Canadian Imperial Bank of Commerce (CM) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CIBC second-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, everyone, for joining us on what we do appreciate will be a busy day for many of you. The purpose of this call is to review with you CIBC's 2010 second-quarter results that were released earlier this morning. These results including the investor presentation we will review with you this morning are available in the investor relations area of our website. The call this morning is being audio webcast and an archived version will be available on our website later today.

The format for this meeting will include formal remarks from CIBC's President and Chief Executive Officer, Gerry McCaughey; our Chief Financial Officer, David Williamson; and our Chief Risk Officer, Tom Woods. Their remarks will be followed by a question-and-answer period where other senior executives will be available for questions.

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 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 Gerry McCaughey.

Good morning. Thank you for joining us. Let me remind you that my comments may contain forward-looking statements. Today's CIBC reported solid results for the second quarter of fiscal 2010. Net income was CAD660 million and cash earnings per share were CAD1.61 on a reported basis and CAD1.46 adjusting for items of note. Return on equity was 22.2%.

Among CIBC's top priorities is to maintain strong capital and competitive productivity. We had strong performance in each of these areas in this quarter. Our tier one capital ratio increased to 13.7% at the end of April, up from 13% last quarter and 11.5% a year ago. Our tangible common equity ratio has strengthened to 8.9%. Our NIX ratio, which has been running at our strategic objective of the industry median was 57.5% for the quarter.

Turning to our business results, CIBC retail markets reported revenue of CAD2.3 billion and net income of CAD487 million. Our retail business continues to make progress. Our 11% core revenue growth in Q2 was the highest since 2007. Personal banking revenue was up 9%. Business banking grew 8% and wealth management revenue was up 16%.

Credit quality continued to improve during the second quarter. Specific provisions in our consumer portfolios were down CAD29 million from Q1 driven by lower losses in cards and personal banking. During the quarter we continued to invest across our retail business to extend our broad-based market leadership in Canada and support our clients with strong advice, access, and choice.

We opened, relocated, or expanded another 10 branches and announced the locations of 20 new full-service banking centers that we will open or expand in high-growth communities across Canada. We strengthened our market leadership in the area of mobile banking with the release of an enhanced offer for BlackBerry and other smartphone users. We launched a new marketing campaign that offers Canadians incentives to expand or switch their banking to CIBC. And we strengthened our business banking platform by acquiring full ownership of CIT Business Credit Canada, an asset-based lending joint venture we have operated with CIT since its establishment in the year 2000.

This transaction is a good strategic fit for CIBC. It will contribute to our objective of growing our business banking activities in Canada and increasing our market position in this important business segment. Sonia Baxendale is available this morning to address any questions you may have on these or other areas of investment within the retail bank.

Wholesale banking reported revenue of CAD548 million and net income of CAD189 million. Excluding items of note, wholesale banking net income was CAD132 million. Wholesale banking's client focused strategy has delivered six consecutive quarters of steady risk-controlled performance. Our wholesale banking is well positioned for future growth.

We hold number one or number two positions in Canada in many core activities including equity underwriting, government debt underwriting, and M&A. Our renewed large corporate lending strategy continues to expand and build new client relationships. And we have a number of large technology products -- excuse me -- we have a number of large technology projects underway that will support opportunities for growth in areas such as electronic trading as well as bolster our risk capability. Richard Nesbitt is here this morning to address any questions on our wholesale banking strategy and priorities.

While investing in our core businesses, we continued to actively manage our structured credit runoff portfolio. David Williamson will provide further details in his financial report.

In summary, CIBC delivered solid performance during the quarter. We were very pleased with our overall results and the quality of our earnings mix. With a tier 1 ratio of 13.7% at the end of Q2, CIBC is well capitalized in relation to both our Canadian and international peers.

Over the past three years, building our capital strength has been a top priority. Our focus in this area positions us well for the current environment, which is showing signs overall of a renewed round of stress. Our priority in deploying our capital is to invest in our core Canadian franchise, where we have natural growth opportunities within each of our core businesses to strengthen our Canadian footprint.

Let me now turn this meeting over to David Williamson for his financial review. David?

Thank you, Gerry. I'm going to refer to the slides that are posted on our website and start with slide five. It's a summary of results for the quarter.

We reported earnings per share this quarter of CAD1.59 or CAD1.61 on a cash basis. Our items of note for the quarter listed on the top right of the slide totaled CAD0.15 per share. Our cash EPS excluding these items was CAD1.46.

We had two items of note this quarter. First, our structured credit runoff holdings generated a net gain of CAD0.11 per share. During the quarter, we continued to take action to reduce our exposure. We completed several sales and terminations that reduced our loans and securities by CAD1.1 billion and reduced our purchase credit derivatives by approximately CAD4.1 billion at an aggregate cost of CAD55 million. The gain achieved this quarter includes the cost of these actions to reduce our exposure.

Second, we had a gain of CAD0.04 as a result of the reversal of tax related interest expense associated with a favorable conclusion of tax audits of previous years. Excluding these items of note, results for the quarter were helped by higher volumes and spreads in retail markets, lower loan losses and continued expense discipline and were hurt by lower wholesale banking revenue.

We continued the quarter with a very strong -- sorry -- we concluded the quarter with a very strong tier 1 ratio of 13.7%, which is up from just over 13% last quarter and a tangible common equity ratio of 8.9%, up from 8.4% last quarter.

This next slide provides a summarized statement of operations on a reported basis showing net income for the quarter of CAD660 million.

Turning now to our business results, starting with retail markets on slide seven, revenue for retail markets in the quarter was CAD2.3 billion, up CAD111 million or 5% from Q2 of last year. This represents the strongest level of growth in retail markets revenue since 2007.

Our core Canadian retail businesses of personal banking, business banking, and wealth management grew by CAD227 million or 11%, driven by higher spreads, increased volumes, and higher fees, commissions, and transaction-based revenues. Revenue was down CAD68 million from the prior quarter primarily due to three fewer days.

Looking at the results of the specific business lines on this slide, personal banking revenue of CAD1.6 billion was up CAD156 million or 11% from Q2 of last year, driven by strong volume growth of 9%. Spreads also improved due to better lending margins, partially offset by the impact of the lower interest rate environment on deposits.

Business banking revenue of CAD324 million was up CAD23 million or 8% from Q2 of last year as a result of higher commercial banking fees and volume growth particularly in business deposits. Wealth management revenue of CAD345 million was up CAD48 million or 16% from the same quarter last year. This solid growth was the result of market-driven increases in asset values and higher transaction-based revenues.

FirstCaribbean revenue of CAD165 million was down CAD39 million or 19% from the same quarter last year primarily due to the impact of the stronger Canadian dollar.

Our other revenue was down CAD77 million from Q2 of last year due to lower treasury revenue allocations. This decrease is associated with lower gains on available-for-sale securities in this quarter relative to the levels that occurred in Q2 of last year.

Slide eight shows the trend for core retail net interest margins or NIMs. Core retail NIMs declined by 3 basis points in the quarter as a result of lower spreads and FirstCaribbean. Canadian retail margins were stable quarter-over-quarter. On a year-over-year basis, NIMs were up 11 basis points as favorable pricing on lending products continued to more than offset the impact of the lower interest rate environment.

As shown on slide nine, retail markets net income of CAD487 million was up CAD53 million or 12% from Q2 of last year. Revenue of CAD2.3 billion was up CAD111 million compared to Q2 of last year for the reasons previously discussed.

The provision for credit losses of CAD334 million was up CAD9 million from Q2 of last year, but down CAD31 million from the prior quarter as a result of decreases in the cards, FirstCaribbean, and personal lending portfolios, offset in part by an increase in business banking. Non-interest expenses were CAD1.3 billion, up CAD41 million or 3% from Q2 of last year. Higher performance-related compensation on higher wealth management revenues was the main driver of this increase.

Turning to Wholesale Banking, revenue this quarter was CAD548 million, down CAD65 million from last quarter. Excluding items of note, Wholesale Banking revenue was CAD443 million, down CAD122 million from last quarter on the same basis.

During the second quarter, revenues of CAD407 million from our core wholesale banking businesses of capital markets and corporate and investment banking were down CAD82 million from last quarter. The main drivers of this decrease were lower activity in equity new issues and M&A and advisory work, and also lower merchant banking revenues in Q2 relative to what was achieved last quarter.

In the other line, revenue of CAD149 million was up CAD17 million from last quarter. The increase was driven by the reversal of tax-related interest expense that I highlighted earlier in my comments and a decline in the mark-to-market losses on our corporate loan hedging program. These items were partially offset by lower net gains on other runoff positions in the quarter.

Turning now to slide 11, Wholesale Banking net income was CAD189 million this quarter, up CAD5 million from last quarter. Excluding all items of note, net income for the second quarter was CAD132 million, down CAD47 million from last quarter on the same basis. Revenue of CAD548 million was down CAD65 million from the last quarter for the reasons previously noted. Provision for credit losses was CAD27 million, up CAD3 million from last quarter. And non-interest expenses were CAD244 million, down CAD74 million from last quarter mainly due to a decrease in performance related compensation and Q1 included the asset-backed commercial paper settlement in our structured credit runoff portfolio of CAD22 million.

This next slide summarizes our structured credit runoff results for the quarter, showing we had a net pretax gain of CAD58 million. During the quarter, we completed several sales and terminations. In aggregate we reduced the total notionals by CAD5.2 billion at a combined net loss of CAD55 million. We will continue to look for opportunities when market conditions are favorable to reduce positions in this runoff book.

In summary, as Gerry stated in his remarks, we are very pleased with our results this quarter. Our retail markets results showed the best level of revenue growth since 2007. Our wholesale results will always be somewhat dependent on market conditions, but our client-driven strategy continues to produce steady and risk-controlled earnings.

Our loan losses have declined as the Canadian economy has improved and our tier 1 capital ratio of 13.7 positions CIBC well for future growth.

Thank you for your attention. At this point, I'll hand it over to Tom Woods.

Thanks, David. With respect to credit risk on slide 21, specific loan loss provisions in the quarter were CAD332 million. The quarter-over-quarter improvement of CAD25 million was due to lower losses in the retail markets portfolio, mainly in credit cards. Gross impaired loans increased by CAD42 million this quarter, but new additions were down for the third quarter in a row and down CAD120 million versus Q1.

As you know, credit markets have become increasingly concerned with the sovereign debt levels of the European countries of Greece, Italy, Portugal, and Spain. To these countries, CIBC has total sovereign exposure of less than CAD50 million and non-sovereign direct exposure of approximately CAD380 million.

The vast majority of our non-sovereign exposure is to investment-grade banks. Included in this is derivative credit exposure of approximately CAD180 million with all but CAD14 million subject to standard CSAs with zero or low collateral thresholds. The only other material exposure to these countries is in our structured credit book, where there are about CAD620 million of corporates mainly underlying CLOs where we benefit from the high subordination levels disclosed in our MD&A.

On slide 22, our US commercial real estate finance business has $2.1 billion of drawn loans and $239 million of undrawn exposure. In Q2 we took loan loss provisions of $28 million, up slightly from $24 million in Q1. Gross impaireds are $346 million and net impaireds $210 million. Losses to date in 2010 have been running at about the same rate as in 2009 and we expect this to continue for the rest of the year.

Our US leveraged finance runoff book has $330 in drawn loans and $497 million in undrawn exposures. In Q2 there was no provision for credit losses. Gross impaireds are $42 million and net impaireds are $16 million. Indications continue to be that provisions for 2010 will be down from 2009.

Our European leverage finance runoff book has CAD728 million in drawn loans and CAD165 million in undrawn exposures. In Q2 there was no provision for credit losses. Gross impaireds are CAD38 million and net impaireds CAD27 million. As I said last quarter, we may have some additional provisions in 2010 here but we do not expect them to be material.

On slide 23, our cards net credit loss rate in Q2 is CAD5.6% versus 6.1% in Q1 and the peak of 7.1% in Q3 '09. Net credit losses were down CAD27 million versus Q1. Both write-offs and bankruptcies improved quarter-over-quarter. All of this is a very encouraging result that reflects the improving delinquency trend we have now seen for the past six months and is attributed at least in part to the refinements to our credit adjudication processes we began over two years ago in advance of the economic slowdown.

On slide 24, our coverage for credit losses continues to be strong where we have 40% of specific allowances as a percentage of our gross impaired. As you can see here, our coverage ratio continues to be well above the Canadian bank average.

Turning to market risk, slide 25 shows the Q2 distribution of revenue in our trading portfolios. In Q2 all but six trading days or 91% of the time had positive revenue, down slightly from 95% last quarter.

On slide 26, as David said, our tier 1 ratio was 13.7% at Q2, up from 13.0% at the end of Q1. Our TCE ratio in Q2 also increased from 8.4% last quarter to 8.9% at the end of Q2. The increase was mainly due to strong capital generation and a decrease in risk-weighted assets.

I will now turn things back to John Ferren.

Thanks, Tom. So we are ready to take questions from the phone.

(Operator Instructions) Steve Theriault, Bank of America.

Thanks very much. Good morning, everyone. A couple of questions. First for Sonia, if I might. Sonia, can you talk a little bit about where you are at on retail and card-specific market share and what initiatives you have going on to get the trends moving in the right direction there?

Sure, on credit cards, our market share has been relatively flat over the last number of quarters. We have as you know for a period of time given the external environment had significantly slowed down our growth. We put in a number of account management strategies to do so. As the environment has improved and is improving somewhat, we have been gradually expanding some of our growth initiatives. We have launched a few new programs over the past quarter and we will continue to look at modest growth.

Given our size in this market, as you know, we are significantly outsized in the credit card market. We will not be looking at aggressive growth in this space certainly over the near term.

And outside of the cards business?

Oh, outside of the cards business, well we have talked about a number of areas. In the deposits area, we have had really good, solid growth across both savings and checking and we will continue down that path. We've again launched a number of new products in that space, so we are looking to continue to grow our market share in deposits.

As you know, the areas that we have been challenged is on personal lending and business lending. Those are two areas of very significant focus for us in partnership with our risk colleagues and we would look to improve our position over the next number of quarters in both of those spaces.

Okay, thanks. And a second one for Tom, if I might. Gross impaireds crept a little higher in the US, but, Tom, some -- I thought some pretty bullish comments from you. Could I interpret that as when I look at the US provisioning the last couple of quarters, it has been in the 20-some million dollar range. Would say it's a low probability that we are going to go much higher there? How comfortable are you on that front?

Steve, this is really hard to predict. My comments, just to remind you, say that the run rate we have seen in Q1/Q2, which is about other side of 25 a quarter, which is what we did in '09, best estimate we will continue. There's a few accounts we're in negotiation with which could go either way. When we do a name by name and actually try and probability weight the outcomes, we actually come in a little less than CAD25 million. But I want to be a little cautious here in case some of these go the other way.

So I hope that gives you some guidance. More or less the same run rate, but it could be a little up or a little down depending on the outcomes of two or three of these situations.

Okay, thank you and thanks for the disclosure on the troubled euro credits.

Michael Goldberg, Desjardins Securities.

Thank you. Given all the volatility that there has been since the start of May, what impact would you expect that this would have on your trading revenue going forward?

Michael, it's Richard. We have, as you know, you can see from our numbers we have held our risk positions at the low level that we took them to in 2008/2009. We kind of were expecting something like this to happen and so we will have so far this quarter the volatility has actually been a positive for us.

That's on an overall basis?

On an overall basis for May, we have performed very well through the volatility.

Thank you, and one other question for Sonia. Can you just repeat -- I missed what you said about what your expectations or plans were with respect to growth of your card business.

My expectations on growth of our cards business was modest single digit outstandings growth over the next number of quarters.

But you said something about you already have a big market share, so you wouldn't be looking -- so you would be looking to grow elsewhere. Is that the correct interpretation I should take away?

No, I said that we had a very large credit card portfolio, so we were not looking at aggressive growth strategies. And I highlighted that we had had some gaps in our growth in both business and personal lending and we were looking to fill some of those gaps. So you would see increased initiatives in that space.

Thank you.

John Reucassel, BMO Capital Markets.

Thank you, just another question for Sonia just on the credit cards. Could you talk a little bit or try and quantify the impact of these credit card changes to your book of business profitability wise? I know the Canadian government is talking about saving consumers hundreds of millions of dollars, but I don't know what that means for CIBC, good or bad. Could you maybe talk about how you are going to offset some of these additional costs?

So a number of things here. In terms of the new regulations, there were some disclosure requirements that came into effect earlier this year and a number of the new regulations will take effect September 1. The most significant of those are interest calculation method, application of payments and minimum grace period. This is a factor that will affect the entire industry not just CIBC, so all of the banks as well as the monoline players.

The way that these will impact each of us vary. On minimum grace period, we actually were already fully in compliance with the regulation, so there's no impact to us on that. And on some of the items we have already put in initiatives and strategies, so on credit limit increases, those kinds of things, to assist in offsetting that. And we would look to offset the impact of these regulations through various new products and programs in the credit card space.

Okay, so you think by September 1 when we see financial results that you can handle the new costs without having a material impact on your credit card earnings?

We will -- what I would say is over the next 12 to 18 months, we will continue to launch new initiatives in this space to offset a significant proportion of that impact.

Okay, and Sonia, while you are just there, could you talk about your outlook for I guess the net interest margins I guess excluding FirstCaribbean? I guess they were flat sequentially from Q1. Is that kind of what we should expect from the retail bank in Canada?

Yes.

Okay, Gerry, just you mentioned the priority is to invest in Canada or your Canadian footprint. Does that mean -- with all the excess capital that the system is generating now, which is I guess a good move from last year, does that mean you have to buy back stock or is there enough opportunities out there to reinvest your excess capital in Canada? How should we think about all that?

Our priority is in Canada and the way we've tried to frame as a strategic statement is that we would like all of our businesses to be minimum number one, number two, or number three. And two of the largest businesses where there's an opportunity there, where we actually were not one, two, or three, but had been in those areas were large corporate lending and business banking. Both of those areas when the economy is recovering and hopefully transitions to expansion should provide opportunities for us to deploy capital within Canada.

So we do believe that given the opportunities in those particular areas as well as some of the strategic acquisitions that we have made like CIT, all of which are concentrated in Canada, will provide us some opportunity to deploy our excess capital. Therefore at this time, our point of view is that we will continue to keep the capital within the bank. We do not have current plans to engage in the activities that you talked about because we do believe we will be able to deploy the capital in a beneficial fashion for our clients when the recovery picks up steam.

Thank you.

Andre Hardy, RBC Capital Markets.

Good morning. Probably for David, on slide seven I guess, slide seven of your investor presentation, clearly if you take out treasury, your retail revenue growth is very strong. Now that treasury line if you had Q1 '09 there would have been even a bigger number than Q2 has moved around quite a bit. And can you help us understand where that might or might not go going forward?

Yes, let's speak to what's shown on this slide as you point out. So slide seven in the other line is primarily treasury and as you see, its year over year when we talk about the retail results, treasury is a big component of the move. So overall treasury results up 5%, but as referred to, if you look at the core results, up 11%. So what's going on on treasury?

Frankly what that is is just less gains on sale of available-for-sale securities that were incurred in Q2 of last year, didn't happen this year. So -- and those bond gains are allocated out to retail. If you look at overall treasury results year-over-year its actually pretty flattish. It's down CAD9 million, so not anything like what's shown in this slide and the offset being just improved results in the area of securitizations.

So the allocation out to retail affected by the gains on available-for-sale securities, overall treasury impacting the overall bank very much more a moderated impact.

Looking forward, I think we are anticipating that the impact of treasury on the bank and the costs associated which should improve over time. As we have talked about in prior quarters, funding costs were high during the '09 period.

We in line with Gerry's stated objective of having a strong platform and consistent and sustainable earnings, we did at that point in time made sure we had the right term structure that had costs associated with it. And we think going forward we should see treasury costs moderate. So that would be the trend line I (multiple speakers).

Now when you did -- I think you are referring to private mortgage securitizations, for example. What would the term of those structures be? Is that minus 54 going to zero in two quarters or two years?

Again, I am referring to securitization of the mortgage, so the CMV program and cards and such forth. So we keep those costs in the center, so they are a cost. So it's -- that funding line will remain a cost when it comes to securitization. But of course that's offset by the periodic inception gains you get when you queue up a new mortgage, so it is somewhat a volatile space, but net-net is a cost of funding that is in the center.

What I'm talking about is just your point about trend line, as funding costs and spreads come in, we are anticipating that the aggregate cost, which is housed through treasury, should be on a positive trend line.

All right, thank you.

Mario Mendonca, Canaccord Genuity.

Good morning. If we could just look at the trading and also the underwriting and advisory, both numbers seemed light. What it would be helpful to understand is if what's been going on in Europe is an affect we can see play out in Q3 or did that actually start to impact your Q2 results? Is that part of what we are seeing here?

Mario, it's Richard. No, I'd say not. Really what the main impact in Q2 was a combination of the two factors David said, was the new issue equity activity primarily, but also the debt activity was -- new issues were down and there was one or two notable transactions that we were either not invited in or decided not to participate in that took us down slightly even further.

So it was one of our weakest quarters in new issue equity finance. And I would note that the debt finance then wasn't as [active] either. That was a big chunk of the reason for the reduction. I would say that that has rebounded in May pretty, substantial new issue equity activity in May and we are a big part of that in the first three weeks of May.

The other big part of Q2 was we had a significant gain in Q1 on the merchant bank, in the continuing merchant bank, which was not replicated in Q2. So as a result, our numbers were down and those things are lumpy and they come once in a while. I wish we had them more frequently, but it didn't happen in the second quarter.

Trading results pretty much flat for the quarter relative to the previous quarter and coming into May, you know, the volatility has been good for us.

Sorry, you characterize trading as being flat quarter over quarter?

Yes, relatively flat from Q1 to Q2 in terms of our capital markets performance, it's been relatively comparable Q1 to Q2. It's really around the new issue equity financing.

Okay, and on credit, it's clear now we are seeing some fairly substantial declines sequentially. A question for Tom. How do you see this playing out, this particular credit cycle? The previous one, when CIBC's credit losses started to decline it was rather abrupt. And I know I'm asking for something that's hard to sort of wrap your mind around now, but does this credit cycle feel like the last one in that when the recovery starts, it will happen all at once? Or does this feel sort of gradual grinding down to a long-term average?

Well, for us it is dramatically different in that as you know our mix is completely different. We've got very, very low corporate exposure now versus the last time, '01/'02. So when the dust settled in '01/'02, not only did the losses go away in the corporate space, they turned in a reversal. So you had a huge differentiation.

This time I guess the way I would describe it is, as I said in my comments, the steps we took, which ended up hurting our share and revenue growth on the card space and to some extent on the unsecured personal space at least for this quarter appear to be paying dividends in the improvements in losses and the reflection in delinquencies we've seen for about six quarters. So there's no reason to think in the cards and personal unsecured space that drop is going to be dramatic, but rather gradual.

I think in the -- our corporate and commercial space in Canada with the exception of a few exposures in the commercial space, which we took provisions for this quarter, quality is very good. Impaireds are very good. Commercial real estate I commented on. FirstCaribbean is a small number. We had a good quarter this quarter. It might be up little bit next quarter just given event risk in a couple of situations, which could go either way.

So the answer your question, Mario, is it's much more gradual this quarter because it's much more heavily weighted into the personal and card space.

And then perhaps either for Tom -- probably for Tom or whomever, the decline in risk-weighted assets this quarter, I'm sure it's disclosed somewhere. I just haven't come through yet. Can you speak to the nearly CAD4 billion decline in risk weighted assets sequentially?

Okay, I will start and David may want to add. It came from a bunch of places. The monolines RWAs helped us by 10 basis points. FX because the Canadian dollar was stronger, US dollar weaker, helped us by about 20 basis points. And most of that was given back in the numerator as far as the tier 1 ratio goes.

We had some upgrades in our various trading books for counterparties. That helped us by about -- 7 and the other 7 or 8 was spread amongst things like the deferred tax asset going down, some counterparty exposures going down, better behavioral scores in the card space. So spread amongst those things. But mainly FX, but again, FX offset in the numerator in the tier 1 ratio.

Thanks very much.

Sumit Malhotra, Macquarie Capital.

Good morning. First for Sonia, you've talked in the past about your wealth management business being much more equity market levered than peers. You certainly had three pretty good quarters off the bottom last year. I'm kind of surprised to see in Q2 with the TSX up 10% sequentially, with your equity flows looking pretty good on the mutual funds side, I'm pretty surprised to see that actually declined very slightly sequentially. Any color you can give me there on what happened this quarter?

Part of the factor was the number of days in the quarter versus the previous quarter. We had pretty solid growth on the revenue front year-over-year and year-to-date, so I think it's a reflection of the positive equity markets. The other factor that would have I guess not have reflected in upside was the lack of new issues over this period. So that would be another influencer in those numbers. But I think relative to the market the wealth business has performed as we would have expected it to.

All right, for Tom on credit, I just want to make sure I heard those numbers correctly and maybe if I could get you to repeat them. You've been giving us some detail on shall we say a few of the challenge areas from late '09, the US commercial real estate and the US and European leverage finance. Provisions in Q1 from what I had noted down were CAD24 million. What was the number this quarter for those three portfolios?

Do you have it?

CAD25 million.

So CAD25 million, so pretty flat. And I think your comment was from what you see right now not expecting too much volatility in that line going forward.

As I tried to say, in the US commercial real estate space, it feels like the run rate will be about the same, but there's two or three situations that we're in the midst of negotiation and they are not massive numbers, but they could go either way. So I hesitate to leave you with the impression that this is really predictable. But it feels like the same run rate.

All right. And finally. I don't know if you commented on this in David's comments on the monoline issue, I saw the bank's name mentioned in some press reports yesterday relating to a possible settlement with AMBAC coming out of a Wisconsin court. Anything you can offer us in that regard?

No, nothing in particular. We're engaged in the process and there's no particular developments. We are supportive of what we're trying to achieve in that regard, but no particular developments to speak to.

Thanks for your time.

Darko Mihelic, Cormark Securities.

Actually the first question is just a point of clarification. Richard, you mentioned that trading was flat quarter-over-quarter, but when I look at the supplemental I see actually a fairly steep decline. Is that because you look at the structured credit and other forms of trading as something that is in runoff and not core, or am I looking at the wrong numbers?

I'm referring to the capital markets.

Darko, maybe I will just jump in here for a moment. When we're talking about the trading income, it's something that we have consistent with what we have looked at before. We've pulled out the structured credit and we look at the wholesale trading numbers. They are within CAD2 million of what they were the prior quarter, just up a titch. And the point we have made before is that through this period of time, the risk that wholesale has taken on has been low in trading activities. We are focused more on customer-supported activities, customer-aligned activities. So our trading income over the past five quarters really has not shown much volatility at all.

This particular quarter when you look at the total bank trading income, we've got the noise from structured credit, which again we pull that down. And then in treasury, we do have some -- that's putting some total bank quarter-over-quarter noise into the numbers, and that's just in relation to the mortgage commitment book, so part of that is in the trading books. Part of it is in the non-trading. It puts some noise in the total bank numbers quarter-over-quarter.

So overall bank in that mortgage commitments not a big impact. It just -- because it's -- the offsets are in the trading and the non-trading, it puts some noise in the quarter-over-quarter numbers. So if you adjust that away, which you should, because overall bank it's not much of an impact. Get back to what Richard was saying, which is the wholesale trading numbers are only pretty flat, up slightly from last quarter.

Okay, fair enough. Thank you. A question for Sonia. Sonia, are you concerned about house prices in Canada? And given that you are a large mortgage player and you also deal with mortgage brokers, are you concerned about possible impacts of rising rates? And what do you see happening here in the back half of the year?

So in terms of the back half of the year on real estate, on mortgage, we would expect some slowing in the market just off of the strong growth in the first half of the year, assuming interest rate environment change as well as some of the other changes that went into place that would affect new homebuyers.

In terms of house prices and any impacts there, I would say that our mortgage portfolio is very, very well stress tested. First of all, the bulk of it is insured and beyond that our loan to value ratios are quite low, and so we are feeling very comfortable on our mortgage portfolio.

I'm not necessarily nervous about losses directly related to mortgages. I'm talking -- when I think of a stress test, I think of the overall holistic approach, which is house prices declined by 15%. What is the overall impact to CIBC given that you also have a large unsecured credit portfolio and a credit card portfolio that is large. Do you do that kind of work as well?

We do, and Tom may want to comment on that as well. We have done a great deal of that work over the last year and again, I would say given our account management, clearly if there's a significant change in the environment we know that that will have an impact on our credit card portfolio. It always does. But given anything that we anticipate right now, we feel that some of our account management and what I would consider fairly conservative approaches on our unsecured portfolios including credit cards that we would be reasonably well positioned.

Thank you, and maybe just one last question for Gerry. Noticing -- given your commentary regarding deployment of capital, could you maybe just speak to the investment in Butterfield and why make that investment in the first place if there's no intention to follow up? Or is there an intention to follow up? Or maybe just describe exactly why that investment was made.

Thanks, Darko. The Butterfield investment is at this time consistent with the presence that we have in the offshore area. As you know, we have significant offshore operations in terms of FirstCaribbean and this brings Butterfield closer to us in terms of our ability to observe it and look at its performance. And also we did believe that the investment was being done in a way that was consistent with an extremely gradual approach to any form of investment. At this time, we don't see in the near term that the opportunity will present itself to increase our investment because we are aware that the other people who have invested in Butterfield are quite committed to this and we wanted very much to be a part of a group that was investing and it's something that allows us -- gives us a bit of a window into the organization and into certain areas where we are not in the offshore world.

I would -- I think that it would be an overstatement to say that we have no intention to invest further. I would just say that it's premature at this time to say that that investment opportunity would exist. So we don't shut the door on possibilities of further investment, but I'm just saying it's highly unlikely given the nature of the other investors in this entity as well as the stage of development of CIBC. But down the road, we would have to see how this particular entity evolved and what the synergies strategically might be with our other operations that are offshore.

Okay, thanks for the answer. That's good. Thank you.

Michael Goldberg, Desjardins Securities.

Thanks. Tom Woods, you said that you have about CAD620 million of exposure to I guess what had been called the PIGS in Europe in your structured credit, highly subordinated in CLOs. Would this exposure get marked to market even though it is highly subordinated? And would that ultimately get reflected in your trading revenue in the second quarter?

Michael, most of these are corporate loans like on the left-hand side of the balance sheet in these various CLOs, and what we own is the stuff on the right-hand side of the balance sheet. And those are marked every quarter, and as David has detailed. So these are indirect exposures, companies residing in those countries.

Right, so as the loans on the left-hand side get downgraded, does that -- even though you are in a highly -- you are in a senior position in the securities that you own, does that still potentially result in a downward revaluation of the stuff that you hold?

First of all, the CAD620 is a very small part of the overall amount of loans on the left-hand side of all these balance sheets. Okay? And I frankly wouldn't say it's any more from a credit quality point of view exposed notwithstanding some of the challenges of the sovereign level in those four or five countries. So it's grouped with all the other loans on the left-hand side, which the credit quality for which flows into the credit quality of the stuff on the right-hand side.

So I think the impact on the ultimate quality of what we own is de minimis. And as David has gone through every quarter, we look at the value of the assets we have on the right-hand side and mark them. So this is a very small part of the overall story. We thought we should disclose it nonetheless because of all the attention on those four or five countries.

Okay, and one other question going back to Gerry's comment about your priority to invest in the Canadian franchise. Are there any things that aside from growing your business banking, are there any things -- any other things on the retail front that you see as a priority or that you see as potentially low hanging fruit in order to strengthen your position?

Michael, this is Sonia here. We have -- we are pretty consistently looking at opportunities in the Canadian market as they become available. So we would be interested in opportunities in all of our core businesses. That would include business banking, personal, as well as in the wealth sector. So that is branch expansion, etc., so we have a pretty broad lens on that in terms of the Canadian market.

Thank you.

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

Okay. Thanks, everyone, for joining us today and again, we do know it's a busy day, so thank you very much. Bye.

Thank you. The conference call has now ended. Please disconnect your lines. Thank you for your participation.