Canadian Imperial Bank of Commerce (CM) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CIBC fourth-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 off your BlackBerries 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 this morning. This morning, CIBC's senior executives will review with you CIBC's Q4 and fiscal 2010 results that were released earlier this morning. The documents that will be referenced on this call, including CIBC's Q4 news release, investor presentation, financial supplement, as well as CIBC's 2010 financial statements and MD&A, can all be found 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 2010 annual report will be available this coming Monday, December 6.

This morning's agenda will include opening remarks from Gerry McCaughey, CIBC's President and Chief Executive Officer. 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 a 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. I want to welcome everyone who is joining us today, and to thank all of CIBC employees who are listening to the call for their contribution in 2010.

Let me remind you that my comments may contain forward-looking statements, as John has mentioned.

Today, CIBC reported net income for the fourth quarter of CAD500 million and cash earnings per share of CAD1.19. Adjusting for items of note, cash earnings were CAD1.68, up 19% from a year ago, and our highest core earnings level since Q1 of 2008.

For fiscal 2010 overall, CIBC reported net income of CAD2.5 billion and cash earnings per share of CAD5.95. Return on equity for the year was 19.4%.

While growing our core businesses through reinvestment and strategic acquisitions, we have furthered our capital strength. We closed fiscal 2010 with a Tier 1 ratio of 13.9% and a tangible common equity ratio of 9.9%.

Overall, our financial results and progress against our priorities contributed to CIBC delivering a strong total shareholder return of 32.4%, highest amongst the major Canadian banks in fiscal 2010.

Turning to our business results, CIBC Retail Markets reported net income of CAD576 million for the fourth quarter of 2010, up 23% from Q4 of last year. Revenue for the quarter was CAD2.5 billion, up 5% from a year ago. Revenue growth was supported by volume growth across most of our retail businesses, and particularly in deposits, mortgages, and business banking, as well as our acquisition of the Citi MasterCard portfolio that closed in September.

Credit quality in our Retail portfolios continues to improve. Provisions of CAD249 million were down CAD55 million from last quarter.

Our Retail business made strong progress in 2010. We opened 35 new branches. We were first to market with innovative new products such as mobile banking applications and the CIBC Advantage card, the first debit card in Canada to offer Visa debit. And we expanded our national brand advertising campaign, demonstrating that what matters to our clients matters to all of us at CIBC.

Retail Markets is well positioned for growth in 2011 with market-leading positions in six of eight major business areas, such as mortgages, deposits and credit cards. Our focus is on maintaining our strong position in these businesses while improving our competitiveness in areas where we are not a leader. At the same time, we will continue to provide value to our clients through ongoing channel and brand investment. Sonia Baxendale is here this morning to answer questions about our progress in Retail Markets.

Wholesale Banking reported a net loss of CAD56 million in the fourth quarter. Excluding items of note, net income was CAD66 million. The items of note included a loss from our structured credit business as we took advantage of an opportunity to settle with one of our financial guarantor counterparties. The settlement reduced our notional exposure by CAD1.2 billion and provided us with an extra CAD100 million or 9 basis points of capital benefit as a result of this transaction. We are pleased with the progress Wholesale Banking made in 2010, which was a year of continued volatility in markets.

The stability of our Wholesale Banking business reflects the hard work put in to refocus our strategy. During the year, Wholesale Banking continued to deliver excellent service and value to our clients through their participation in many notable investment banking deals; growing and adding client relationships in our corporate lending business; delivering another strong year within the corporate and government bond markets; and leading the industry in electronic trading for our clients.

As industry conditions improve, Wholesale Banking is well positioned holding number one or two positions in most of our core activities. Richard Nesbitt is here this morning to answer questions about progress on our Wholesale Banking business as well as current business conditions.

In summary, 2010 was a good year for CIBC and our stakeholders. Our progress supports the strategic path we are on and positions CIBC well for the future.

I would like to take this opportunity to thank our shareholders and all of CIBC's 42,000 employees for their ongoing dedication to serving our more than 11 million clients in Canada and around the world. Let me now turn this meeting over to David Williamson, our Chief Financial Officer, 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 number 5, which is a summary of our results for the quarter.

We reported strong results this quarter. Excluding items of note, which I will review in just a moment, our results were helped by lower loan losses, volume growth in retail markets that contributed to revenue growth in all three of our Canadian business segments, and the completion of the MasterCard portfolio acquisition. These improvements were partially offset by higher expenses and lower revenue in Wholesale Banking.

Earnings per share this quarter were CAD1.17 or CAD1.19 on a cash basis. We had three items of note, which are listed on the top right of this slide, totaling CAD0.49 per share. Our cash EPS excluding these items was CAD1.68, up 19% from adjusted earnings per share of CAD1.41 a year ago.

The first item of note was a loss of CAD0.31 per share from structured credit run-off that resulted primarily from our choice to take advantage of an opportunity to receive a cash settlement for existing purchase protection, the majority of which was unmatched. This transaction resulted in an improvement in our capital ratios, as Gerry mentioned. I will cover structured credit in more detail later in my remarks.

The second item resulted from the repatriation of capital that netted to a loss of CAD0.30 per share. This repatriation only affects balances that were previously included in other comprehensive income, and therefore, does not affect shareholders' equity or our capital ratios.

Third, we had a reversal in the provision for credit losses in the general allowance, which improved earnings by CAD0.12 per share. This reversal resulted primarily from improved credit experienced in the cards and personal lending portfolios, and was further increased by a refinement to how we calculate the small-business general allowance. This reversal was partially offset by the need to establish a general allowance for the acquired on-balance sheet MasterCard assets from the acquisition.

As Gerry mentioned, our capital position remains strong with a Tier 1 ratio of 13.9%, and a tangible common equity ratio of 9.9%.

Slide 6 provides a summary of statement of operations on a reported basis, showing net income for the quarter of CAD500 million. As shown on the slide, the provision for credit losses has declined by CAD71 million from the prior quarter. This represents the fifth consecutive quarter of improvement. Specific provisions decreased by CAD82 million from the prior quarter due to improved performance across all of our portfolios. This decrease was partially offset by a slightly lower recovery in the general allowance this quarter relative to the preceding quarter. Tom Woods will provide further comments on our credit experienced in his remarks.

I would also like to take a moment and comment on the impact that the capital repatriation is having on revenue and income taxes as shown on this slide. Again, this item is only a movement of balances within shareholders' equity from other comprehensive income and into retained earnings via the income statement. That is why the repatriation doesn't affect shareholders' equity or our capital ratios. The balance relates to nontaxable foreign exchange losses on funds and foreign subsidiaries being offset by taxable gains on related hedges. The net result is a large net foreign exchange gain that goes under revenue and a large tax expense on that gain from the hedges.

We reported the same type of item several times before, and it doesn't affect our capital. However, I thought it was worthy of comment due to the size of the balances this quarter.

Turning now to our business results, starting with CIBC Retail Markets on slide 7. Revenue for CIBC Retail Markets in the quarter was CAD2.48 billion, up CAD124 million or 5% from the fourth quarter in 2009. This growth was the result of improved performance in the personal banking, business banking, and wealth management businesses.

Looking at the results of the specific lines of business on this slide, personal banking revenue of CAD1.65 billion was up CAD91 million or 6% from the same quarter last year due to continued volume growth in deposits, mortgages, and lending as well as the MasterCard portfolio acquisition.

Business banking revenue of CAD355 million was up CAD21 million or 6% from the same quarter last year, primarily due to increased volumes. This was our highest level of revenue in business banking in over four years. Wealth management revenue of CAD355 million was up CAD18 million or 5% from the same quarter last year, as stronger equity markets increased asset values.

These positive moves in revenue were partially offset by a CAD33 million decline in FirstCaribbean revenue to CAD127 million, primarily due to the impact of a stronger Canadian dollar and lower volumes.

Other revenue was up CAD27 million from the fourth quarter last year, primarily due to higher treasury allocations.

Slide 8 shows the trend for our core retail net interest margins, or NIMs. Retail NIMs increased by 5 basis points in the quarter and were helped by the MasterCard portfolio acquisition and improved deposit spreads, but were hurt by narrower lending spreads, resulting in a net 5 basis point increase. Net income this quarter from CIBC Retail Markets was CAD576 million, up CAD108 million or 23% from a year ago.

As shown on slide 9, revenue was up CAD124 million for the reasons previously discussed. The provision for credit losses of CAD249 million was down CAD113 million from the same quarter last year and down CAD55 million from the prior quarter, reflecting improvements in our credit experienced in all business lines across Retail Markets.

Non interest expenses were CAD1.4 billion, up CAD87 million or 6.5% from a year ago, primarily due to higher pension expense and the application of amended actuarial inputs including lower interest rates; the introduction of HST; and other items, such as higher advertising spend and MasterCard servicing costs that are more closely tied with enhancing revenue.

Turning to Wholesale Banking, revenue this quarter was CAD238 million, down CAD77 million or 24% from the third quarter. Excluding items of note, Wholesale Banking revenue was CAD391 million, down CAD44 million or 10% on the same basis.

Looking at the results of our Capital Markets and Corporate and Investment Banking businesses, the main drivers of the quarter-over-quarter decrease were lower fixed income and currencies revenue and lower equity new issues revenue.

In the Other segment, losses of CAD90 million were CAD29 million higher than the prior quarter, mainly as a result of the financial guarantor settlement.

Wholesale Banking net income was a loss of CAD56 million this quarter, down CAD81 million from the prior quarter.

As shown on the slide, or sorry, slide 11, revenue was down CAD77 million for the reasons we just discussed. The provision for credit losses was CAD8 million, down CAD21 million, driven by lower losses in the US real estate finance and European run-off portfolios.

Non interest expenses were CAD327 million, up CAD69 million from the third quarter, mainly due to higher performance-related compensation, higher professional fees and severance costs.

Excluding all items of note, net income for the fourth quarter was CAD66 million, down CAD55 million from the prior quarter on the same basis.

This next slide summarizes our structured credit run-off results for the quarter. We had a net pretax loss of CAD177 million this quarter versus a loss of CAD138 million last quarter. The loss this quarter was primarily driven by a loss of CAD163 million realized when we chose to terminate CAD1.2 billion of purchased credit derivatives with the financial guarantor previously reported as counterparty one. The impact of this transaction is included in row four on this slide.

This transaction resulted in a cash -- a receipt of cash in a settlement of CAD63 million and had a positive impact on our Tier 1 ratio of 9 basis points, which as Gerry mentioned, is the equivalent to approximately CAD100 million of capital.

Subsequent to year end, we also terminated all remaining contracts with counterparty four with no impact on earnings. As a result, the CAD561 million of notional purchase protection reported for this counterparty in the fourth quarter has now been eliminated.

The remaining items on this slide were largely offsetting and reflect a quarter where the value of underlyings improved.

Our fourth quarter contributed to a strong financial result for 2010. Our earnings per share growth remains strong, well above our objective on a reported basis, but more importantly, up 9.8% excluding items of note, putting it at the top end of our medium-term growth objective of 5% to 10%.

Our return on equity was 19.4%, a strong result and just below our medium term objective of 20%. Our capital strength continued to improve, and we finished the year with a tangible common equity ratio of 9.9%, which is up significantly from 7.6% at the end of the prior year. In addition, we continue to maintain a very strong Tier 1 ratio of 13.9%.

On productivity, our objective is to maintain a NIX ratio that is at the median level within our industry, an objective that we have achieved for the year to date. And these results were delivered with a lower risk profile. We operated within VAR limits that were below our peer average.

And our 2010 loan-loss ratio of 56 basis points is now meeting our medium-term stated objective, and, due to improvements in credit quality, is down from 70 basis points in 2009.

Thank you for your attention. At this point, I would like to turn the meeting over to Tom Woods.

Thanks, David. Good morning, everybody. With respect to credit risk on slide 22, specific loan loss provisions were down for the fifth successive quarter at CAD215 million. The CAD82 million reduction versus Q3 was due to improvement in both Retail Markets and Wholesale Banking, particularly in our cards, FirstCaribbean, and Commercial Banking portfolios.

General loan losses were a recovery of CAD65 million or 6% for the reasons David has already covered.

Gross impaired loans were down CAD206 million in Q4 for two reasons. First, new formations were down for the fifth consecutive quarter; and second, the amount of impaired loans removed due to write-off was higher.

On slide 23, in our cards portfolio, net credit losses continued to improve as our loss rate in Q4 was 4.1% versus 5.2% last quarter and the peak of 7.1% in Q3 2009. Losses were down CAD18 million versus Q3. The loss rate was helped by the acquisition of the MasterCard portfolio. You may recall that the assets we acquired met high credit quality standards. Although, as expected, we will begin to see some negative migration in 2011 in this portfolio, the near-term outlook for cards as a whole, in losses, is good.

Losses in other personal loan portfolios also improved in Q4. And the outlook for losses in 2011 is good here as well.

We had recoveries in our mid-market Commercial Banking business this quarter, and FirstCaribbean losses were negligible. So the 2011 loss run rate in these two areas will likely be higher than what we saw in Q4.

Overall, FirstCaribbean losses in 2011 should be about the same as in 2010. And, as discussed in the last webcast, if there are increases versus the 2010 run rate, we do not expect them to be material for CIBC as a whole.

Slide 24, our US Commercial Real Estate Finance business has $1.8 billion of drawn loans and $867 million of undrawn exposure. In Q4, we took loan loss provisions of $8 million, down from $17 million in Q3. Gross impaireds are $221 million and net impaireds, $146 million.

Losses have trended down in Q3 and Q4. We expect that losses in 2011 will be slightly higher than the US -- I'm sorry -- slightly lower than the $78 million in fiscal 2010. However, as I said on previous webcasts, because losses in this area are dependent on a number of factors, we could see a slightly higher loan-loss run rate in the next few quarters.

Our European leveraged finance run-off book on slide 25 has CAD746 million in drawn loans and CAD140 million in undrawn exposures. There was no provision for credit losses in Q4 in this portfolio.

On slide 26, our US leveraged finance run-off book has $227 million in drawn loans and $315 million in undrawn exposures. There was no provision for credit losses in all of 2010 in the US leveraged finance portfolio. At the moment, the outlook for loan losses in both leveraged finance run-off portfolios, that's the UK and US, continues to be positive.

Turning to market risk on slide 27, you can see the Q4 distribution of revenue in our trading portfolios. In Q4, all but two trading days, or 97% of the time, had positive results, up from 89% last quarter.

Slide 28, our Tier 1 ratio of 13.9% of Q4, down from 14.2% at the end of Q3. Our tangible common equity ratio increased to 9.9% from 9.5% last quarter. The lower Tier 1 ratio was mainly due to the redemption of 600 million of preferred shares, partially offset by earnings net of dividends. You can see in the chart that RWA reductions had a small positive effect on the Tier 1 ratio. This was mainly because RWA reductions in our structured credit portfolio more than offset the RWAs increase due to the MasterCard acquisition.

The biggest part of this was a CAD1.5 billion RWA reduction that came from our decision to terminate CAD1.2 billion of purchase protection. The RWA impact, partially offset by the loss on the transaction, had the effect of improving our Tier 1 ratio by 9 basis points.

As you know, banks are awaiting clarification from regulators on the Basel III rules to be implemented in fiscal 2013. CIBC expects to have capital ratios comfortably above the 2019 minimums by the implementation date of November 1, 2012, even without the benefit of the phase-in period for the various capital deductions. And in fact, based on our current understanding of the rules, we would exceed or be very close to meeting the 2019 minimums for the various ratios as of October 31, 2010. Thanks; I'll turn the meeting back to John.

Thanks, Tom. So we'll open up the phones for questions.

(Operator Instructions). John Reucassel, BMO Capital Markets.

Thank you, just a question for Sonia. Sonia, on the MasterCard acquisition, can we assume all the increase in the credit card balances was related to the acquisition? And could you talk about the NIM in the Retail, if you excluded the impact of the credit card acquisition?

Sure. So the lion's share of the increase would have been attributable to that; that's correct. And, sorry, what was the second part of your question, John?

What would the net interest margin of 2.86% in the quarter, up from 2.81%, how much was that aided by the credit card acquisition, the MasterCard deal? And then could you maybe make some comments on the competition on the lending side?

Yes, we had -- the Citi acquisition was, of course, an increase. We had an offset from FCIB, so we would have basically been flat otherwise.

Okay. So all the increase then was due to better deposits?

That's correct.

Great. Okay. And what about competition? Can you talk about that and how it looks -- how -- what loan growth looks like so far in fourth quarter?

Well, as we had expected, while still growing, its overall mortgages and generally in the lending space and, consumer demand has slowed. I would say that we are still of the view at this point that 2011 will be in the low to mid single digit growth rates across the board. And, as you would expect in that kind of environment, competition is fierce, and there is significant pressure -- pricing pressure -- as a result of that.

Okay. And last question, Tom, just on your comment on the TCE ratio under Basel III, so what you're telling us, the 9.9% TCE ratio under Basel III would be above 7% today, just to be clear?

Well, no, the 9.9%, and I think this is what you're saying, is what's reported today. What we are saying is when you look across all four ratios, pro forma today relative to the four ratios, and we're not differentiating between each of the four. We would actually be either in excess or very close to meeting them, factoring in all of the deductions that are actually going to be phased in to 2019. So I'm not going to make a specific comment on TCE. The comment I made was on all four, were either in excess or very close. And within a year or two years, we will be through on all four.

Okay. Thank you.

Gabriel Dechaine, Credit Suisse.

Another question for Tom, the decline in risk weighted assets attached to the structured credit business, is that reducing the risk weighted assets in that exposure by about half?

Sorry, just say that again.

So the risk weighted assets went down by CAD2 billion in the structured credit run-off portfolio.

Yes, right.

Is that about half of the risk weighted assets in that portfolio?

Yes; we have about CAD2 billion left. Is that right, Brian?

Yes.

And, I guess my next question to Gerry, when you've talked in the past about returning capital to shareholders, either buybacks or dividend increases, a lot of the cautionary tone was about this exposure. And as it's been cut by half, so quite a bit faster than I think anyone would have expected; what does this do for your near-term outlook for dividend increases?

Well, our outlook on dividend increases is that, as we have said in the past, we guide ourselves by our payout ratio, and our payout ratio that we have indicated in our scorecard every year in the annual report and repeated on a regular basis is a target of 40% to 50%. With this quarter's earnings, we are now within or getting very close to the upper end of our ratio. So, the topic of dividends starts to become something by the metrics that we use, that is a discussion that we could see coming up as earnings progress, depending upon market conditions, and other elements of the unfolding regulatory environment in terms of capital.

So, I think that a combination of the comments you made, but more importantly, our overall view of our steady-state earnings in relation to our ratios, would lead one to expect that the discussion around dividend increases is one that is starting to come into focus a little bit more than when I would've talked about this in the past.

We're not there quite yet because we're just at the upper end of our payout targets. But you're correct that as we make progress, this topic is something that is getting a little bit closer.

Okay. And then last one for Richard, I guess Wholesale Banking, the expenses, could we just talk a bit about why those were up? Sorry I missed it. And then the top line, the trading looked weak in the fixed income area.

Yes. It was a slow quarter from a couple of perspectives; revenue is off about CAD33 million. Half of that was just related to the equity new issues business being much slower for everybody in the industry. We remain one of the top players in that, so if it's down, it's down.

There was less volatility in the fixed income and currencies markets. Good news is that volatility is picking up. Good news for us; bad news for maybe some others. But we are starting to see much better tone towards the end of October and November. I pointed out that we just recently led Husky Energy equity financing, CAD1 billion financing. In the last week, we led CAD1 billion BCE bond financing. And we did a -- led a Newalta high-yield, Canadian dollar high-yield financing. So, things are -- I think things are looking better right now. Hopefully that will continue.

On the expense side, there was some catchup items. There was about CAD37 million of catchup in incentive compensation. I think you really should look at incentive compensation over the full year.

And then, there was a -- we did downsize an operation in New York where we eliminated about 13 people in the front office and another equivalent number or slightly more in the infrastructure area, so we took some charges on that. And there was some other year-end catchup expenses as well. So again, I would look at the full-year expense rates rather than just the quarter.

Okay. And I'll sneak this, the volatility comment, you were saying it's good for you, bad for some others. That's more your comment that yours is a client flow business as opposed to (multiple speakers)

Yes, exactly. We need the client flow. We have very, very little proprietary activity going on. And, we really need to see the clients in the markets doing things. And I would say that the back half of 2010 was relatively slow from that perspective. It looks good, and as I said, it started to trend up towards the end of October.

Okay, thank you.

Just as an add-on to that, I know Richard did mention that market conditions were improving in terms of the environment that he was seeing in October, and I know that he did discuss November a little bit there, but I wanted to emphasize that without taking anything away from his statements, the consistency of our Wholesale results has been extremely important to us. And I just would ask David Williamson to give a little bit of history on that. Because I think a huge amount of the progress that has been made in our Wholesale business has to do with that consistency, which provides a foundation of earnings. And as Richard said, in a little bit of a better environment, the bottom-line numbers probably would be a bit better. But I think the consistency is critical, and I would like David to comment on that.

Certainly. Thanks, Gerry. So, on page 9 of the SFI, we have our trading activities, and if you take those numbers and adjust out the impact of structured credit, it links with what Richard was saying, which is the focus of our trading activities being that on our customer flow as opposed to proprietary trading, and just resulting in a more consistent and sustainable level of trading revenue.

In fact, over the last eight quarters, we've been within a range of CAD150 million to CAD225 million now for each quarter for the last two years. So, indicative of being tied more to customer flow and less so to proprietary trading. And as Gerry said, linked to his and our objective of consistent and sustainable returns.

Glad I could set up that editorial.

Yes, and if I could, it's Richard again. I'll just add that I think some of the steps we've taken should see us moving towards the better end of that range for us.

We just added a high yield -- [gained] a high-yield operation in our trading -- in our Capital Markets area. And, we've completed the staffing of our senior Capital Markets person in London, Hong Kong, and in New York to support our business here, which is an international business based in Canada. So I'm very hopeful that we're going to see us moving up to the high end of that range.

Steve Theriault, Bank of America Merrill Lynch.

Thanks very much. Maybe for Sonia or for David, how much did the Citi deal add to earnings in the quarter? I think it was in for roughly two-thirds.

It was for two-thirds. So on a reported basis, really didn't do much of anything because we had two months of it, but we had to set up the general for the cards that came on balance sheet, so --

Was that CAD40 million? Was that --?

The general was of that kind of size, but it -- that's the upshot is that setting up a general of about that size offset the returns for the couple of months.

And then for Sonia, if I look at the mortgage balances, trying to do it on a managed basis, it looks to me like residential mortgage balances declined actually about 1.5% in the quarter. Is that right? Is that indicative of us starting to see some material softening here?

They did not decline in the quarter. I'm just trying to see what you're looking at, but --

Just taking the balance sheet mortgages and adding back the securitized notionals.

Yes, so if you look to page 15 of the investor presentation, you will see that they are up on the quarter. It's low -- the growth is slow, that's for sure, but there was still growth in the fourth quarter. And you see mortgages and lending combined; lending is flat, so the increase that you see on that slide is attributed to mortgages.

Okay. Maybe I'll come back to you on that.

Okay.

And then maybe for David, the Corporate and Other line was a particularly strong contribution, if we net out the noise from the capital repatriation. Is that at all securitization driven or were there some AFS gains that are going through that line? That's close to a positive 50, whereas typically, a bit of a drag on an operating basis. So some color there would be appreciated.

Yes, certainly. No, primarily what's going through there is gains on AFS sales that stay in the center. So quarter over quarter they're about the same, but some stayed in the center this quarter more so than in the prior quarter. So that's what -- you're absolutely right about the delta, but that's what caused it.

How much of the CAD47 million would be AFS related?

Pretty much all of it.

Okay. And then maybe just to follow up, Dave, how much of the general allowance reversal was attributable to that small business methodology change that you mentioned?

It was -- the key thing is the biggest part of the reversal was the improvement in cards and personal lending, so that was the biggest item. And frankly, actually, the parameter change was smaller than the impact of MasterCard. So, you've had three things hitting the general. MasterCard set up being roughly equal to but bigger than the parameter change. So really what the big driver or the general change was just improvement in the underlying credit.

Okay. Thanks very much.

Steve, just to come back -- it's Sonia here -- to come back to you on the residential mortgages, the quarter over quarter number is up almost 1%, it's up 0.7%. And the year over year is up 6%.

Thank you.

Darko Mihelic, Cormark Securities.

Hi, a couple of questions, the first one with respect to the capital repatriation; can you just remind me the boundary -- what is it that causes it? What triggers it? Is it over -- should we really care? I mean I'm just trying to get my head wrapped around this item. It's particularly large this quarter and I'm just trying to get my head wrapped around it.

Yes, by all means, it's an item that does take a moment to wrap your head around, but the key thing is no, you shouldn't care; no impact on capital ratios; no impact on shareholders' equity.

But let's -- there are bigger amounts, so let's go through it just to make sure that we are collectively aware of the mechanics. But the big picture is just as you said, Darko, you shouldn't care. We've had a number of these since I've been with the Bank; just this one is bigger.

So, the genesis of it is when we move money into our foreign subsidiaries, pretty much at any point in time in the past, it's been with a weaker Canadian dollar than we currently have. So, irrespective of when the money went offshore, you can be pretty much sure that we're going to have a foreign exchange loss on our funds that are in those foreign subsidiaries. However, we hedge those positions. So we are going to have gains on the hedges.

What causes the noise is the foreign exchange loss in the foreign subsidiaries is now taxable. The hedge is taxable. So in order to end up in a happy place on an after-tax basis, you have to over hedge, right? And there is some ratio of almost like CAD1.50 for every CAD1 we're trying to hedge because of taxes.

Okay, I see. All right.

So what's ending up happening is you have an oversized gain on the hedge relative to the loss, and that goes into revenue. But you have this tax expense as well, which goes into the tax expense line. So in aggregate, you end up near enough to flat. This repatriation we had CAD117 million charge indicating we were underhedged, right? But that's what's going on, is the taxable hedge offsetting a nontaxable offshore position.

And why you shouldn't need to care is, each month and each quarter, these flows are being recognized in other comprehensive income and shareholders equity, and so they are already in our ratios or already in our shareholder equity base. They're already in our capital ratios. It's when we actually move the money, it crystallizes it by moving it all within shareholders' equity, but moves it from other comprehensive income into retained earnings via a quick trip through the P&L. So flash it through P&L, but only just in moving from one part of shareholders' equity to another part of shareholders' equity. So it's already in our ratios. It's been reflected over the months and quarters of the past years, but when we move the money, it crystallizes it.

Thanks for that. I mean I may follow up with you just because it's peculiar to CIBC.

My main question really relates to expenses. And this is probably a question for Gerry, or you, David. I'm not sure who wants to tackle this, but in the past, CIBC used to look at expenses at the all-in level and suggest this is kind of a number that we look at that we're going to manage to. And you've sort of gone away from that. But this particular quarter, expenses certainly were a lot higher than where you normally come in at, whether you would look at it from an efficiency point of view or even from just an overall run rate level.

So, perhaps, maybe you can -- you touched upon the wholesale side. But maybe you can touch upon just at the all bank level, how much of these expenses we should think of as sort of one-off or one time, and maybe guide or give us an idea of what a run rate would more or less look like for CIBC.

It's Gerry. I will start off with the strategic element, and David will give you the details that answer the latter part of your question. I will address the former part.

We -- oh probably five years ago, decided that from an expense viewpoint, we wanted to, over a long-term, normalize our expenses at a median NIX ratio within the industry. As you recall at the time, we were at the back end of the industry. What we did at the time was lay out a program of cost reductions, which we achieved, and then we basically said that that was it for the cost reductions, and it was cost discipline from there on in, i.e. we were going to hold the expense level, which we did for several years, while our revenues started to recover. And the idea was that we were now going to address getting to the median NIX through the revenue side, having normalized what we considered our cost base. So that's why you saw Q4 of 2006 I believe it was, became the target because people wanted something, a metric, until we got to the median NIX ratio that they could mark us on either above or below your absolute number.

Once we got closer to the NIX, which we actually have achieved in many quarters now, we basically said as of the end of 2009 or I think around that period because we got to the median NIX at the end of 2009, that the median NIX had been and always was the strategic target, and we had let go of those absolute numbers because it was a frozen number from 2006. And we adjusted it for any disposals and all that, so it really was something where, to have a vibrant business and to, most importantly, achieve our NIX at a certain point through growth, you can't keep your expenses at an absolute level that's three or four years old on an ongoing basis.

So, our expense growth since then has been in a positive ratio to our revenue growth, thus the progress on our NIX. So the absolute level that we are targeting from a scorecard viewpoint is the median NIX ratio.

All that having been said, to get to the second part of your question and set David up, Q4 had some extra expense items in it that are not expected to repeat. I'll turn it over to David now.

Thanks, Gerry. Yes, Darko, I appreciate you asking the question because the Q4 expenses aren't something you would want to annualize, because you would end up too high for the next year. So, frankly there's not any one particular thing.

Obviously, there's HST which we had a full quarter of it now. We only had a bit in the third quarter. Some of the growth initiatives in Retail are coming through. But to Gerry's point, there's advertising and project spend, some professional fees, some severance, just a variety of items that caused Q4 to be higher than what you would want to annualize for the next year.

And you're not willing to provide sort of like a roundabout number of how far off we are relative to like an annualized run rate?

No, I think because there is so much potential for movement here, it's -- we might be probably just better to say, which is exactly what you identified; they are higher this quarter than what you would anticipate. You would expect them to come off in the run rate for next year and in Q1 of next year.

Okay. All right, thanks very much.

Sumit Malhotra, Macquarie Capital Markets.

Yes, just staying with Darko's question on expenses, if I look at Retail Markets this quarter, you've been -- obviously some of the expense uptick does go through there as well. You had a couple of quarters in which we have seen operating leverage in Retail turn negative this year, and certainly that's been the case on an all-bank level.

Sonia, when I go back to your investor day a couple months back, and think about the targets you gave us, when we're laying out specifically in this case 2011, how are you thinking about the revenue expense relationship, and in a slowing revenue environment, do you still have enough levers that positive operating leverage is a reasonable goal?

Yes, I think the message I communicated at the investor day would still remain consistent. There are two big factors in terms of the retail numbers that have had an impact. One is HST, and the other is pension. So those would be the two impacts relative to the broad message that I provided at the Investor Day, which remains consistent.

I might have missed it earlier, the comment on pension. Is there just a little bit of detail you can provide on that?

Why don't I let David talk about that since that's an all-bank impact?

Sonia is right. That's an all bank, but obviously when we talk all bank, Retail Markets ends up with the vast majority of it, and that's why it's relevant for Retail Markets. So, new actuarial inputs, not the least of which is lower interest rates, has pushed up our pension expense. So if you look at it, which we do for retail, year over year, Q4 over last year's Q4, part of the adverse impact on the operating leverage is pension expense, and then obviously now we have a full quarter of HST and that hits Retail as well. So those are -- if you pull those out, we get to a place where we would want to be on operating leverage.

So if I play ball with all the items you specified, if I can say that, non-comp expenses are up about CAD90 million; and how much was the pension? How much was the HST? Do those both go through the Other line?

Yes; so, obviously, pension is probably something that should be a theme you will hear throughout the calls with the various banks because that -- with interest rates coming down, it should be something that's an industry kind of phenomenon; and the same also with HST.

To actually break out the amounts, I think -- I don't know if there's an effective way to best do that. There's other things going on inside Retail that are consistent with what Sonia would have talked about as far as revenue enhancements but tend to be a bit higher in the fourth quarter. Project spend sometimes comes up a bit higher in the fourth quarter. Advertising tends to be seasonally higher in the fourth quarter. And that's why you wouldn't want to take those and annualize them, but they are consistent with the growth story in Retail.

So I think you're messaging is from both of you, there's some stuff in this quarter that's not likely to repeat. And in Sonia's case, I mean, I guess for one reason or another, the Bank has been dealing with, or the segment has been dealing with a lower revenue growth environment for a few years, and you think there's still enough on the expense side that you can keep the revenue expense gap positive?

Yes, that's right. That's exactly right.

Okay. Lastly, just shifting over to credit for Tom, you referenced in your comments the large write-off in the commercial real estate book in the US. So, if I just look at the numbers here now, I take it that this write-off related to some of the stuff that had been set up before, your gross impaired loans at the end of the quarter, down to $221 million. So have we basically in your mind here, the write-off just related to stuff that you had provisioned for over the past year? Is that the right way to think about it?

Well, the past 18 months. And just for clarification, what Sumit is referring to is, taking off the balance sheet loans that we have concluded we have no reasonable expectation of recovering on. So all of these would have been provided for before; most of them in the last 12 months, but, some of them would have gone back 18 months.

So I'm looking at this. Over the last year, your provisions for US CRE have been about CAD115 million and you have taken a CAD91 million write-off this quarter. So it doesn't look like there had been much before that in that portfolio. So you're feeling pretty good about where we stand now here?

Yes. Just to be precise, not all CAD91 million would have been from the last 12 months. Or sorry, not all of the write-off would have been from the last 12 months. It would have gone back further. But, we did a particularly intensive review this quarter of predicted recovery rates, so I am feeling pretty good. And the kind of write-offs you saw in Q4, I would be very surprised if you saw anything close to that in Q1 and Q2 just because we have done a very intensive review.

Thanks for your time.

Michael Goldberg, Desjardins Securities.

Thanks. Good morning. It looks like fourth-quarter results were helped by securitization activity. I'm looking at your securitization revenue, and also page 17 of your supp pack. So was the increase in securitized card receivables related to the Citi acquisition, is one question.

I know we're still a year away from IFRS, but is the most -- but is the recent benefit of securitization taking you above the earnings level you would be at under IFRS treatment of securitization revenue?

And, how should we interpret the roughly CAD50 million to CAD60 million increase in the income statement to impact this quarter, and offset against what you said were higher than normal expenses?

Okay, let me take a crack at that, Michael, and just guide me if I get off point. So, page 17 of asset securitization; you're right, non-interest income securitization revenue, up CAD60 million. So not all of it, but a big chunk of that is the MasterCard bringing on the Broadway trust component, which was the biggest part of the asset that we got from MasterCard.

Now, you've raised the IFRS question and how does that impact earnings in an IFRS world. So, an interesting question because you have two offsetting elements to that. So, in a Canadian GAAP world, when you securitize, you get a gain on securitization, but you lose the NIMs going forward. In an IFRS world, you get the NIMs but you lose the gain up front. So, it's not fact-certain as to what it actually means to your earnings.

We think on average, earnings in the IFRS world will be higher than what they would be in a Canadian GAAP world. But, if that's -- it's a trade-off between not getting the upfront gains, but getting enhanced NIM.

Now, as you know, Michael, we've been showing Retail as if we keep all the securitizations in the center so that Retail is shown with its NIM, but I know your question is in relation to the overall bank results, and that is the dichotomy we will have in an IFRS world. No up front again, but enhanced bank-wide NIMs.

So looking at that bottom line of the total income statement effect going from CAD48 million to CAD102 million this quarter, how should we view that CAD54 million increase in relation to the impact on your earnings?

So, a couple of things I guess. One is that that, by having now the Broadway Trust in there, that is going to be a reoccurring theme in our earnings, right? So that's a delta. We had only two months in Q4, so as we go forward, we will have a full quarter and we will have continued Broadway Trust in that; so that is one thing we all need to keep in mind when we're looking at our earnings.

And then the other part that you are quite reasonably trying to understand is just what earnings will do in an IFRS world. And again, we think it will be better than what it would be under Canadian GAAP, but it's, again, there's that delta between what you get as far as NIMs and gains on sale.

So I just want to clarify this and make sure that I understand it. Can I look at this increase as being a picture of sort of a one-time impact on earnings? Although it will remain, but just the increase as being a key part of the benefit of the -- overall of the Citi card acquisition on results this quarter?

Yes, there's more -- we might need to take it off-line and then I'll put it on the frequently asked questions, anything that the broader group would be -- want to be interested in or that comes out of our conversation.

But big picture, yes, this is something -- this is a new thing, so part of it is going to continue because Broadway Trust will continue, so that's going to bump the amount that you will see here going forward, and bump it further because we've got a full quarter coming as opposed to a part quarter.

But obviously, inside this space, there's other things than Broadway Trust. So you're going to still have -- so don't just take the CAD102 million and say that will be it forever. But I think your primary point is why is it higher than Q3? Yes, it should continue to be at higher levels due to Broadway Trust's impact.

Anything beyond that, Michael, we can dissect it a bit further, but we maybe should do that off-line, if you're on for that?

Okay. But just one last thing in terms of that increase, in terms of order of magnitude, what you were talking about in expenses, without going into the detail of expenses, is the positive effect here -- how does it compare against the negative effect of the sort of one-time type or irregular effect of expenses that you were discussing?

I'm not too sure I follow you. So, the other expenses I discussed is the bank-wide expenses?

That's right.

I don't see a tight correlation there. What I was talking about was the overall expenses just this quarter, a number of items that frankly nothing, no particular themes say other than pension and HST. A lot of other items in aggregate are elevating our expenses this quarter.

Separate and apart from that is the -- what we've got with Broadway Trust.

The one theme here where it does maybe connect is the impact that MasterCard has on the general; that is one thing that -- where there is a connection point. As far as we're seeing the pickup on asset securitization revenue here, but at the same time, we need to recognize that we set up a general provision for the on balance sheet cards that weren't part of Broadway Trust.

Okay. Maybe we can take it off-line.

Okay. Yes, I would be happy to do that. And again, for anyone on the call, what comes out of that conversation, I will put it on the FAQ for everyone to see. Thanks, Michael.

Mario Mendonca Canaccord Genuity.

This is just a clarification of an answer you gave to Steve Theriault. If you look at your analysts view items, those extra slides that you set up and provided to us, when you go through the reversal of the general, you explained that there was a strengthening in Retail Markets of CAD7 million pretax. My understanding is that that related to the MasterCard acquisition. Is that true?

No, I think the CAD7 million that's in retail, that's FirstCaribbean. FirstCaribbean this quarter is still -- the general will go through retail. In the future we won't have it do that, but that's FirstCaribbean.

Okay, sorry. Then that answers my question. Thank you very much.

Yes, no trouble at all. Thanks, Mario.

Peter Routledge, National Bank Financial.

Just a quick question on the dividend. I'm interpreting from Tom's comments that capital, while important, is probably not going to be a material issue in thinking about the dividend in 2011.

So then, the question is, earnings, and how does EPS versus your core cash EPS affect that decision? And the reason why I ask is, to some extent, it's not improbable that the bank continues to have some one-time charges or unusual charges for getting down your structured credit exposures. And I'm wondering, is that a material issue when you're thinking about what to do with the dividend? Or do you just look straight to core cash EPS? And that's it. Thanks.

I, at this time, would not expect that that would be a material issue.

And, you just -- I mean why? I mean you're likely to have some more charges against core cash -- or against EPS or your structured credit.

Well, actually, 2010 was a net positive in that department, so I -- and I'm not making a forward-looking statement here, but if you look at it, that's been a positive, it's been a negative, and the reality is, that in terms of long-term sustainability of our dividend, which is why we have a 40% to 50% payout, the core earnings are the most important indicator, unless you were getting a very strong deviation, which we don't expect.

And as I say, in 2010, it was a positive. I wouldn't use that positive element either to derive the payout. That's why we go to core earnings.

All right. Thank you.

Thank you. There are no further questions registered at this time. I would like to return the call to Mr. John Ferren.

Okay, thank you, everyone, for joining us this morning. On behalf of the entire team here, we hope you all have a safe and enjoyable holiday. Thank you very much.