imperial Bank of Commerce (CM) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CIBC first-quarter results conference call. Please be advised that this call is being recorded. To reduce the audio interference within the boardroom and over the conference call line, please turn your BlackBerry off 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.

Thank you. Good morning and thank you for joining us today in Montreal where CIBC will hold its annual general meeting later this morning. The purpose of this call is to discuss our Q1 2010 results that were released earlier this morning and are now available on our website. This call is being audio webcast and will be archived later this evening on CIBC.com.

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 risk 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 turn me meeting over to CIBC's President and Chief Executive Officer, Gerry McCaughey.

Good morning, thank you for joining us this morning in Montreal. Let me remind you also that my comments may contain forward-looking statements. Today, CIBC reported solid results for the first quarter of fiscal 2010. Net income was CAD652 million, cash earnings per share were CAD1.60 on a reported basis and CAD1.65 adjusting for items of note. Return on equity was 21.5% and our efficiency ratio was 57.1%. We reported a very strong tier 1 capital ratio of 13%, up from 9.8% a year ago.

Each of our core businesses performed well. CIBC retail markets reported revenue of CAD2.4 billion and net income of CAD529 million. Revenue growth in core businesses, good expense management and stable credit performance contributed to an overall solid result for our retail businesses.

During the quarter, we continued to invest across the business in support of our clients. We opened, relocated or expanded five more branches with another 30 expected in 2010. We became the first major bank in Canada to launch a mobile banking application for the Apple iPhone. We broadened our suite of deposit products with the new launch of a new eAdvantage Savings Account and we continued to invest in our brand. Sonia Baxendale is available this morning to answer question on our retail priorities.

Wholesale banking reported revenue of CAD613 million and net income of CAD184 million. Excluding items of note, wholesale banking net income was CAD179 million, up CAD49 million from Q4. Wholesale banking continues to demonstrate consistency in its results and leadership in key market segments while undertaking further initiatives to grow its client-focused activities.

While investing in our core businesses, we continue to actively manage our structured credit run-off portfolio. Our activity this quarter included terminations of written credit derivatives and financial guarantor hedges, CLO sales and the settlement of US residential mortgage market contracts with financial guarantors. David Williamson will provide further details on activity this quarter.

In summary, CIBC deliver broad-based performance to start 2010. CIBC retail markets and wholesale banking reported higher revenues than both last year and a year ago, reflecting the investments we are making on behalf of our clients and to capitalize on growth opportunities.

While investing across our businesses, we continue to build capital and manage our expenses. This quarter, we also achieved significant reductions in our runoff portfolio, reflecting our strategy to take advantage of favorable market conditions and opportunities that present an acceptable economic risk/reward trade-off to reduce the size of our portfolio.

For the rest of 2010, we expect further progress on our core priorities of achieving and maintaining market leadership in our core businesses, actively managing our business mix and underpinning our core businesses with industry-leading fundamentals.

In closing, I would like to thank CIBC's employees for their contributions over the past quarter and throughout the challenging environment of the past couple of years. Our progress reflects the commitments they make everyday in support of our clients. Let me now turn the meeting over to David Williamson for his financial review. David?

Thank you, Gerry. Good morning, everyone. I'm going to refer to the slides that are posted on our website, starting with slide 5, which is a summary of our results for the quarter. We reported earnings per share this quarter of CAD1.58 or CAD1.60 on a cash basis. Our items of note for the quarter listed on the top right of the slide totaled CAD0.05 per share. Our cash EPS, excluding these items, was CAD1.65.

I will summarize each of the items of note briefly. During the first quarter, our structured credit runoff business generated a net gain of CAD0.04 per share. We had a loss of CAD0.03 per share on the mark-to-market of credit derivatives in our corporate loan hedging program and a loss of CAD0.06 per share related to the write-down of future tax assets due to the enactment of lower corporate tax rates in Ontario.

Excluding these items of note, results for the quarter were helped by higher wholesale banking revenue, higher volumes and spreads in retail markets and lower loan losses and were hurt by higher expenses and a higher effective tax rate. We concluded the quarter with a strong tier 1 ratio of 13%.

The next slide provides a summarized statement of operations on a reported basis, showing net income for the quarter of CAD652 million. In the first quarter, we made two external reporting changes, both of which were applied retroactively. We moved our global repurchase agreement or repo business from treasury, where the results are allocated primarily to retail markets, over to capital markets within wholesale banking. Also, we moved large corporate cash management activities from business banking and retail markets over to corporate and investment banking within the wholesale banking group.

Both these changes were made in recognition that these businesses better align with the pre-existing activities within wholesale banking. The combined impact of these two changes resulted in transferring assets totaling CAD26 billion, combined liabilities of CAD23 billion and net after-tax income of only CAD4 million to wholesale banking in the first quarter of 2010.

So turning now to our business results, starting with retail markets on slide 7. Revenue for retail markets this quarter was CAD2.4 billion, up CAD27 million or 1% from last year and up CAD46 million or 2% from the prior quarter.

Our core Canadian retail businesses of personal banking, business banking and wealth management saw a combined revenue growth of CAD186 million or 9% compared to last year. The main drivers of this core revenue growth were higher spreads resulting from improved customer pricing, increased volumes, including solid performance in personal deposits and secured lending, higher fees, commissions and transactional revenue and stronger equity markets.

Now let's look at the results of the specific business lines as shown on this slide. So first, personal banking. Revenue of CAD1.6 billion this quarter was up CAD147 million or 10% from last year. Wider spreads and solid volume growth across most of our key retail products was partially offset by lower mortgage prepayment penalty fees and the continuing impact of the lower interest rate environment on our deposit business.

Business banking revenue is up 5% from last year and our wealth management business had its third consecutive quarter of revenue growth. First Caribbean revenue of CAD157 million is down CAD23 million or 13% from last year, mainly due to the impact of a strengthening Canadian dollar. In the other line of business, revenue is down CAD136 million this quarter relative to last year due to lower treasury revenue allocations. This decline is due to the unusually high levels of gains on sale of available for sale securities, which we highlighted in Q1 of last year.

Slide 8 shows our retail net interest margins or NIMs made a change this quarter to show you NIMs excluding the impact of treasury. The objective here is to assist in providing a better understanding of our core NIMs in retail.

As you can see, total retail market NIMs, excluding treasury, was up 11 basis points from the year before as favorable pricing on lending products more than offset the lower interest rate environment. Retail markets net income this quarter was CAD529 million, down CAD48 million or 8% from the first quarter of last year. Revenues were up CAD27 million from last year for the reasons previously discussed and the provision for credit losses was CAD365 million, up CAD87 million from last year, but comparable to last quarter.

The year-over-year increase was driven primarily by higher write-offs and bankruptcies in the cards and personal lending portfolios. Tom Woods will cover credit quality in his remarks on our retail and wholesale portfolios.

Now interest expenses were up CAD23 million or 2% from last year. Higher performance-related compensation and higher pension expense were partially offset by lower support expenses and the impact of the strengthening Canadian dollar on expenses at First Caribbean.

Turning to wholesale banking, revenue this quarter was CAD613 million, up CAD110 million or 22% compared to the prior quarter. Excluding items of note, wholesale banking revenue was CAD565 million, up CAD87 million or 18% from the prior quarter on the same basis.

During the first quarter, our core wholesale banking businesses of capital markets and corporate investment banking were up CAD67 million or 16% compared to the fourth quarter of 2009. The main drivers of this improved performance were merchant banking revenue included a CAD46 million gain on the sale of an investment in the quarter. Net of minority interest and related expenses, the after-tax gain on this sale was approximately CAD18 million. We were also helped by increased fees and corporate credit products and higher revenues from FX options, commodities and fixed income.

In the other segment, revenue of CAD132 million was up CAD44 million from the prior quarter, primarily due to lower mark-to-market losses this quarter on the corporate loan hedging program and valuation adjustments that decreased revenue in the fourth quarter.

Wholesale banking net income was CAD184 million this quarter, revenue was up CAD110 million from the fourth quarter for the reasons previously noted. The provision for credit losses was CAD24 million, down CAD58 million from the prior quarter, mainly due to lower losses in US real estate finance, Canadian large corporate and the European leverage finance runoff portfolio.

Noninterest expenses were CAD318 million, up CAD73 million from the fourth quarter, mainly due to an increase in performance-related compensation, as well as the asset-backed commercial paper settlement and our structured credit runoff portfolio of CAD22 million. Excluding all items of note, net income for the quarter was CAD179 million, up CAD49 million from the prior quarter on the same basis.

This next slide summarizes our structured credit runoff results for the quarter. We had a net pretax gain of CAD25 million this quarter versus a gain of CAD85 million last quarter. This is the third consecutive quarter of gains. The items shown on the slide are largely offsetting and reflect the positioning of the structured credit book to dampen earnings volatility.

First, on row one, we had pretax gains of CAD388 million from reductions to CVA balances on financial guarantors. This resulted from an improvement in the mark-to-market value of the underlying assets, as well as a tightening of the credit spreads on financial guarantors.

Row two relates to gains on unhedged US RMM positions of CAD81 million driven primarily by improved valuations.

Row three primarily relates to unhedged purchased credit derivatives on non-US RMM positions, which generated write-downs of CAD42 million, again driven by improved valuations of the underlying assets.

The fourth row relates to losses we experienced on purchased credit derivatives on loans and receivables of CAD186 million. As discussed in previous quarters, the underlyings are 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 fifth row relates to gains and losses on the unwinding of several positions during the quarter. In aggregate, we reduced the total notional outstanding by about CAD7.6 billion at a combined net loss of CAD78 million.

The sixth and final row includes the impact of the change in valuation on the Cerberus note, which generates losses when the market for the underlying assets improve, includes the impact of the settlement related to our asset-backed commercial paper activities and other items, including expenses associated with our structured credit holdings.

In summary, revenues and earnings have increased, loan losses have decreased from last quarter, our capital position continued to strengthen and progress was made in reducing our structured credit exposure. Thank you for your attention. At this point, I will turn it over to Tom Woods. Tom?

Good morning, everybody. With respect to credit risk on slide 22, specific loan loss provisions in the quarter were CAD357 million. The quarter-over-quarter improvement of CAD51 million was mainly due to lower losses in corporate lending. Gross impaired loans increased by CAD15 million this quarter, new additions were down CAD120 million versus Q4.

Slide 23, our US commercial real estate finance business has US$2.1 billion of drawn loans and US$262 million of undrawn exposures. In Q1, we took loan loss provisions of US$24 million, down from US$47 million in Q4 last year. Gross impaireds in this portfolio are US$315 million and net impaireds are US$207 million.

We continue to believe that provisions in 2010 will be below those recorded in 2009. Although, as I said three months ago, predicting losses in this area is challenging as it will depend on a number of factors, including the general economy and impact on lease-up rates, rental prices and sales prices, the capability and willingness of project sponsors to inject equity, the availability of government support in certain sectors and the flexibility of other lenders where we are involved in restructuring negotiations. But having said that, we do continue to believe that provisions here will be lower than those booked in 2009.

Our US leverage finance runoff book has US$354 million in drawn loans and US$532 million in undrawn exposure. In Q10, there was no provision for credit losses in this book. Gross impaireds are US$50 million and net impaireds are US$16 million. Indications continue to be that provisions in 2010 in this book will be down from 2009.

Our European leverage finance runoff book has CAD770 million in drawn loans and CAD192 million in undrawn exposures. In Q1 2010, there was no provision for credit losses in this book. Gross impaireds are CAD42 million and net impaireds, CAD29 million. And as I said last quarter, we may have some additional provisions in 2010 here, but we don't expect them to be material.

On slide 24, our cards net credit loss rate in Q1 was 6.1% versus 6.3% last quarter and the peak of 7.1% in Q3 2009. Net credit losses were down CAD6 million quarter-on-quarter. The outlook for Q2 is for losses of about the same amount and then improving somewhat in the second half of the year. In other words, continued stability or improvement versus the peak in Q3 last year.

The account management initiatives that we began deploying in the summer of 2008, which I have discussed in previous webcasts, have helped reverse the loss trend in this portfolio. While loss levels are still elevated, delinquency rates continue to be stable and we are optimistic that the early actions we took position us well going forward.

Slide 25, our coverage for credit losses continues to be strong where we have 38% of specific allowance as a percentage of our gross impaired. As you can see here, our coverage ratio was well above the Canadian bank average.

Turning to market risk, slide 26 shows the Q1 2010 distribution of revenue in our trading portfolios. In Q1, all but three trading days or 95% of the time had positive revenue, up from 91% last quarter.

Slide 27, our tier 1 ratio was 13.0% in Q1, up from 12.1% at the end of Q4. Our TCE ratio in Q1 increased as well to 8.4%, up from 7.6% last quarter. The increase was mainly due to earnings, net of dividends, capital issued through our dividend reinvestment program and employee stock option program and a decrease in risk-weighted assets. Thanks and I will now turn the meeting back to John Ferren.

Thanks, Tom. So we will open up the line for questions now.

(Operator Instructions) Steve Theriault, Merrill Lynch.

Thanks very much. Good morning, everyone. A question for Sonia or maybe Tom. It looked to me like bankruptcies were down quite a bit for the last month or two's worth of data that we have seen, but we didn't see as meaningful an improvement in card losses maybe some people would have expected. Can you take us through what the most important drivers are before we will see -- I know, Tom, you gave us some context for timing -- but can you take us through what some of the most important drivers are to get some positive traction in card losses?

Separately, Sonia, could you take us through some of the market share trends for Q1 in cards and the other pieces of the retail business? Thanks.

Hi, Steve. It's Tom. Maybe I will start and then hand it back to Sonia. As I said, the cards losses overall on a managed basis were down from $224 million to $217 million; you see that on the slide. Flow write-offs, just because of the way delinquencies track through, were improved, which we expected given the good leading indicators we have in delinquencies.

But your question is a good one because the bankruptcy number offset that and it is a bit technical, but what happens -- and you can see the numbers up until November, the December numbers are not yet out -- but what happened was we had September -- there is a lag effect between the industry bankruptcies and the time that banks actually book losses. And our first month, November, was quite high. December and January were tracking back where you would expect them. As you may know, the bankruptcy law has changed and it looks like there was a bit of a pipeline effect of people filing for bankruptcy because it becomes less attractive post-September 19 versus before.

So we feel pretty good that, unless the economy reverts back, that the uptick we saw in Q1 of reported bankruptcies will decline in Q2 and perhaps in Q3. That was a bit of an anomaly, Steve, just because of the lag effect.

So on the market share question, a couple of things I would comment on. In our overall lending products, I would say we were basically flat across the board. Mortgages were essentially flat, credit cards. We saw a little bit of improvement in both our outstandings market share and our purchased volume, given some bounce back in consumer spending. So generally quite positive on the credit card front. Particularly, Tom referenced some of the changes we had made in our account management processes there and so we have seen some positive effect.

On our unsecured and secured lending, again relatively flat in that space. In the deposit side of the business and GICs, we have had a number of strong quarters in the past year and that has maintained itself. And mutual funds I think is the other area that we were up slightly in our overall long-term net sales in that area.

Sonia, the institutional AUM was up quite a bit in the quarter. It looked like up to about CAD104 billion after being in the kind of high CAD80s billion for several quarters. Can you tell us what is going on there?

Tom, I think that's CIBC Mellon. The biggest factor is Mellon.

Okay, thanks very much.

Michael Goldberg, Desjardins Securities.

Good morning. Can you tell me what accounts for the roughly CAD60 million increase from the fourth quarter in wholesale net interest revenue?

Hello, Michael. David Williamson speaking. So wholesale this quarter up on a few fronts. We talked -- so trading revenue we should maybe speak to and overall results, but net interest revenue, nothing particular other than just core activity, nothing standing out there that we should cover.

So there is no anomaly in that number?

No, there's not any noise that would be worthy of speaking to.

Okay. Another I guess number-related question, even excluding the merchant banking gains, your available for sale gains this quarter were much higher than the fourth quarter, but below first-quarter '09. Can you remind us why it was so low in the fourth quarter and is the current level of AFS gains sustainable?

The gains on AFS, as you know, Michael, are, by definition, pretty volatile. So sustainability, it is really a function of interest-rate moves and a whole number of factors. So it is a volatile number. So as you highlighted and it is worth pointing out, because it affects the retail results this quarter, gains from AFS are down substantively from a year ago. And remember back to a year ago kind of roughly today, we highlighted at that level, we made a point of saying that that level wouldn't be sustainable because it really was an outmarket size of gains of AFS in the first quarter. And that -- now we are down substantively, maybe to a level that could be more sustainable. Again, it is a volatile type of number, but what it does highlight is, year-over-year, we are down in retail CAD136 million just in treasury allocations, which are driven effectively solely by the decrease in AFS gains year-over-year.

So an important thing to recognize when looking at retail revenue this quarter, there is CAD136 million of bad news there in effect from the impact of treasury allocations, again due to what you highlighted, Michael, which is the reduction in AFS gains this quarter relative to a year ago. The quarter-over-quarter more normal noise in the sense that this is a somewhat volatile space.

Okay. And finally, given your understanding of the proposals issued by the Basel committee before year-end, what do you estimate that your tier 1 ratio would be and your ratio of what they have referred to as higher-quality capital?

Hi, Michael, it is Tom Woods. I may hand the second question over to Brian if he has that number handy. If not, we can come back to you. But on the first question, I think as everybody on the call knows, the draft is advertised as a draft for discussion contemplated to kick in probably three years from now. There has been some discussion about it being delayed even longer than that.

A number of analysts, perhaps including yourself, Michael, have made projections like pro forma Q4 last year, okay? So our tier 1 ratio published last quarter, which was just before this thing came out, was 12.1%. The range of analyst predictions, if these rules were implemented October 31, 2009, range from 7.5% to 9.7% with an average of 8.6%.

Our own number is a little better than that, okay? So think about it as 300 basis points and I know other banks have offered up their own calculations and 300 to 400 seems to be the range that they have talked about. But I would caution you, and I know you know this, Michael, that you really have to look down the road and make some assumptions. In our case, the item that is the most punitive, if you were to simply overlay the changes on Q4 '09, as you know is the deferred tax asset, and assuming we continue to generate earnings along the lines of what we have been doing, by 2012, that would be mitigated quite a bit.

And our own calculation is that if that were the case, our tier 1 three years from now wouldn't be much different than it is as of Q1 '09. It would be a little lower, but not much different. So hopefully that gives you some sense as to all the moving parts. Do you have anything on the tier -- okay, we will come back to you, Michael, on the common component, but the same sort of math sort of holds.

Thank you.

Brad Smith, CI Capital Markets.

I had two quick questions relating to the impaired loan portfolio. I was wondering if you could just speak to the increase in the residential mortgage impaired loans of about CAD60 million in the quarter. Just talk a little about maybe regional distribution of that, whether those are all insured or not. And then second question, financial institutions. The impairment from last quarter has gone down; it has basically been eliminated. Was that a function of a restructuring or an actual repatriation of funds to bring it back on side? Thank you.

Okay, Brad, it is Tom. On the mortgages, it went from CAD402 million to CAD462 million. There is a bunch of things going on there and I think the summary is nothing to be alarmed about. CAD20 million of that is an increase in arrears from our insured book. CAD20 million is a change in methodology and this is quite technical, but just with respect to the mechanics of booking impaireds on foreclosed loans. So that is more just methodology. And the bulk of the 20%, I believe and Brian, you can correct me, was in First Caribbean where -- there is a bit of seasonality there and that book is more volatile. Mortgages go in arrears and then they come back and they go back and forth, but we had a somewhat higher uptick. So in the third CAD20 million, the bulk of it is that.

So would you expect that to be trending down then, Tom?

I think certainly the methodology change uptick is going to be with us, but the -- we are not alarmed about our mortgage portfolio. We have 80% insured. I wouldn't expect it to increase very much; perhaps decrease, but nothing that is going to be markedly different. I don't know that I can make a prediction that it is going to go down, but nothing that we are alarmed about.

Great. And just the FI impaired?

Yes, I believe and again, Brian, correct me, I believe that was a restructuring. Was it a restructuring or a sale, Brian, do you know?

That was a combination of restructurings and sales and I would say successful resolution on a couple of accounts during the quarter, but no major story there.

Thank you very much.

John Reucassel, BMO Capital Markets.

Thank you. Just trying to get an understanding of the reduction in your risk-weighted assets and particular, one thing you mentioned was parameter changes from the ARB. If someone there could just maybe explain to me what parameters changed or give me an example or some more color on that?

Okay, John. It's Tom. I will start and then hand it over to Brian O'Donnell. Like all banks, as you may know, are in regular contact with regulators, in our case OSFI, to discuss the underlying assumptions in how we calculate capital and risk-weighted assets. And as I think I mentioned in the Q&A at the end of last quarter, because all of this does not happen at the same time during the year, you can get some blips from one quarter to the next.

In Q4, we resolve the credit card market parameters and it hurt us by, what, Brian, 15 or so or more? It hurt us 25 in Q4 and I think this question came up and we, at that time, were pretty well done on the rest of our personal portfolio -- the personal loans and the mortgages. And I think I said it looked like we were going to get some back. So we got 19 basis points back this quarter.

There is nothing imminent in the next few quarters, I don't think, Brian, that is coming at us, but that is an example of the kind of volatility you may have. As it happens, the two offset. We and OFSI agreed that our assumptions on cards had to be increased and then the flipside on the mortgages and the other personal loans.

The 19 back was on mortgages and personal loans?

Yes, yes.

Okay. There is this issue on synthetic CDOs on the Lehman bankruptcy and I understand the legal proceedings are underway and your specific synthetic CDO has not been implicated. Are we ever going to get any clarity? Is this going to be resolved legally in the next three months or could this drag on for three years or when should we expect that we get some better clarity on this issue?

This is Mike Capatides, CAO and General Counsel. There is no certainty as to the timing and it is quite possible, as with matters like this, that because of the appeal process, that particular case, which again does not involve us, that particular case and other matters that may come up, including us, could go on for quite some time.

Is the specific CDO for CIBC, is that in the pipeline to come up or has that not at all been brought up in the courts?

We have not been sued.

Okay. Okay. And last question, just on loan growth and I guess I don't know if all -- for Richard and Sonia -- but the consumer has been providing lots of good loan growth for CIBC and the Canadian bank system. With the change to the CMHC rules in April, is it best for investors to expect that loan growth in the retail, whether it is CIBC or the industry, to slow down and could some of that be offset by a recovery in the corporate loan book? I would just be interested in your views on the balance of 2010.

I will start on the retail side. I would say that the changes that have taken place on the CMHC side, they are good changes. We support those changes. They are good for the ongoing stability of the mortgage market. And we would expect modest impact to the growth in our lending portfolios overall on the consumer side.

On the commercial and business side of things, as we have talked about before, that is an area of focus and growth for our organization so we would expect to see some good momentum and growth in that area of our portfolio over the next year.

And would that be sufficient to offset kind of slowdown in the mortgage side, Sonia?

I think that on the mortgage side it has been our view that that would stabilize and slow down a little bit, modify a little bit, throughout 2010. So we still think that there is little change to that but we should see some positive growth for sure on the commercial side of things.

Thank you.

Could I just build on, John, your question on risk-weighted assets? We spoke about the parameter change and just thought I would put a bit more meat on the bones on the change in RWAs in the quarter. The parameter change which just Tom spoke to was one component of the overall change in risk-weighted assets.

The other parts that are probably just worth touching on in this call which were about the same size impact from the commutations and reductions in our structured credit exposure or so about CAD1.5 billion of risk weighted assets came out as a result of the activities in the quarter. And also as a result of some of that corporate loan exposure reduction that Brian O'Donnell spoke to that also took out about CAD1 billion worth of risk-weighted assets.

And then a final component was again this quarter we reduced the deferred tax asset balance by a fairly substantive amount and that gets about 100% weighting on risk-weighted assets. So that is kind of a double win. We get some risk-weighted assets back and we further reduce the deferred tax asset balance.

So those are the primary drivers of the risk-weighted asset reduction. The overall Tier 1 increase was that plus the earnings in the quarter and the impact of the dividend reinvestment program, all of which took us to the 13% Tier 1. So just a bit of additional color. Thanks.

Thank you.

Sumit Malhotra, Macquarie Capital Management.

Good morning. I think one of John Reucassel's questions may not have fully been answered. I was looking at the same thing. As far as business loan growth is concerned, on the balance sheet, we actually see a CAD2 billion quarter-over-quarter increase, the biggest we have seen in quite some time. Looks like most of that went through the wholesale market segment and I think it was just yesterday, you talked about or you put out a press release talking about a new corporate lending initiative you had started in Montreal. That is something Richard Nesbitt has spoken about in the past few calls. Just wondering if there is some color you can tell us on what you're seeing as far as wholesale lending and kind of surprised to see that picking up pretty substantially this early in the cycle.

Maybe I will start and Richard may have some comments. There is a technical issue there that accounts for a little over CAD3 billion. We converted some of our CLO exposure into loans pursuant to one of the transactions. So that kind of masks what otherwise was a pretty stable loan balance this quarter. I don't know, Richard, whether you want to comment on the outlook?

Yes, the outlook -- very clearly, we would like to, along the comments that Sonia made in business banking, in corporate banking, we definitely see us growing over the next three years and we are putting in place the resources in order to do that.

As you recall a year ago, we separated our corporate lending activities from our investment banking, specifically for the purposes of growing our lending -- we are a bank, so we lend and we like to lend and we are good at lending. That is starting to bear fruit now.

Yesterday, we announced the establishment of a corporate lending office here in Montreal, very proud of that, very pleased with that. So over the next three years, we would see adding to our corporate lending book. If you recall, we have a stated objective. We would like to be in the top three of everything we do here in Canada and so that should give you some direction of where we are headed in terms of our corporate lending activities.

All right, but I think Tom's answer for this quarter, the business loan growth we see or even in wholesale banking, the average loan growth we see is pretty much due to the reclass of the CLO?

Yes, and I can just put a bit more color on that. On our MD&A page 9, we go through some of the transactions or all the transactions that are material in structured credit. So there's a couple here that come into play. So the first bullet, the 3.5 conversion of synthetics to bring them onto the balance sheet, that is what Tom was specifically speaking of. The reason why the increase is smaller than that -- also during the quarter, we sold, which is about the fourth bullet point, some of our CLOs.

So two things happened. We converted some of the positions to loans and balances, makes it more -- put it this way -- less volatile because it's now an accrual account. And then in addition, we actually reduced the exposure by selling. And as you can see by -- when I went through my comments on structured credit, and the loss, when we took down CAD7.6 billion of notional, the losses in doing that weren't that substantive off that base. So we were able to get out on those CLOs pretty close to marks. That is how we got a conversion and then a sale of some of the outright exposure.

I appreciate that color. It seemed a little early in the cycle to start seeing corporate commercial loan growth running at that kind of clip. One more for you probably, Dave, and I'll wrap it up there, might be for Tom as well.

Residential mortgage securitization, we have started to hear about banks and governments looking at exit strategies for some of the programs that were put in place. I think we all know that there wasn't too much in Canada, but certainly resi mortgage securitization has provided a helping hand on the funding side. It has been a benefit to revenue as well. Your resi mortgage securitization looks a lot lower this quarter than we have seen over the last couple of years. Just wanted to get your thoughts on how you utilize this program, how you're feeling about your funding sources and whether this is something we don't have to see as much from CIBC going forward?

No, we will continue to see us using the CMB core program going forward. We are looking at making sure we keep a varied mix of funding as you saw us this quarter in the covered bond market both in Switzerland and in the States, a couple of successful transactions there. So we look to maintaining a variety of funding sources. But the securitization is definitely a core program.

The IMPP, which is probably the one you are referring to specifically, was kind of an ancillary government program that was put in place given the recent market difficulties. That we are anticipating that program will burn off as it becomes less relevant in the more stable environment we are in now. But that will leave the old CMB program, which we have been a participant in consistently for an extended period of time and you will continue to see us active in that program.

Thanks, guys.

Darko Mihelic, Cormark Securities.

Thank you. Good morning. My first question relates to page 24 of the supplemental. We have there a rather large increase in very early stage delinquencies I will admit in business and government. Is there any read-through from that? Should we be looking at that carefully or is that -- I would imagine you guys would have some knowledge on these loans given that they are larger in nature. Any comments on that?

It is Tom. The bulk of that is a seasonal or a quarterly seasonal affect we typically see in First Caribbean and it is a bit hard to explain, but every Q4, it seems that we have an uptick in the under 31 days and then it recovers in Q2. And in discussions with the First Caribbean people, we believe that that should repeat again in Q2.

The best explanation we can give is that, for the holiday season, many medium and small businesses stock up, they borrow and as the cash filters in, some of it trickles over into our Q1 from the standpoint of not making payments on a timely basis under 31 days. But by Q2, virtually all of that comes back, so it is not something we are alarmed about. The bulk of that increase is First Caribbean, not Canada.

Okay, thank you. A second question, you're not supposed to have such strong trading results and I guess I just wanted to ask, do you think that, given -- we must have ended on a very good note in the first quarter with respect to trading. I am getting the sense from some people that it might be a very lumpy endeavor. Can you give us any idea of what you feel is a good run rate for trading or what you feel the outlook is on that front?

Hi, Darko, David Williamson speaking and then I may very well hand over to Richard if he has additional comments. On the trading income results, our reported numbers are obviously affected by structured credit. So when you take out structured credit and get down to the core trading income, it has been for us quite stable over the last many quarters. So on the downside, in the last few quarters, we didn't see the increases in trading revenue that others did; we were just a bit less aggressive in proprietary positioning.

What we have here is more of a stream that is related to client-centric business. So if I look at the five past quarters, our trading revenue again, adjusting out structured credit, has gone from a low of about CAD190 million to a high of CAD220. So for five quarters, it has been quite stable. So that gives you a bit of a historic perspective and maybe I can hand over to Richard for going forward.

I thing that is -- what we are doing today and what David has described is what you should sort of expect with the way we are managing the business today. We are using about CAD1.3 billion of capital in the continuing businesses and we have constrained liquidity usage as well as a risk management technique. But I think what I would say is that, over time, and I am talking the next one to three years, we will take share in the market. With the team we have put together, I believe we will take share and I think over that kind of period, we should start to see some growth in our trading business. But right now, I think we are operating within the range that David talked about.

Thanks. One final question. Is there any color that we could get on the sale of Mellon or the corporate trust business? Is that material at all or what should we think about with respect to that?

That wasn't a material transaction, so I wouldn't spend too much time on that, Darko.

Okay, thanks very much.

Mario Mendonca, Genuity Capital Markets.

Good morning. Thanks for the clarification on the retail margin, how that was stable quarter-over-quarter. Outside of retail, it would seem that the margin did improve and what I'm trying to understand is whether that is a reflection of moving higher margin businesses, like the CLO that was formally in derivatives, now on loans, is that what we are seeing, is that what is causing the margins to look better and therefore, does this higher margin seem -- is it sustainable going forward? That is the first question.

David Williamson speaking. You are right. The quarter-over-quarter, the retail margin, pretty stable. Off a couple of basis points in First Caribbean, so the domestic NIM is up slightly quarter-over-quarter. But you are right. The bank NIM on interest earning assets is up quarter-over-quarter. And the delta there, you are now isolating wholesale banking and treasury and the improvement there is in the treasury space. Net interest income and treasury is up quarter-over-quarter and also true year-over-year as well. Hopefully sustainable or put it this way. It is not something abnormal happening in there that is causing the lift.

But does it reflect the move from derivatives -- from CLOs from derivatives to loans?

No, no. That wouldn't really be much of a factor.

Okay. Is there any change in the bank's philosophy toward those convertible preferreds, as in possibly converting ahead of Basel changes or -- sorry -- rather ahead of IFRS?

No fundamental view change on that. As we have said before, it is kind of optionality in the sense that we will see what happens in the global environment regarding changes in capital requirements and such forth and we will see how IFRS plays out over the next while. So no change in view. It stays available to us as an option and we will continue to look at it that way until we have more information from some of the moving pieces.

Thanks very much.

Jim Bantis, Credit Suisse.

Good morning, just a couple sets of questions. Sonia, you referred to commercial or business banking as an area of focus for growth coming out of your division. Can you give us a sense again where your absolute market shares are on commercial lending and commercial deposits and what the trends have been recently?

Sure. So on our small business and commercial banking, as I have talked about previously, we do have a number of initiatives that we are focused on to grow that business. Our current market share is 12%. It has declined over the last couple of years to that level. We are looking to increase our share in both our lending and deposit products in the business space.

This past number of months, we launched a new business operating account, which has been working very well for us. We have had a lot of growth in that area. We expect to continue to grow in that space and we are doing a lot of work with Tom's group on the risk front to look at our processes and practices and look at our opportunities, one, to increase the business with our existing clients, as well as expand our client base. We also have hired a new head of our business banking group, Jon Hountalas who joined us earlier this year. So a lot of activity in this space, but the basic element is we are at 12% share.

Got it. Thanks very much. The comments regarding the retail NIM earlier were helpful. Can you remind us, and I apologize if you mentioned it earlier, but is there a lag effect that we should expect NIM to continue to expand because of your repricing efforts on business banking and the unsecured loan book or has that been largely built in now?

That is pretty much built in. We have had the positives on the lending side. We have had some spread compression on the deposit side, which are pretty much offsetting each other and I would expect minimal change over the next -- the remainder of the year.

That is great. Thanks, Sonia. And a very quick question for David on the risk-weighted asset trends. It looks like the deleveraging continues and you highlighted structured credit, corporate and deferred tax assets. I would suspect at least two of those three factors that drive risk-weighted assets lower will continue in terms of structured credit, deferred tax assets. Have I got that right in my thinking?

Jim, this is our last opportunity for a question from you, so yes, I think I can say you are on track. Those are trends that will continue to seize opportunities to reduce our opportunity. As Gerry said in his opening comments where the economic risk/return trade-off makes sense, we will continue to look for opportunities to reduce our exposure in structured credit. So we still have CAD7 billion of risk-weighted assets attached to the structured credit portfolio. So that would -- over time, one would hope erode and we continue to make quite good progress in reducing our deferred tax assets. So that's got 100% allocation to it, so that would also go just exactly as you outlined.

Great. Thanks very much, David. Much appreciated.

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

So thank you, everyone, for joining us this morning. If you do have any further questions, please do e-mail me or call me; I would be happy to help you out. Thank you, everybody.

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