Canadian Imperial Bank of Commerce (CM) 2011 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 line, please turn your BlackBerry off for the duration of the meeting.

I would like to turn the meeting over to Mr. Geoff Weiss, Vice President, Investor Relations. Please go ahead, Mr. Weiss.

Good morning and thank you for joining us. This morning, CIBC's senior executives will review CIBC's Q2 results that were released earlier this morning. The documents that will be referenced on this call, including CIBC's Q2 news release, investor presentation and financial supplement, as well as CIBC's Q2 report to shareholders, 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.

This morning's agenda includes opening remarks from Gerry McCaughey, CIBC's President and Chief Executive Officer. Kevin Glass, our CFO, will follow with the financial review; and Tom Woods, and our Chief Risk Officer, will provide a risk management update.

After the presentations, there will be a question-and-answer period that will conclude by 9 a.m. With us today for the question-and-answer period are CIBC's business leaders, Victor Dodig, Richard Nesbitt, and David Williamson, 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 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.

Thank you, Geoff, and good morning, everyone. Before I begin, let me remind you again that my comments this morning may contain forward-looking statements.

Today, CIBC reported solid results for the second quarter of fiscal 2011. Net income was CAD678 million and cash earnings per share were CAD1.62, or CAD1.75, adjusting for items of note.

Return on equity for the quarter was strong at 19.9%.

Turning to our business results, CIBC Retail Markets reported net income of CAD553 million, up 14% from a year ago. Revenue was CAD2.5 billion, up 5% over the same period in 2010, supported by volume growth in all of our Canadian segments. Loan losses of CAD279 million were down 16% from a year ago. Personal banking volume growth was solid across most lines of business, including deposits, mortgages, and cards.

In Business Banking, which has been an area of focus, we increased market share with funds managed growth of more than 9% from a year ago. Wealth Management also performed well this quarter in what continued to be a strong equity market. Revenue was up 15% from a year ago.

We enjoyed strong sales and performance in our mutual fund business. Year-to-date, long-term fund sales of CAD2.5 [billion] surpasses the sales record set in all of 2010 in only six months.

During the quarter, Retail Markets continued to invest in providing sound financial advice and greater access and choice for our clients. We introduced three new MasterCard credit cards with PayPass contactless tap-and-go functionality. We continued to expand full-service banking on weekends, allowing customers to bank at over 500 branches on Saturdays, and 50 branches in select urban markets on Sundays.

And we launched a new marketing campaign focused on deepening customer relationships by offering them more reasons to switch to CIBC, for expert advice, innovative products and services, as well as added convenience.

David Williamson and Victor Dodig are here this morning to talk about our progress in Personal and Business Banking and Wealth Management, respectively.

Wholesale Banking also performed well this quarter despite more challenging market conditions compared to Q1. Net income was CAD112 million. Excluding items of note, net income was CAD162 million, down CAD23 million from a very strong first quarter.

Wholesale Banking participated in a number of significant client transactions across our Capital Markets, Investment Banking and Corporate Lending businesses. These included continued success in leading government bond offerings and key roles advising on merger and acquisitions, particularly in the mining sector and IPO activity in the energy sector, demonstrating the capability of our new Global Energy team based in Calgary.

These core client-focused businesses continue to report consistent and sustainable results aligned with our risk appetite. Richard Nesbitt is here this morning to talk about our progress in Wholesale Banking.

We continue to actively manage down the structured credit runoff portfolio. During the quarter, we reduced our exposures by CAD2.4 billion, which had a positive impact on Tier 1 capital ratios of 9 basis points. Subsequent to the quarter end, we have already taken further action that is expected to have an additional 9 basis point positive impact to the Tier 1 ratio.

The current primary determinant of disposition is capital and funding characteristics. Therefore, if conditions remain unchanged, we will continue to dispose of this portfolio with neutral to positive capital and funding characteristics.

Our strong earnings this quarter contributed to further growth in our capital ratios. Our Tier 1 ratio increased to 14.7% from 14.3% at the end of Q1. Our tangible common equity ratio increased to 10.6% from 10.2%. Also this morning, we announced two capital initiatives.

First, we announced that we intend to seek to have our Series 26, 27 and 29 convertible preferred shares treated as nonviable contingent capital under Basel III. While this announcement has no impact on our Basel II Tier 1 ratio, it improves our long-term Basel III capital ratio by filling in a portion of the non-common Basel III Tier 1 capital requirements at an attractive rate.

We also announced our intention to redeem our Series 30 preferred shares. The effect of this redemption is expected to be accretive to earnings by about CAD0.03 per year.

CIBC continues to be well-capitalized to support growth in our core businesses and assess market opportunities with a focus on Canada. Our Q2 pro forma Basel III common equity ratio is estimated at 7.8%, exceeding the 2019 minimum standard of 7%. We believe our capital strength positions CIBC well for long-term growth and success.

Let me now turn this meeting over to Kevin Glass for his financial review. Kevin.

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

As Gerry mentioned, we reported strong results this quarter that were helped by lower loan losses, volume growth in CIBC Retail Markets and higher Treasury results. They were hurt by lower Wholesale Banking revenue relative to a strong prior quarter, lower Retail Markets spreads and lower reported FirstCaribbean revenue.

Earnings per share this quarter were CAD1.60, or CAD1.62 on a cash basis. As listed on the top right of this slide, our only item of note is related to structured credit runoff and totaled CAD0.13 per share. I'll provide more details on this in a few moments.

Our cash EPS excluding this item was CAD1.75, which, while down from the prior quarter, was well up from the second quarter last year. As Gerry mentioned, our capital position continues to strengthen, and as you can see on this slide, we finished the quarter in a very strong position.

Slide 6 provides a summarized statement of operations on a reported basis, showing net income for the quarter of CAD678 million.

I would now like to turn to our business results, starting with CIBC Retail Markets on slide 7. Revenue for the quarter was CAD2.45 billion, up CAD118 million, or 5%, from the same quarter last year. Sold year-over-year domestic revenue growth was supported by strong market-driven growth in Wealth Management and by volume growth in Personal and Business Banking.

Looking at the results of the specific business lines on this slide, Personal Banking revenue of CAD1.6 billion was up CAD16 million, or 4%, from the same quarter last year due to solid volume growth in most products, including the acquired MasterCard portfolio, and higher fees, partially offset by narrower spreads on lending products.

Business Banking revenue of CAD337 million was up CAD13 million, or 4%, from the same quarter last year, with strong volume growth of 9%, partially offset by narrower spreads.

Wealth Management revenue of CAD397 million was up CAD52 million, or 15%, from the same quarter last year due to higher asset values and trading volumes.

FirstCaribbean revenue, as reported in CIBC's consolidated statements, was CAD116 million, down CAD49 million, or 30%, relative to the prior-year quarter. This was primarily due to lower gains on sales of securities and the impact of the weaker US dollar, which negatively affected both the value of translated results, as well as the accounting for certain available-for-sale securities which did not qualify for hedge accounting under Canadian GAAP. Excluding these items, FirstCaribbean results were actually in line with both the prior-year quarter and previous quarter.

Other revenue was up CAD42 million, primarily due to higher Treasury allocations. As part of our recent Treasury activities, we have taken advantage of favorable market opportunities and accelerated our term funding. A consequence of taking this action is larger liquid assets on the balance sheet and higher funding costs, which are primarily allocated to Retail Markets. Had we not accelerated this funding, our Treasury allocations to Retail would have been higher.

Turning now to slide 8, net income this quarter from CIBC Retail Markets was CAD553 million, up CAD66 million or 14%, from the same quarter last year. Revenue was up CAD118 million for the reasons previously discussed.

A provision for credit losses of CAD279 million was down CAD54 million from the same quarter last year as a result of improved economic conditions. Tom Woods will discuss credit quality in his remarks.

Non-interest expenses were CAD1.4 billion, up CAD89 million or 7% from the second quarter last year. This was primarily due to increases in performance-based compensation, higher pension expenses, the impact of HST and higher servicing fees related to the acquired MasterCard portfolio.

Regional margins were down 6 basis points versus the prior quarter, largely due to mix, much of which was caused by a seasonal decline in cards balances, as well as the effects of more competitive pricing in mortgages and lending. We expect that near-term margins will continue to be pressured by competitive rates.

Given the recent organizational announcement to separate the management of CIBC Wealth Management and FirstCaribbean from CIBC Retail Markets, we expect to commence reporting on a revised basis beginning next quarter. We are currently finalizing our disclosure, but in any event, we do anticipate reporting Wealth Management as a separate segment.

Turning to Wholesale Banking on slide 9, revenue this quarter was CAD393 million, down CAD78 million or 17% compared to a strong prior quarter. Excluding items of note from both the current and prior quarter, Wholesale Banking revenue was CAD441 million, down CAD80 million or 15%.

During the second quarter, our core Wholesale Banking business of Capital Markets and Corporate and Investment Banking revenue was CAD452 million, down CAD48 million or 10% compared to the first quarter of 2011. The main drivers for this decrease were reduced market activity, which lowered revenues in both our Advisory and Equity Issuance businesses, and lower Merchant Banking revenue.

In the Other segment, we had a loss of CAD14 million, primarily due to credit valuation charges in the current quarter compared with reversals in the prior quarter.

On slide 10, Wholesale Banking net income was CAD112 million this quarter, down CAD24 million from the prior quarter. Revenue was down CAD78 million from the first quarter for the reasons previously noted. Credit quality continues to remain strong, with a provision for credit losses of CAD1 million this quarter.

Non-interest expenses were CAD271 million, down CAD32 million from the prior quarter, mainly due to lower performance-based compensation. Excluding all items of note, net income for this quarter was CAD162 million, down CAD23 million from the prior quarter on the same basis.

This next slide summarizes our structured credit runoff results. We had a pretax loss of CAD70 million this quarter versus a loss of CAD68 million last quarter. Starting with row 1, here we had a decrease in the CVA resulting from improvements and changes in the underlying value of holdings hedged by financial guarantors.

On row 2, we had a loss of CAD57 million on purchased credit derivatives that are marked to market and which hedge loans which are carried at amortized cost. This was largely a timing issue, and there was a loss this quarter due to the improvement in the market value of the underlying loans.

On row 3, we had a loss of CAD19 million resulting from the sale of securities and termination of written protection totaling CAD1.2 billion, as well as terminating CAD900 million of purchase protection. This resulted in a total reduction in notionals of approximately CAD2.1 billion and lower capital requirements, resulting, as Gerry mentioned, in a net positive impact on our Tier 1 ratio.

The loss on row 4 represents the net effect of gains and losses on unhedged positions, as well as interest and expenses. Subsequent to the year-end, we sold certain securities positions, terminated unmatched protection purchased from financial guarantors and agreed in principle to sell the residual value of the USRMM positions hedged by the limited recourse note. These transactions are expected to result in a pretax gain of approximately CAD24 million and lower regulatory capital requirements, for a net positive effect on our Tier 1 ratio of approximately 9 basis points.

In summary, our second-quarter results were strong. Compared to the second quarter of last year, we experienced strong revenue growth in our Canadian Retail Banking business. And compared to a strong prior quarter, our Wholesale Banking results declined in line with market conditions. This business continues to deliver steady and risk-controlled performance as a result of our client-driven strategy.

During the quarter, we continued to have good loan-loss experience and our capital position continues to strengthen. Thanks for your attention and I would now like to turn the meeting over to Tom Woods.

Thank you, Kevin. Good morning, everybody. With respect to credit risk on slide 18, specific loan-loss provisions in Q2 were CAD210 million, down CAD16 million versus Q1. The quarter-over-quarter decrease was primarily due to lower write-offs and bankruptcies in the credit card and personal lending portfolios, and the favorable impact from the credit card securitization that took place in Q1. This was partially offset by higher losses in the MasterCard portfolio we acquired from Citicorp in Q4 of 2010.

You will recall that we acquired only non-delinquent accounts. New delinquencies are occurring, as expected, and have rolled through to write-off for the first time this quarter.

General loan losses were a recovery of CAD16 million, similar to the prior quarter. The reversals in the Business and Government and Personal portfolios were partially offset by an increase in provisions in the Credit Card portfolio.

Gross impaired loans were down CAD87 million in Q2 for two reasons. First, new formations were down for the seventh consecutive quarter; and second, the amount of loans returning to performing status was higher.

On slide 19, our Cards portfolio loss rate in Q2 was 4.8% versus 4.5% last quarter, and the peak of 7.1% in Q3 2009. Losses were up CAD3 million versus Q1, as expected, due to the MasterCard portfolio.

On slide 20, our US Real Estate Finance Business has CAD1.9 billion of net drawn exposures and CAD699 million of undrawn exposure. In Q2, we took loan loss provisions of CAD4 million, down from CAD5 million in Q1. We had CAD170 million of net impaired loans in this portfolio.

Losses have trended down now for four successive quarters. The outlook for losses in fiscal 2011 continues to be positive. However, we could see a slightly higher loan-loss rate in the rest of the year.

Our US leveraged finance runoff loan book has CAD167 million in net drawn exposures and CAD211 million in undrawns. There were net recoveries of CAD1 million in Q2 in this portfolio.

Our European leveraged finance runoff book is CAD476 million in net drawn exposures and CAD104 million in undrawns. In Q2, there were net recoveries of CAD2 million in this portfolio.

The outlook for losses in both leveraged finance runoff portfolios continues to be positive.

Turning to market risk on slide 22, it shows the Q2 distribution of revenue in our trading portfolios. In all but three trading days in Q2, or 95% of the time, we had positive results.

Slide 23. As Gerry said, our Tier 1 ratio was 14.7% in Q2, up 40 basis points from 14.3% at the end of Q1. Our tangible common equity ratio increased to 10.6%, up from 10.2% last quarter. The higher Tier 1 ratio was mainly due to earnings net of dividends, equity issued in our dividend reinvestment plan and a decrease in risk-weighted assets.

The Basel III guidelines will be effective starting January 1, 2013. CIBC is well-positioned for the Basel III transition. Our pro forma Basel III common equity ratio as at April 30, 2011 is 7.8%, exceeding today the announced Basel III 2019 minimum requirement.

I will now hand it back to Geoff Weiss.

We will now take questions on the line.

(Operator Instructions) Gabriel Dechaine, Credit Suisse.

Hi, good morning. Just want to talk about the Commercial Lending. The balances were up (about) over 4% on a linked-quarter basis. But you are also talking about pressure on spreads. Can you give me a sense of what your strategy is there, if you are taking some lower spreads in order to gain market share, which appears to be the case?

And then on the capital front, I mean it is encouraging to see your disclosure on Basel III, the non-viable or contingent capital stuff. I get to about a 1% contingent capital, if you will, ratio. Is that -- how should we look at your capital structure on a pro forma basis? Are you going to manage to a 7% core Tier 1, and then have 3% [non-VCC] or something along those lines?

And then also, do you have any further plans to reduce your preferred share capital base? There is a lot of -- basically, what one of your peers did was targeted rate reset preferred. But I was wondering if you are going to adopt a similar strategy.

Hi, it's Gerry here. We will take two and three first, and then David will handle number one. I think the questions were -- you are interested in Basel III positioning, and then you are interested in our intent as to our existing non-common Tier 1.

Right.

Okay. On Basel positioning, first of all, the NVCC, we think has a value in the area of 70 basis points, in terms of a contribution to what will be the new Tier 1 under Basel III. So -- and if you want a little briefing on the calculation of that, we can make someone available to you after the call. So, I think that is part one.

Part two is that today we took action to indicate redemption of our Series 30. In our schedule of other preferreds, there are preferreds coming up for redemption dates, some of them at slight premiums to par, depending on the timing. And in general, our intention is to look very closely as we get to those redemption dates to exercising our right of redemption.

These securities are still qualified under Basel II and do have a phaseout period under Basel III, so I wouldn't say that -- I don't want to notify you in advance. There is always uncertainty around these matters. But in general, if conditions remained the same and there were no surprises, we would be looking very closely at exercising the redemption rights that you see in the schedule of all of our Tier 1 -- excuse me -- non-qualified for Basel III Tier 1 securities. That is part one. Part two is that --

If I can just pause you before the -- oh -- part two -- not the commercial stuff, but the (multiple speakers)?

No, part two on this is that it is possible that at a future date we would look at purchase of securities in the marketplace. You have seen that certain other of our peers in the banking industry have looked at that, so that is always a possibility.

And I did want to make clear that whatever the means, the reality is that we have a tremendous excess of Tier 1 under Basel II. And other than what we have converted today through this NVCC security, which we are very pleased with, the rest of it under Basel III, subject to the phaseout period, is not useful to us from a core capital level. So whatever method we can find to reduce that unnecessary access, that we will be pursuing.

And just to clarify, how do you see your capital structure -- 7% core Tier 1? What minimum you are going to manage to -- in non-common Tier 1, what kind of ratio are you looking for there?

Well, first of all, I wanted to emphasize that the new Basel III regime only starts in 2013. And then there are phase-in periods that allow a variety of the elements of the final 2019 to be phased in over the intervening period. And so that is the first thing, is that we are not there yet.

So when one talks about what one might have as targets that could be different than the regulatory requirement, I think it is a bit premature to get there now, because we are not even in the period. So to try to get to what is required in 2019 early, and then to have targets above that at this point I think is a bit early from a viewpoint of establishing that.

However, I would say that when we do come to that period of time, we would be looking at qualifying, and we have been trying as much as possible to qualify in 2013 for the 2019 requirements, which we think is way at the upper end of best practices, part one.

And part two, we would be looking at -- when you are trying to stay above these levels, you do require some differential in order to manage from quarter to quarter. So it is reasonable to assume that we would have some form of internal target that would be above what the regulators would have out there.

Lastly, I would say, some of this, I think, is still subject to change at a regulatory level. There is a lot more clarity now than there was recently, but it is possible there will be further developments [regulatorially]. There is still the discussion around strategically important financial institutions, as opposed to globally strategically important financial institutions that is taking place. And we really do need to see the outcome of that before we would give you much further indication as to the size of such buffers.

Okay.

I will turn you over to David now for the lending answer.

Thanks, Gerry.

Thanks, Gerry. Yes, so the question on Commercial Lending volume growth, and the recognition that there is pressure on spreads. So a couple of points I would make there.

One is in Commercial Banking, I think some of the key factors that have allowed us to get some traction on our volume growth is we brought in new leadership for this space some time ago. And then beyond that, we deepened the team. And then after that, changed the sales team structure with the intent of just putting more focus on this spectrum of borrower, and made sure that we were giving it due attention, and had our sales team structured in a way that we were more focused on the need of this customer group. And I think that has allowed us to get some traction in this space, in the commercial lending space.

Now with respect to rates, in actual fact, we increased our lending rates during the '08/'09 timeframe. So we had our -- actually took action to improve our structure for sales, but actually took action to increase lending rates.

But what we are seeing now, Gabriel, as you have identified, is some giveback in that space. Competitive pressure in the lending space is increased right now, and there is some giveback on the lending spreads.

In addition, on the deposit side, in a lower interest rate environment as rates continue to decline, it just puts pressure on the spreads we are getting on business deposits, which also affects the overall spreads in the sector.

So overall, I would like to believe that some of our actions on the team and our sales structure is helping us get traction on volumes, and the current environment is putting some pressure on spreads.

Thank you.

John Reucassel, BMO Capital Markets.

Thanks. Just a question, Gerry, on these conversions of the prep shares to NVCC. Do you expect to do that -- given the current coupon, are you going to have to -- or prep dividend rate, are you going to have to change that? And could you maybe give some details on what the trigger event is in deed poll -- just some of the mechanics of the conversion?

I am going to turn it over to Andrew Kriegler, from our Treasury Department, who has been closely working on this, and he will give you the exact details. Andrew?

Thanks, Gerry. Good morning, John. I guess first thing, to answer your question about the dividend rate, we are not changing the dividend rate or any of the other substantive terms of the securities. All we have done in respect of the qualification of these securities as NVCC instruments is to, in the first part, undertake to OSFI to convert them if, as and when there is a finding of non-viability.

Second, we have also undertaken through this deed poll mechanism to tell the holders of the securities that we will not convert the shares to common, except in the circumstances where there is a finding of non-viability. So as a result, all we have done is narrowed down the circumstances that can cause these preferred shares to be converted. That is the only changes we are making.

Okay, and what is the trigger event?

The trigger event is the finding of non-viability by the Superintendent.

But that is not going to be a specific capital ratio? That is just at the discretion of the regulator.

That's correct. It is in line with the draft guidelines that OSFI published sometime ago.

Okay, I will ask more questions offline. Just a question for David Williamson. You know, we have seen spreads narrow at a couple of your competitors domestically now. What is your outlook for spreads generally? Can spreads stay where they are even if there is no increase in Bank of Canada interest rates, or is this just an anomaly this quarter and spreads aren't that bad? Could you give us an update on the outlook for spreads?

Be happy to, yes. So when we look at what's happened quarter-over-quarter as kind of jumping off point for us, so we are down 6 basis points in NIMs. A couple of factors there. One is mix of our businesses, and partly that is driven by seasonality. And then the other factor is just what I was speaking about before with commercial lending, it is broader than just commercial lending.

The competitive forces right now in lending broadly and in mortgages, it is fairly strong. So looking forward, our plan is for NIMs to stabilize and be relatively flat. But it's going to be somewhat dependent on the degree of the competitive pressure in the marketplace.

And then the other thing you touched on, Tom, is just also the impact of declining interest rates, what that has on our deposit balances. That is another factor, which again, no crystal ball on that as where that will guide us.

So the forecast of flat spreads remains, but it is more sensitive to competitive issues that have emerged over the last three months than you would have said three months ago?

That's exactly right. Yes, that is exactly right. The other thing I would touch on was just something that Kevin put in his remarks. Just our funding costs, we did some advanced funding. There are some extra costs associated with that, to the extent that that has an impact on NIM. So that is something that would drift away as we don't prefund; that was one impact that Kevin referred to.

But I think big picture, you have got it absolutely right. The pressures in the market over the last few months have just caused us to tweak that expectation of flat NIMs a bit to say let's see how competitive the market remains over the next little while.

Great, thank you.

Michael Goldberg, Desjardins Securities.

Thank you. You are generating a lot of capital and your capital ratios are increasing, but your earnings are still too low to increase the dividend. So I have got two related questions.

First, remind us your payout objective and where earnings would have to get to before the dividend would likely increase. And second, what are you going to do with -- otherwise with the capital that you are generating? And then I have got a couple of other questions, if I can, after that.

Certainly. Michael, it's Gerry. Our payout range is targeting to have a dividend between 40% to 50% of our earnings. And if you look at it now, we are at the upper end of that range. Last quarter, we were within the range.

And so the first thing I would say is if one looks at it literally, as we work our way into the range, in theory, we are eligible for a dividend increase. However, I would say that the idea of hovering around 50% is not what our practice has been in the past. Generally, what we have tried to do is take dividend action as we work our way down the range. And the reason for that is because we are at a certain point in the recovery cycle today where we would target to move to the lower end of the range so that you are given more room when you get back into a slower environment or recessionary environment.

So 40% to 50%; we are at the top end of the range. And historically we have -- and I don't see at this time yet a reason to vary from how we operated in the past. Generally, we would try to work our way down the range a bit here, in order to hit our target of high, high confidence around sustainability. So that is part one.

The second part was, I think, given the capital buildup, which is going quite well, your question is about what do we intend to do with the capital. We do intend to take my first set of statements here, and be continuously examining that dividend in light of do we -- are we in an environment where we have a lot more capital building up than we did in the past? Which would be one reason to vary somewhat from our practice of working our way well down into the range of 40% to 50%. So, it is possible that we could move a little earlier than we have in the past because of the excess capital.

We haven't operationalized that yet, because there are too many things changing and that continue to change in terms of the requirements for Basel III. And I would emphasize again that while much of the frameworks of Basel III are on the table, our view is that there is still sufficient question marks out there. And I have said before, this whole concept of strategically important financial institutions and globally strategic importance financial institutions does leave the possibility that there will be globally further overlays coming in terms of capital requirements.

Our intention to be at the forefront of compliance, so that you will be able to continuously question us about an excess, is where we are at today. We want to make sure that we have an excess and that we have in excess when the rules -- or if the rules become more strict. So, that is the main part of my dividend answer and my capital answer.

The only thing on the capital side I would emphasize is we have a tremendous amount of latitude and intention, subject to what I said earlier on about changing conditions and all that, to deal with our non-common Tier 1 equity that we have today -- under Basel II we have an excess; under Basel III, these things don't count. And so they do have a phaseout that operates all the way through to 2019. We really would like to, as I say, basically eliminate the overhang of that capital as rapidly as possible, because that fits every scenario that has been presented so far as a way to improve earnings and yet to continue to advance as being the strongest bank from a capital viewpoint.

Can I just follow up on one thing? When you talk about possibly moving sooner than you would perhaps more normally do, could we consider possibilities such as buyback or special dividend as potential options?

Well, on buyback, I would say at this time that is the least likely, because of everything I said about the changing rules and the evolving rules around Basel III. We really wouldn't want to get into buying back until there is absolutely clarity there and we really knew that we had an excess that we were buying back with. Because again, one of our key objectives here is that when you are looking at CIBC, and you are saying, here is all this stuff that is going to happen between now and 2019, and we can -- you can look at us and say, well, wait a minute. They are compliant across-the-board; therefore, everything that comes in is available for this discussion.

We are just not sure that if we are buying back capital today, it actually was capital that was available for buyback. It might be available now, but if you have to use it in 2014 -- or excuse me, come up with it in 2014, our view is that we would very much want to clear the visibility for you on we're compliant, what comes in of earnings pays the dividend, and the rest of it is available for the business, and does not have to be sidelined in order to comply with these new standards. So that is our primary objective -- the visibility around that.

And we are there now. We do comply. We are being cautious because we think it is possible there are other restrictions coming in Basel III. We don't know that for a fact, but there are enough discussions going on globally that the possibility is fairly strong.

On the special dividend, that would have -- and I mean -- now I am working through the logic of this -- it has much less of an impact in terms of the whole reason why I said buybacks are at the bottom of the list for the moment. I have in the past mused that there are interesting characteristics to special dividends that fit scenarios where you have a transparent, determined excess of capital, but you might not be where you want to be in a payout ratio. And I would say that those remarks, I still think from a technical viewpoint are quite accurate and do fit the scenario that we have today. However, all the other things I've said earlier on about Basel III changing regulation, creating visibility, would say that it is unlikely that we would act in that fashion at the moment.

Thanks, and just one other thing. If you take FirstCaribbean out of Retail, where would you put it?

I am not -- do you mean geography?

No, just in terms of reporting.

I mean accounting geography -- sorry. In winter, I would leave it exactly where it is, Michael. I will turn over to Kevin.

Michael, it is one of the things that we are still looking at. As you know, we now have an International segment, so what we would potentially look at is putting it together with our other International operations. A lot of that is retail, so we haven't decided yet whether or not it stays in Retail.

Another potential option, I guess, would be to put it in Corporate and Other. It is not big enough to stand on its own, so we wouldn't -- we surely wouldn't show it as a separate segment. So it is more a case of where we decide to include it.

Thank you.

Darko Mihelic, Cormark Securities.

Hi, good morning. I'm wondering if we could just go back to the discussion on prefunding. And I'm just looking for a little bit more color on what exactly it was that you did. How much did it hurt the quarter in terms of impact on net interest income? And more importantly perhaps, how much will it help your margin on a go-forward basis? Any color on that would be helpful, I think.

So it's Kevin Glass. I will take that. I think as far as accelerated term funding is concerned, these higher external funding costs are primarily allocated to Retail. And so the (inaudible) impact for the current quarter was -- we estimate approximately CAD10 million.

To the extent we slow our funding plans forward, or have different opportunities, that will obviously -- opportunities, rather -- that will obviously impact what the future looks like. And our Capital Group and businesses are still taking a look at that.

Sorry -- so this is top of the house CAD10 million or just CAD10 million to Retail?

Well, it's CAD10 million to Retail, and that is on an after-tax basis. 90% of that -- or that represents 90% of the top-of-the-house number, because that gets allocated out of Treasury, 90% of which goes to Retail.

Okay, and how does it help your margin in future periods?

Well, to the extent that we can deploy those in high-yielding assets, obviously, that would help margins. We prefunded so we got it at very good rates. So to the extent we don't have to replace it with higher, more expensive debt in the future, that is going to help us in the longer term.

Okay, thank you. And maybe just a couple of numbers questions as well. When I look at your supplemental, a couple things really stick out. One is card fees really came in at a brand-new low, and income from securitized assets was up quite big. I'm wondering if you can just touch on those, if you could.

Sure, and those are two -- they are directly related. So at the end of last quarter, we did have significant -- call it securitization. If you remember, it was about CAD1.7 billion. That was for internal capital management. And as a result of that, our -- it had no economic impact to the bottom line. But our securitization income is up and card fees would be down, so it is between those two lines.

Okay, that's helpful. Thank you.

Brad Smith, Stonecap Securities.

Sure, thanks very much. My question relates also to the capital. I am not sure who I should direct it to -- Gerry, perhaps you. The discussion that just preceded here, talking about excess capital and how you might deal with that, I found intriguing. And I appreciate that your Tier 1 ratio is quite high on both the current and the proposed Basel.

My question really relates to the leverage of this Bank. The assets to common equity ratio increased to just under 29 times in the latest quarter, and that was up from just under 28 in the previous quarter. The Basel III proposals, as I understand them, are going to include a companion leveraged calculation, which does not incorporate the consideration of risk-weighted asset assessment.

I was just wondering how that -- how the Bank is viewing that companion leverage calculation and how that might impact the Bank. If I look at the risk-weighted assets assessment, it has come down about 11% since mid-2009. And at the same time, the actual asset on the balance sheet has gone up by an equivalent quantum. So that mathematically explains the change quite clearly in the risk ratio. But it still leaves the Bank with a very high -- I would say on a global basis, probably one of the higher leverage ratios. Can you just offer some insights into that, and how that might affect your willingness to buy back stock or otherwise distribute capital?

Well, there are two -- and I am going to -- for more numbers, I'm going to turn it over to Andrew Kriegler in a second. But I did want to say I would take two approaches to that.

Number one is, as Andrew is going to lay out for you, we are actually quite comfortable with our leverage position. And there are elements of why it is up now that we have selected to do for the moment. As these new rules come in, we have high control over dialing that down. And it has to do with some of the things that have been discussed here today about funding levels and the inventory of prefunded term debt that we have today, and how we run that off.

So, number one, we feel fine about our leverage ratio today and in the future, because the nature of that buildup you are talking about is highly controllable, and there is a lot of it that is this prefunded term that ends up being placed overnight and there is a lot of mechanics to it. Andrew will fill you in a little more on that.

However, part two on this is on a planning basis strategically, we feel that we are in very good shape in terms of the various elements of balance sheet, as I have laid out. We are looking at a lot of our activities through the Basel III lens at this time and the Basel II lens. That is why in my remarks I talked about some discontinued businesses and the fact that we are vigorously pursuing eliminating positions in those. Because we are finding very often that you might have a P&L that is negative on it, but a pretty big positive capital impact under the New World. And now that liquidity is in there in the market -- and I am now talking about the structured credit side -- we are able to free up a lot of capital as we roll through, eliminating those securities. And we are probably -- I just wanted to say we are becoming a little more aggressive in that department as the liquidity is there. And there is a willingness to take paper losses -- not paper losses -- actually, to realize a loss on these securities when it is highly accretive from a capital viewpoint.

As we eliminate those securities, it also brings down the leverage ratio. And you are not seeing it in there because of the funding, but there is a steady quarter-after-quarter decline in the usage of our leverage and capital as a result of the elimination of positions in our legacy books, structured credit and whatnot.

That is important, because it is also releasing term funding. Right now, you are seeing that contributing to the backup in term funding. And -- because we don't necessarily have securities that are maturing right away or places to put the money. But as you utilize over time the resources that are freed as a result of these activities, you find that your leverage ratio moderates. Because there is a redundancy right now that is taking place as a result of prefunding term debt and releasing term funding when you eliminate positions that were term funded.

So, the reason why I am giving you this second part of the equation is we get an advantage that is higher than it was in the past under the new regime by aggressively eliminating our structured credit book. And, it is a path that we are on, and -- we have been on it all the time, but the conditions liquidity-wise are much better, and the conditions in terms of how capital is affected are much better in terms of eliminating these positions.

Therefore, we are far more inclined to take an accounting P&L loss in order to generate the freeing up of balance sheet from the viewpoint of leverage, but also from the viewpoint of capital. So as to our current picture and why the leverage ratio is highly controllable, I will turn it over to Andrew.

Gerry, just before you do that, I was just -- can you understand how it is a bit confusing for someone like myself to hear you securitizing credit card balances at the end of the prior quarter for capital management purposes,, being willing to take a realized loss on a book that will eventually, I think, in your expectations, run off without a loss, in order to improve your capital position? And at the same time, we are talking about how you are going to deal with an apparent excess capital position. I am not sure how you can square those two sort of understandings and discussions.

Okay, that was a lot in one shot. Kevin was making vigorous notes. He writes faster than I. So I will give him first crack at that.

Just in terms of the securitization, from a capital point of view, it was an effective way for us to do an internal transaction to move funding. So it wasn't a capital leverage issue; it was just an internal transaction to manage funding. And Andrew can cover that in a bit more detail in his comments. So I just wanted to stress that.

Thank you.

Sorry -- Andrew will go through the nooks and crannies of this a little more. But there is a very consistent thread here is that we are engaged in activities that are in businesses where we have capital tied up, we want to liquidate in order to get at the capital. If there is term funding tied up there, we want to liquidate in order to get at that. And we want to deploy that into businesses where we can use it to generate profitable returns and service our clients.

And right now, we are finding that we are able to generate capital both from those activities and earnings much faster than we are able to use it. And we think that that is actually a good thing for the moment, given the changing standards. Andrew will give you a little bit more of the math on some of these things. Andrew?

Thank you, Gerry. So just to pick up the point that Kevin made a moment ago, in respect of the securitization that was done at the end of last quarter, that was done, to be clear, for internal capital management purposes. That is to say the relative legal entity capital of the various subsidiaries that we have; it didn't affect the consolidated numbers.

Second, in respect of Basel III leverage -- well, actually, let me back up for a second. As you can see from our disclosure, we are well within the asset-to-capital multiple limits that exist today under the Basel II regime. Basel III leverage, which is a 3% leverage ratio rather than an assets-to-capital multiple, doesn't come in for a number of years to come.

Having said that, we do monitor where we believe we will be should that regime come into place today. And we feel comfortable that we will be not constrained by that leverage ratio over the coming years.

In terms of the detail about this quarter's movements, there are a couple things I can point you to. And I would emphasize that there is some short-term variability in the size of the balance sheet movements related to a couple of things that have already been highlighted on the call.

One of those is the degree of prefunding that we did. And another is the degree to which short-term balances come onto the balance sheet, can be deposited, for example, in securities positions or in deposits with central banks, that cause the size of the balance sheet, and therefore the leverage ratio, to move up and down over short periods of time. That is not indicative of sort of a systemic increase in the Bank's leverage over the long period. As I say, we feel fairly comfortable that we will not be constrained by either Basel II leverage or Basel III leverage over the long term.

Okay, thanks very much for the fulsome answer.

Mario Mendonca, Canaccord Capital.

Good morning. It is sort of difficult to understand how CIBC's margins or NIM in the various segments move around, and even from a total bank basis. Because disclosure isn't quite the same as we get from some of the other banks.

So perhaps, Kevin, or maybe even -- or perhaps someone else, if you could talk about what happened to the Retail NIM this quarter? And maybe on a total bank basis, we all have our own ways of looking at total bank margin -- it seems to have come in a lot. And it makes sense given the increase in liquidities in the quarter. Could you talk about what happened to the all-bank margin, perhaps excluding trading, and what happened in Retail? I'm trying to understand where the pressure really was this quarter.

Okay, Mario. It's Kevin. I will hand over to David at the end of this for Retail. But as we said, that is market-driven, as well as some seasonal mix issues driven by seasonally low credit card balances. And that was about 6 basis points.

But if we look at overall margins bank-wide, there were a number of issues that didn't really impact the economics of the bank, but did have a negative impact on NIMs. So one of the things that Andrew alluded to and we have spoken about is funding opportunities. So as a result of our prefunding, this significantly increased our liquid asset balances. And you will see that on the balance sheet when you take a look at it. And that had about an 8 basis point, I would say impact, on bank-wide NIMs.

The other thing to take into account is if you look at the previous quarter, we actually had some interest income on tax reassessments. So it wasn't massive, but all of these add up. And that also had a couple of basis points impact on bank-wide NIMs.

The securitization that we spoke about earlier, the card securitization, that was about CAD1.7 billion. Again, didn't impact the bottom line of the Bank, but there was a swing between NII and securitization income. So what that does is it makes it looks like our bank-wide NIMs are compressed, and that had about a 4 basis point impact.

So if you add all of those up, that is what really had taken our -- if you look at it bank-wide -- the NIM down from we say around 2.08 down to about 1.94, 1.95.

Okay, so the math you are coming up with then is about 14 basis points?

Around that, yes.

Which is very similar to the 14 basis points I am calculating as well, although I probably have -- I am doing it in a slightly different way, but it is essentially the same delta.

You are suggesting then that that delta is accounted for by the prefunding. And it certainly makes sense, because the prefunding was 8 on its own, the securitization 4; there is 12 there, plus a little bit -- plus a few other things. So that is essentially what causes that 14 basis point delta.

The question then is, how soon would you expect to regain that 14 basis points, or is that really not really the way to look at it?

Well, I mean -- we can certainly talk about it. So, some of it, you are not going to regain because the delta, for example, on -- the interest, some of the smaller issues, like the interest income on tax reassessments, that has come and gone and we will bank the money. But that NIM isn't coming back.

If you look at the securitization, that is here to stay for a while. So we're not going to see that coming back. But again, that doesn't have an economic impact, so that is not an issue for us.

Retail NIMs are -- I will let David chat to -- talk to that for a little bit. And then the funding, over time, we do expect to pick that up. It is just a question of time, how are we going to deploy that and how we are going to actually use the funds that were raised.

And Kevin, (inaudible) as much as CAD15 million?

Well, they're actually two things that happened. Andrew alluded to some short-term borrowing opportunities. There were some extremely low rates that we took advantage of that we could place with central banks and in other spots. It wasn't particularly profitable, but it did give us a bit of pickup on the bottom line. But again, that significantly increased the balance sheet, so that had a negative impact on NIMs.

The other elements of it is actual prefunding for -- as part of our funding plan. So if you look at -- from the beginning of the year, this quarter, it was about 15, beginning of the year was about CAD25 billion. It is about a 50-50 split between the two of them.

Okay. And then, David, perhaps on the Retail side?

Sure, so a bit of a simpler story there. Two dynamics. So one is quarter-over-quarter mix. So mix is -- and I am going to refer to the seasonality of things -- cards outstandings are down about 1.5% from last quarter. And obviously, cards are a higher NIM product. So that is one of the mix factors that are causing NIMs to be off.

Now, there are two things that that could be. One, for sure is seasonality. First quarter has the holiday season in it, and now our customers are paying off their balances. That is going to be, I would think, the bulk of it. Potentially some of that could be just consumers moderating and delevering. But, further evidence that it is seasonal is that the April outstandings were up above the January and kind of February outstandings. So that was indicate that there is that seasonal element to it, which would imply that part should come back.

Then the other bit is just what we spoke of before, which is the marketplace right now on lending and mortgages is competitive. And that part, we will see just how that plays out over the next while. In the fullness of time, I would expect the NIMs will flatten out. Just we'll have to see what the competitive marketplace is. So those are the two primary drivers.

David, I understand those changes; those are the ones you have talked about before. What I was trying to get at here was the delta, how much margins actually came in in the quarter in Retail.

Six.

Six basis points? Thanks very much.

No trouble.

Sumit Malhotra, Macquarie Capital Markets.

Thanks, good morning. I will try and keep it brief. This one is probably for Tom Woods. Tom, in your newly-acquired MasterCard portfolio, if I look at the results of the securitization conduit for that book, is that a reasonable comparison for what is happening on balance sheet for CIBC? Let me start with that one first.

No, it's a bit technical. But just as a refresher for some others, we took this book on in August of last year. And there were no delinquent accounts. So there are no delinquent accounts in the securitization, no delinquent accounts on our books; so those are the same.

Delinquencies then started, as you would expect. And in February, that was 180-day mark, when they rolled through to write-off. So we had -- and you are seeing this month by month in the securitization releases. Zero in September, building up to I think a little over 9 in March. So that would, for the most part, be similar to what is on our books.

This is where it gets technical. Because the cards are still on the Citi core system until probably August/September, the accounting is somewhat different. So we are front ending probably 3%, 3.5% in that 9, okay? And you're seeing that on our books as well. But we've had questions about is it apples-to-apples with your core? And it really isn't; it's about 3 points different. And that will come back over time.

The other thing to keep in mind is this portfolio is very similar to our CIBC classic portfolio, as opposed to the Aerogold Premium. So whereas our core portfolio has a mix of classic and Aerogold, and hence a lower rate -- and this quarter it was about -- I think 4.8% consolidated. When you see a 9 number, and you ask why is it 9, I think you have to think about it being about 6, and then recognize that it is entirely classic.

So bottom line is it is a bit apples and oranges, but it is performing in line with our expectations. You could see over April/May a slight further tickup, but we would expect that to come back as higher recoveries occur because of the front-ended nature of this accounting.

And just to bottom line it from my perspective, if I go back to your Investor Day in the fall, I think the commentary around that book was you would expect the loss rate on the portfolio you had picked up to be not more than, say, 100 to 200 basis points higher than the legacy CIBC book. Is that still the appropriate level to think of?

Yes, when you (adjust) for the accounting and when you adjust for the fact that the mix is different, okay, I would probably say 150 to 200. If you look at our combined at 4.8, and you accept my analysis of the 9 being kind of like 6, you are about 100 basis points now. And that will probably tick up another 50 or so over the next two months, maybe 100.

Thanks for your time.

Andre Hardy, RBC Capital Markets.

Thanks. Just to clarify on your last answer, Tom, the 9 is more like a 6, but are you going to have recoveries once the cards are not on your systems? And then related to the systems conversion, how much do you expect in annual savings from moving from the Citi system to the CIBC system?

We will take it in two parts. Part one -- and this is where it gets technical, Andre, and I can take you through this off-line. But there are three main accounting differences, which mean the reported delinquencies are higher, but because of that accounting difference, the expected recoveries or accounts that ultimately will pay off, as opposed to will default, will be higher as well. So that will tick back over time. And in fact, we are already seeing in the month of March -- and we -- preliminary April numbers show the delinquency numbers are coming back. So the short answer is yes, that will come back in the form of higher accounting recoveries.

I don't know -- is there anyone that can comment on the costs?

Yes, the cost savings will be there. Not necessarily massive a number. It is part of the CAD3 billion plan that we would have outlined before. We are on track to do the conversion, as Tom said. August/September timeline, we will get it onto our platform, and things are tracking.

Actually on the transaction itself, whether it is balances, revenue or NIAT, the Citi acquisition's performing better than the Board-approved plan. So we are happy with it and the conversion itself is tracking to plan as well.

Thank you.

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

Thank you for joining us this morning. If there are any follow-up questions, please contact Investor Relations. Have a great day.