Canadian Imperial Bank of Commerce (CM) 2011 Q3 法說會逐字稿

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

I would now like to turn the meeting over to Mr. 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 Q3 results that were released earlier this morning. The documents that will be referenced on this call, including CIBC's Q3 news release, investor presentation, and financial supplement, as well as CIBC's Q3 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 will include opening remarks from Gerry McCaughey, CIBC's President and Chief Executive Officer. Kevin Glass, our Chief Financial Officer, will follow with a financial review and Tom Woods, 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 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 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.

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

Today we recorded our results for the third quarter. Net income was CAD808 million and cash earnings per share were CAD1.91. We are very pleased with these results. We reported higher revenues and improved efficiency ratio and balanced performance across our three main operating businesses -- Retail and Business Banking, Wealth Management, and Wholesale Banking.

Return on equity for the quarter was also strong at 21.5%. During the quarter we announced a strategic investment in American Century Investments, a leading US-based asset management company. This investment complements our strong Canadian asset management franchise and provides a platform for growth internationally in a business with attractive demographic and risk characteristics.

We have now received all regulatory approvals for this transaction, which should close very shortly, and is expected to be accretive to earnings by CAD0.15 per share in 2012.

This quarter CIBC's tangible common equity ratio increased to 11% from 10.6% in Q2. Our pro forma Basel III common equity ratio is estimated at 8.2%, exceeding the 2019 minimum standard of 7%. As previously announced, we completed the redemption of CAD400 million of preferred shares on July 31. Also, on August 17 we were pleased to announce that OSFI confirmed nonviable contingent capital treatment for approximately CAD900 million of convertible preferred shares.

These actions optimize our long-term Basel III capital structure in filling approximately 50% of the non-common Basel III Tier 1 capital requirements that are due by 2019.

Our industry leading Basel II Tier 1 ratio remains very strong at 14.6%. On the topic of dividends, our dividend payout ratio is between 40% to 50% of our earnings. Another quarter of strong earnings continued to put us within that target range, and as a result, we have announced a CAD0.03 per share increase to our common dividend today.

Turning to our business results, Retail and Business Banking reported net income of CAD539 million, up 2% from a year ago. Revenue was CAD2 billion, up 3% over the same period in 2010. Loan losses were CAD285 million in line with the same quarter last year.

During the quarter retail and business banking continued to invest in providing greater access and choice for our clients. We were recognized by global finance magazine as the best in mobile banking among North American banks, the first time this award has been presented.

This quarter we introduced the CIBC mobile brokerage app, becoming the first bank to allow Canadian investors to execute trades using their mobile device. And we added Visa payWave, a contactless payment feature, on all newly issued and renewing credit cards in the Aerogold family as well as CIBC Classic credit card. David Williamson is here this morning to answer questions about our progress in Retail Business Banking.

Wealth Management also performed well this quarter. Revenue was up 12% from a year ago driven by growth in our retail brokerage and asset management businesses. We continue to experience strong sales and performance in our mutual fund business. Year-to-date long-term fund net sales of CAD3.2 billion are up CAD1.2 billion or 64% compared to the prior year.

We are very excited about our investment in American Century that will enhance the strength of our wealth management franchise by adding increased capabilities and scale. Victor Dodig is here this morning to answer questions about our progress in Wealth Management.

Wholesale Banking continued to perform well this quarter generating solid earnings with historically low levels of risk as reflected by our low VAR. Net income was CAD145 million. Excluding items of note, net income was CAD158 million.

Wholesale Banking participated in a number of significant client transactions across our capital markets, investment banking, and corporate lending businesses. These included key roles advising on equity and debt offerings in the financial services and communications sectors, corporate lending activity in the energy sector, as well as mergers and acquisitions activity. Also this quarter, we were proactive in launching leading-edge technology capabilities to meet the needs of our clients.

These investments will allow us to leverage our industry-leading strength in equities trading into other products, such as foreign exchange, while simultaneously strengthening risk management capabilities. Richard Nesbitt is here this morning to answer questions about our progress in Wholesale Banking.

In summary, we are very pleased this quarter. We experienced balanced revenue growth. Our cash efficiency ratio improved to 58.3%. Our industry-leading return on equity increased to 21.5% and our capital levels are strong, positioning us well for investing in our businesses looking forward.

We also announced our investment in American Century, which should close shortly. All of these strengths have allowed us to increase our quarterly dividend to CAD0.90 per share.

Let me now turn the meeting over to Kevin Glass for his financial review. Thank you.

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

Gerry mentioned we reported strong results this quarter that were helped by higher Wholesale Banking revenue, volume growth in retail and business banking, as well as higher wealth management revenue, and was hurt by lower retail and business banking spreads. Earnings per share this quarter were at CAD1.89 or CAD1.91 on a cash basis.

As listed on the top right of the slide, we had three items of note this quarter, the net impact of which nets to zero. The first item of note was a net gain of CAD0.06 per share due to a reduction in the general allowance. The next item is a loss related to structured credit run-off which totaled CAD0.03 per share, and I will provide more details on this in a few moments.

The last item was related to the premium on redemption of preferred shares in the quarter. This has no impact on net income, but it did reduce earnings per share by CAD0.03.

As Gerry mentioned in his remarks, our capital position remains strong and we finished the third quarter with an industry-leading Tier 1 capital ratio of 14.6%. Our tangible common equity ratio was 11%.

Slide six provides a summarized statement of operations on a reported basis showing net income for the quarter of CAD808 million. Now last quarter we announced changes to our organizational structure whereby Wealth Management and international Retail Banking operations, including CIBC First Caribbean, will be separated from CIBC Retail Markets. This is the first quarter where results are reported on this basis. As a result of these changes, we now have three strategic business units -- Retail and Business Banking, Wealth Management, and Wholesale Banking -- along with Corporate and Other.

So turning now to our business results, let's start with Retail and Business Banking on slide seven. So revenue for Retail and Business Banking in the quarter was CAD2 billion, up CAD57 million or 3% from the same quarter last year. Steady year-over-year revenue growth was supported by growth in each of the personal and business banking segments.

If we look at the results of the specific business lines on this slide, personal banking revenue of CAD1.6 billion was up CAD61 million or 4% from the same quarter last year due to solid volume growth in most products as well as higher fees, partially offset by narrower spreads due to the low interest rate environment and competitive pressure on mortgage and lending spreads. Business banking revenue of CAD358 million was up CAD5 million from the same quarter last year. While revenue was hurt by narrower spreads resulting from the lower interest rate environment, business banking continues to grow volume in both deposits and lending products.

Other revenue was down CAD9 million from the prior quarter last year but up CAD42 million from the prior quarter, primarily due to the impact of treasury allocations.

On slide eight, net income for this quarter from Retail and Business Banking was CAD539 million, up CAD13 million or 2% from the same quarter of the prior year. We have discussed revenue already, which is up CAD57 million. The provision for credit losses of CAD285 million was up CAD4 million from the same quarter last year as a result of write-offs on the acquired MasterCard portfolio, which is mostly offset by improved economic conditions on the remaining portfolio.

Tom Woods will discuss credit quality in his remarks.

Noninterest expenses were CAD1 billion, up CAD53 million or 5% from the same quarter last year, primarily due to the impact of HST, servicing fees related to the acquired MasterCard portfolio, and pension expense. Retail NIMs were down 6 basis points versus the prior quarter, primarily due to margin pressure on mortgages.

Results from our Wealth Management business are shown on slide nine. As noted earlier, this is the first quarter with separate reporting for Wealth Management. Revenue for the quarter was CAD404 million, up CAD44 million or 12% from the same quarter last year. As Gerry highlighted, Wealth Management continues to show strong year-over-year revenue growth in the retail brokerage and asset management lines of business.

Looking at the results of the specific business lines on this slide, retail brokerage revenue of CAD263 million was up CAD28 million or 12% from the same quarter last year due to higher fee-based revenue from improved capital markets and higher commissions from new issues and equity trading activities. Asset management revenue of CAD116 million was up CAD17 million or 17% from the same quarter last year, and this is primarily due to higher client assets under management resulting from improved capital markets and continued strong net sales of long-term mutual funds.

Slide 10 reflects a net income this quarter from Wealth Management of CAD68 million, up CAD15 million or 28% from the same quarter of the prior year. Again, we have discussed revenue and noninterest expenses were CAD307 million, up CAD24 million or 8% year-over-year, and this was mainly due to performance-related compensation.

Turning to Wholesale Banking on slide 11, revenue this quarter were CAD454 million, up CAD61 million or 16% compared to the prior quarter. Excluding items of note, Wholesale Banking revenue was CAD455 million, up CAD14 million or 3% on the same basis.

During the third quarter revenue for our core Wholesale Banking businesses of capital markets and corporate and investment banking were CAD483 million, up CAD28 million or 6% compared to the second quarter of 2011. The main drivers for this increase were higher merchant banking gains and higher advisory revenue. This was offset to a certain extent by lower fixed income revenue and lower equity and new issues revenue as a result of weaker market conditions and lower client activity.

In the Other segment revenue of CAD20 million was up CAD37 million from the prior quarter, but this was primarily due to lower losses in our structured credit run-off business.

On slide 12 Wholesale Banking net income was CAD145 million this quarter, up CAD33 million from the prior quarter. Revenue was CAD61 million for the second quarter for the reasons previously discussed. Credit quality continues to remain strong with a provision for credit losses of CAD6 million this quarter compared to CAD1 million in the prior quarter.

Noninterest expenses were CAD294 million, up CAD23 million from the prior quarter, mainly due to higher performance-related compensation. Excluding all items of note, net income for this quarter was CAD158 million, down CAD4 million from the prior quarter on the same basis.

This next slide summarizes our structured credit run-off results. We had a pretax loss of CAD18 million this quarter versus a loss of CAD17 million in the last quarter.

Starting with row one. Here we had a loss of CAD15 million on the credit valuation adjustments resulting from credit spreads widening and declines in the underlying value of holdings hedged by financial guarantors. On row two we had a gain of CAD16 million on purchase credit derivatives that are marked to market which hedged loans that are carried at amortized cost. This is largely a timing issue and there was a gain in this quarter due to declines in the market value of the underlying loans.

On row three we had a net gain of CAD13 million resulting from the unwinding of positions. These transactions reduced our notional exposure by CAD9.6 billion, increased our Basel III Tier 1 ratio by approximately 7 basis points, and increased our Basel III common equity ratio by approximately 4 basis points.

The loss on row four represents net effective gains and losses on the remainder of the hedged and unhedged positions as well as interest and expenses.

So in summary, we had a very strong third quarter and we had strong third-quarter results. Compared to the same period last year, both our retail and business banking and our wealth management businesses demonstrated solid revenue growth. Our investment in American Century, which was announced this quarter, will further improve our Wealth Management performance.

Amidst the volatile market conditions of the third quarter our wholesale banking business produced very strong operating results. The client-driven strategy of this business continues to produce steady and risk-controlled performance. So if we look at the bank overall, we continue to have good loan loss experience, we maintained our expense discipline which contributed to an improved cash deficiency or NIX ratio, and our capital position remained strong.

Thanks for your attention and I would now like to turn the meeting over to Tom Woods.

With respect to credit risk on slide 20 total loan loss provisions during the quarter were $195 million, essentially the same as in Q2. The specific provision increased by $22 million to $232 million, primarily due to the maturing of the MasterCard portfolio we acquired from Citibank late last year and more normal losses in our commercial portfolio. General loan losses were a recovery of $37 million, compared with a $16 million recovery in the prior quarter, due to the favourable impact of the credit card securitization we did in May and improved delinquencies. Gross impaired loans were up $25 million in Q3, as improvements in our Canadian and U.S. portfolios were offset by higher impaireds in the Caribbean.

Our Cards portfolio loss rate in Q3 was 5%, versus 4.8% last quarter and the peak of 7.1% in Q3 2009. Losses were up CAD14 million versus Q2 due primarily to the MasterCard portfolio as expected. Our cards delinquency rate showed an improving trend quarter over quarter.

Slide 22, our US real estate finance business had CAD2.6 billion of drawn exposures, CAD552 million of undrawn. In Q3 we took loan loss provisions of CAD7 million, up from CAD4 million in Q2. We had CAD161 million of net impaired loans. As discussed in our Q2 webcast, we can see a slightly higher loan-loss run rate in this business in the next few quarters.

Our European leveraged finance run-off book had CAD471 million in drawn exposures and CAD97 million in undrawn. In Q3 there were no provisions or reversals in this portfolio. Our US leveraged finance run-off book had CAD176 million in drawn exposures and CAD173 million in undrawn. There were recoveries of CAD1 million in Q3 in this portfolio.

Turning to market risk, slide 24 shows the Q3 distribution of revenue in our trading portfolios. In Q3 we had positive results 83% of the time. Our average trading VAR was down 21% from Q2 and we reduced risk in the more volatile markets towards the end of the quarter.

On slide 25 our Tier 1 ratio was 14.6% at Q3, down from 14.7% at the end of Q2. Our tangible common equity ratio increased to 11% from 10.6% last quarter. The 0.1% decrease in Tier 1 ratio was mainly due to the redemption of CAD400 million of preferred shares and slightly higher risk-weighted assets currently offset by earnings net of dividends and equity issued in our dividend reinvestment plan.

The risk-weighted assets increase this quarter came mainly from slightly higher corporate and commercial loans outstanding, as well as a normal course Basel II parameter update. CIBC is well positioned for the Basel III transition. Our pro forma Basel III common equity ratio, as Gerry said, at July 31 was 8.2%, exceeding the Basel III 2019 minimum requirement of 7%. Our Basel III ratio would be about 7.6% after giving effect to the American Century Investments acquisition which is expected to close shortly in Q4. Back to you, Geoff.

Thank you. That concludes our prepared remarks. Operator, we would now be pleased to take questions on the phone.

(Operator Instructions) Steve Theriault, Bank of America Merrill Lynch.

Thanks very much. A question for David Williamson. Dave, the other banks, some of the other banks that reported weak margin trends in Q2 had a reasonable bounce back this quarter, but your margin continues to be under pressure and I think it was down another 6 basis points. So can you flesh out the margin trend a little bit more for us for Q3 and speak to your outlook going forward?

Do you think after a couple of quarters of relatively weak trends there you may be in a position to outperform the group in the near term? Or do you think the margin will just ebb and flow with peers from Q3 levels?

Sure, yes, let me talk to that and sort of how we are affected specifically. So starting off from where we jumped off last quarter, that point -- there is two dynamics that are pressurizing, putting some pressure on margins.

So, first, just the impact of the sustained low interest rate environment in which we find ourselves currently and the competitive pressure in the lending market. So neither of those two conditions improved this past quarter and that led to the decline in our retail margins by the 6 basis points you referred to.

So the biggest driver of the decline in spreads for us is mortgage spreads where prices do remain very competitive, and we feel it more than some of our peers, given the relative size of our mortgage portfolio. So looking forward I would say the current view is that we are looking at, it would appear right now, a prolonged period of low interest rates which does put pressure on deposit margins. True for us and true for the industry generally.

On the asset side it's different, so that depends on market pricing and our ability to optimize prices within that context. So as we know, asset margins have been under pressure across the industry, although this quarter we will be, if we look on a quarter-over-quarter basis, what I see is some of change in direction. Of note, although a quarter doesn't indicate a trend, what we are seeing in our business banking and our small business banking is NIM has actually expanded on a quarter-over-quarter basis. So it's just a quarter but it does indicate that there is maybe some change in the market on spreads.

There was small business banking; what was the other area where you saw some slight margin expansion?

I am sorry, in commercial banking we also saw quarter-over-quarter expansion on spreads.

Okay. And a quick additional one. Card balances, Tom, your comments cut out and I missed it, but on card balances there was a reasonable lift this quarter. For David or for Tom, can you give us a sense of how much of that growth was due to the Citi deal and how much of it might be considered more organic?

Give us that again, Steve, sorry.

The card balances, if I look at one of Tom Wood's slides, looked like they had a pretty good lift this quarter to 197 -- sorry that is the PCL. Pardon me, I will scratch that question and keep it to one.

Gabriel Dechaine, Credit Suisse.

Good morning. Just a follow up on that NIM question briefly. The NIM contraction in Canadian banking, I would have thought it actually would have gone up because of that pre-funding activity from last quarter; if you can kind of walk us through the dynamics there.

Then just my main question on the US real estate finance business, one we don't normally pay much attention to, but it looks like balances increased 40% sequentially. Is this higher line utilization, some organic growth? I believe you have positioned this thing for growth again. If that is the case, maybe you should move it out of the run-off disclosure. And just kind of let me know what is going on with that business right now. Thanks.

Gabriel, it's Kevin. Why don't I take the first part of that question? In fact, we are seeing the benefit of that prefunding. Our overall bank NIMs this quarter were up a couple of basis points and part of that is because of higher treasury net interest income.

That higher treasury net interest income, however, is allocated through to the businesses through the other line. And so in terms of the direct retail NIMs that you see that wouldn't reflect the immediate benefit of that prefunding because that flows down through the other line which is not used to calculate retail NIMs.

Okay. And the US real estate finance?

It's Richard, I will take that. So real estate finance is, far as I know, not in run-off. We have been operating as if it's an ongoing business and we are going to continue to do that.

Real estate finance, I have been saying for the last several quarters now, is a business that we decided to begin to grow again. We had suspended our new loan activity from late 2008 right through till the beginning of this year, but we have laid out a plan for -- to begin to grow that business at a time.

We think that with the written down values of the real estate properties in the United States in the commercial area and, particularly if you focus on the right regions, this is a very good opportunity and the pricing remains very attractive in this business. So we have set out a plan to grow that business over the next three years, in terms of the current horizon, both on the -- of growing our balance sheet position in that business as well as re-engaging in the CMBS market. Again, I talked about over the last several quarters of our joint venture we have with Blackstone where we were assembling a fixed-rate loan of mortgages, a portfolio of mortgages to sell into the CMBS market in the near future.

Thank you.

Peter Routledge, National Bank Financial.

Thanks. Just a question for David on the supplemental package, page six. I noticed the loans and acceptances to deposits ratio sort of flips over the last couple years, goes from 106% loans greater than deposits to 96% today. So what is driving that?

Is that just more securitization in covered bonds or is there something more fundamental happening in terms of your deposit gathering? If you could talk about how that flip in that ratio might impact NIM. And I guess I will just leave it at those two questions.

So those lines are impacted by treasury activities, as you highlighted, so that will impact some of the dynamics there. What I can do is just stand back a bit and just talk about some of the dynamics in our deposits in lending business, because I don't know if those lines are indicative of what is going on in the business itself due to some of the impacts of treasury activities. Does that make sense?

Yes, that would be great.

Okay. So if we look at volumes, and I might comment on NIMs thereafter. So first on a year-over-year basis and then quarter-over-quarter basis give you a little bit of a sense of a trend.

What we are seeing is on the lending side, first personal lending, good growth, good year-over-year growth. And on the business banking side, both small business and commercial banking, we are seeing very good volume growth, like 10% or better. So compared to deposits, deposit gathering activity is strong so on the personal side it's as strong as our lending activity.

So good growth but not as strong as what we are seeing in business banking, whereas on both the lending and the deposit side we are at about 10% or better. So very strong deposit gathering, very strong lending activities in business banking, and stronger than what we are seeing on the personal side.

And you are getting 10% year-over-year growth in business lending and deposits?

That is correct and you will see that in our results. On the market share side you will see we are up 17 basis points in business lending, and you will see that last quarter good solid growth. So we are seeing out market growth in our business lending quarter over quarter, we are seeing it again this quarter, and we are also similar growth on the deposit side.

So now if I kick over to quarter over quarter, what we are seeing is personal lending and the deposit side is picking up steam. Actually, it's just growing at a faster rate even than what our year-over-year basis is and that is in the personal.

On the business deposits and the business lending, on a quarter-over-quarter basis a bit different. So on the business side it's still lending, it's still growing, growing quite well -- not at that same year-over-year pace. And on the deposit side that is a where on a quarter-over-quarter basis we saw a decrease.

So we have had really good business deposit gathering now for a few quarters. This quarter it came off. Not systemic; we have a couple of balances that left during the quarter and that affected our quarter-over-quarter results. So that could be what you are seeing on slide six, but again I think more of that is treasury activities.

So big picture, very strong growth in deposits and lending and business banking. On a quarter-over-quarter basis we lost some deposits so that affected the deposits quarter over quarter, not a trend. We believe overall that franchise is strong.

Then as I mentioned earlier -- and it's just a quarter, it's not necessarily a trend, but we are actually seeing spreads expand on the business lending side. Now the other NIM factor I referred to before is in respect to interest rates. We just -- in this low interest rate environment, us and I think any other bank on the street is going to feel some compression on deposits, be it personal or business. Hopefully that gives you some insight.

That does. Thanks very much.

Michael Goldberg, Desjardins Securities.

Thanks. In your shareholders report you mentioned that treasury and interest on tax reassessments benefited net interest revenue. Can you quantify those benefits, please?

Michael, it's Kevin. I can give you a big picture. I think that was about [CAD80 million] that we are talking about. I think about half of that would have related to the extra days and volume growth with the balance relating to the treasury and tax interest. The tax interest was well under CAD10 million, so the balance would be the treasury net interest income.

I just want to make sure I have got that right, so the tax interest is under CAD10 million and the treasury benefit?

Well, the treasury benefit would be about CAD30-odd-million, something like that.

Okay. I will also ask a question for Gerry that I have asked on all the other calls. Can you give us some comfort about liquidity of European banks? And what are you doing to protect yourself from a liquidity event?

Michael, in terms of giving comfort on liquidity of European banks, I don't have -- you are asking me about their status -- I don't have really anything to add to what you are hearing in the marketplace about the status of European banks. So far all of our counterparties are acting actually in a reasonable, business-as-usual fashion with an environment that is a bit strained.

So I don't have anything to add to the status of the European banks. In terms of our status as to our exposure to European banks, we are in good shape and I will turn it over to Tom Woods to lay out for you what that is. Tom?

Just for the benefit of everybody, in our disclosure we talk about this in three buckets, particularly as it relates to the peripheral countries. We have got no direct sovereign exposure to the peripherals, number one. Number two, we have got about CAD40 million direct exposure to investment grade banks in three of the peripherals. We have got nothing in Greece or Portugal, so CAD40 million in Italy, Spain, and Ireland.

Then, finally, a little under CAD500 million exposure to corporates through our CLO run-off book, corporates located in the five peripherals, but we have got high subordination points on that. So I think if you compare that disclosure to other global banks, including the Canadians, we are definitely at the low end of that.

As it relates to nonperipheral European banks, our exposure is a very manageable there. We are in the -- it's all investment grade except for, I think, about CAD2 million. Short-term, diversified, largely US dollars so that is a very manageable exposure as well.

Thank you very much, Tom.

Mario Mendonca, Canaccord.

Good morning. First, on the pre-funding last quarter that was what was offered as an explanation for the significant increase we saw in the interest-bearing deposits with the banks. Now that number has obviously declined this quarter, pretty much back to where it was in Q1 2011. And we also see that in business deposits, business to government deposits coming right back down.

So if you just describe the dynamics. Did you just sort of change your mind on the prefunding? So what is actually happening there and what are the risks of those balances moving up and down? Then, secondarily, if you could just comment on the sustainability of the lower tax rate this quarter.

Sure, it's Kevin Glass. So let me talk about the prefunding. Actually, when we spoke about it last quarter there were two factors that resulted in the increase in liquid assets. The first was prefunding and what we have done with that prefunding is we have managed to redeploy some of that into term assets, which is now yielding a high return. So that strategy is playing out, although we still do have some element of excess funds relating to that.

But the other, and actually from a balance point of view bigger number, was market conditions that provided an opportunity to take short-term funding at advantageous rates. We took advantage of that and placed it into liquid assets. So what we have done is those balances have come down. Again, they are very liquid and will likely stay at these lower levels.

So just to be clear, the opportunity you saw was in Q2 2011?

Yes.

The opportunity is not there in Q3. So what changed from Q2 to Q3 that caused the opportunity to go away, just declining interest rates?

Just market conditions in terms of our ability to invest that money in short-term instruments.

Okay. And then on the sustainability of the tax rate?

Our tax rate is lower this quarter, and that is a result, largely, of business mix. So it's somewhat lower than we would anticipate moving forward, but not significantly. So we do anticipate a slightly lower tax rate than we have had moving forward, but perhaps a little higher than we have seen this quarter.

And when you say a little higher than this quarter are you just talking maybe a few points, like 2% higher or something like that?

Yes, if that. Then we need to bear in mind that the good news is next year we will get the benefit of lower corporate tax rates as well.

Thanks for your help.

John Reucassel, BMO Capital Markets.

Thanks. Just a question for Gerry. Gerry, on the dividend looks like you are paying out about 47% of current quarter's earnings, and you have talked about being at the lower end of your 40% to 50% range just given the volatility in the marketplace. One could read into that that you see some pretty nice growth next year, but has your view of managing towards the lower end of that payout ratio changed or you are still sticking with that?

No, my view has not changed and we -- I don't give forward-looking guidance, but we feel we are very solidly within our existing range and dependent upon the environment that we would continue to look to work down in the range.

Okay, okay. Then just on the US real estate financing, it looks like Tom most of -- or Richard -- most of the increase is coming in multifamily and multiuse and other. Could you give an indication of what other exposures are, Richard?

Well, sure. Other would be commercial buildings, office buildings; this is all commercial real estate so I think that would probably be the other major category. Let me just tell you a little bit more about real estate finance to follow on from my previous answer.

So we have been in this business, at least with the team that we have in place today, for almost 15 years. Performed very well through the credit crisis; we have about 60 people in New York in this team. One year we maybe had a small net income loss -- I think that was last year -- through the whole credit crisis.

So the team performed very well, the portfolio performed very well. We didn't have zero loan losses but they were able to earn their way through the entire credit crisis.

So if you look at the environment now, buildings have been written down 40%, 30%, 40% you are providing loans that are at the 60% to 70% loan-to-value because you are providing senior financing, and you are getting spreads that are far superior to spreads that you would get for an equivalent unsecured corporate loan. So you have got the building, you are getting higher pricing. We have got a great team in place.

The other thing that has changed -- of course, all the European banks are gone from the marketplace so we are competing primarily with the domestic US banks. We are one of the few foreign bank teams left. Other Canadians are involved but the Europeans are gone. So all those conditions put together make this a very attractive marketplace to participate in, and we at CIBC think we are pretty good in terms of our credit evaluation of commercial real estate loans.

Okay. Just to be clear, are these new originations or are these purchase loans or --? I just missed that discussion.

Virtually all of it would be new originations.

Okay, thank you.

Sumit Malhotra, Macquarie Capital Markets.

Good morning. First question is for Kevin just to circle back on that discussion regarding the benefit from the net interest income at the all-bank level received from treasury. Can you give us maybe a helping hand here as to what exactly the drivers are for that treasury line on a quarter-to-quarter basis in terms of the contribution treasury receives?

Is it changes in interest rates, shape of the yield curve, positions you put on it? I am sure that all plays a role, but a little bit of help here would be useful given how volatile this line seems to have been.

Sure. I think, generally speaking, this is a volatile line and will continue to be so but in the current quarter, if we take the two big components flowing through there, would be our cost of funding as well as the charges out to the business units. So because spreads have widened in the current quarter, charges out to the business units, which negatively impacts direct NIM, which you have seen in retail, that is a benefit flowing into treasury.

The funding costs, which we spoke about our prefunding is lower than it would otherwise have been, again because of widening spreads this quarter. So are seeing the benefit of that in treasury and then that gets allocated out to the business units through the other line. So that is why you will see quarter over quarter other is going up in our business units.

So if I think about Q4, since the end of Q3 you have had a steep decline in, let's call it, risk-free rates for lack of a better term, but at the same time I think there has been further spread widening. Does that mean as far as treasury within corporate or other is concerned continues to get the benefit from those factors where retail markets, for example, gets hurt on the other side?

I think that is fair to say. But I would again say that is all things being equal, right, so it's a very dynamic place. Funding conditions continue to change; we keep rolling over our funding but by and large that is correct.

Okay. Second question, last question is either for Kevin, maybe for Gerry as well. Non-compensation expenses this quarter, if I look at it on an adjusted or operating basis, looks like the bank actually posted a quarter-over-quarter decline. It was pretty flat year over year.

This is coming after a period where you have shown quite steady increases in expenses. Is there something new at play here in terms of a management process of some of the project expenses that you have talked about in the past run their course? And a little bit of a helping hand here on what you should expect from costs going forward would be important.

Well, I am glad you pointed that out because we did make important progress on our NIX ratio this quarter. As we have indicated, one of our major cost metrics that we use is the NIX ratio and that is because we want to make sure that there is a right balance of investment in the business. And measuring expenses versus revenues is one of the ways to do that.

I have to tell you that we are looking at a reasonably steady state in terms of our expenses. There are a number of initiatives that are underway that have to do with fairly large consolidation of expenses or changes of systems that have a beneficial impact. As a result of that I would say that the expense picture is reasonably good looking forward.

All that having been said, I want to go back to my most important metric that we use on this, which is the balance of revenue versus expenses, and that is what we are targeting. So does that answer your question?

I think it does. It's fair to say when I go back a few years, maybe when you were initially in the role, expenses were something that the bank talked about quite regularly in terms of managing to a specific level. The last couple of years that leverage trend or that NIX trend has started to go back in the other direction and that is why it caught my attention this quarter that you were able to hold that level pretty flat.

So I guess that is a key question, are we back at that kind of a stage that we had back in 2006/2007?

I would like to think that we have maintained the discipline all the way through, but I -- to go back I would tend to generally agree with your narrative that originally we set a target of a median NIX within the industry. The reason why we did that was because we wanted to make sure that the investment versus expense reduction balance was correct, and the marketplace would move. The marketplace had been improving in terms of the NIX ratio so it was the way that we evergreened to our targets.

Originally, we calculated that we had a dollar number that we had to reduce our expenses in order to get to the median and that is why we originally set out targets for you. I think it was CAD500 million at the time. We did achieve those targets which did get us to the median, and as a result of that we started to talk more so about the median because we felt that the opportunity for CIBC was at least as good in terms of improving our revenue profile as it was in reducing our absolute dollar expenses.

All that having been said, in the last year or so there were some headwinds that we have talked about in terms of HST costs and pension costs, and, as Kevin has noted, there is a certain element of those abating. In addition to that we do have some projects ongoing that will be of assistance in allowing us to see an abatement in the absolute dollar level of expense increase.

So NIX is still our target because revenues are important, but we do have a number of initiatives on the go. They are efficiency initiatives or systems initiatives; they are not just cutting of costs. We do see the impact of those coming in over the course of the next while.

And there is some spending on integration costs of a number of our recent acquisitions that are also abating, because those costs were at a level that we thought we should just absorb them. We will now get the benefit of those costs abating.

An example of that would be we just completed our conversion from running two systems on the MasterCard purchase and we are now running only one system. And that also gives us a cost reduction. We had been bearing that cost since the acquisition and it was something that over the course of the year was substantial.

And that stopped this quarter, the MasterCard?

We just did the conversion within the last couple of weeks so you would actually -- that is why I am saying that.

See more of it in Q4?

It's a moderating influence. There is always other influences that push expenses up, but it is a -- we have a couple of things that would be moderating influences and would be in the reduction area.

Okay. Thanks for your time.

Darko Mihelic, Cormark Securities.

Thank you. I think I will avoid asking a question on treasury, but maybe, Kevin, I would love to sit down with you for a bit and talk through it. So I will ask my question on trading and I am sort of going to reference Tom's remarks.

Tom, you mentioned that a lot of the losses occurred in the back half of the quarter, but when I look at page 28 of your shareholder report I actually don't see any of that in this table. I do see the VAR that you are referencing.

So what my question is, and maybe it's for you, Tom, maybe it's for Richard. I am not sure who wants to answer the question. But we are almost finished August and it has been a pretty rough month and you have been reducing your VAR. So my question is has the VAR been reduced consciously? And given what has happened in August is it having the desired effect of reducing volatility within trading results?

Maybe these trading results that I see here on page 28, maybe they have the structured credit run-off embedded in it, I don't know. So maybe you can talk to trading X structured credit.

Maybe I will start and then hand it over to Richard for a business comment. There is a couple of things that you said there, Darko. Page 28, those results do not include structured credit so that is your non-structured credit trading results.

To your question about the VAR reduction was it conscious? Yes, it was absolutely conscious and it's a joint decision driven by the business with risk involvement. You will see on page 27 of the MD&A, although we had average VAR of CAD6.1 million, which would be the lowest of the Canadian banks in the quarter, we finished the quarter at CAD3.5 million, which is as low as I can ever remember it in probably over a dozen years here at CIBC. And that is just a reflection of caution within the market and limiting and focusing our activities on client business as opposed to directional views.

So maybe with that comment I will hand it over to Richard to add to it.

If you look at the record, we started taking down the VAR at the early part of the third quarter and took it down pretty consistently through the quarter. You could see the volatility in the market starting to pick up. Certainly we can't predict the future, but our view is that volatility -- it has gone from being volatility to erraticism, so much worse than volatility. I don't mind volatility; it's erratic markets that are difficult to manage.

So you can see it coming so we took it down deliberately. I would say in August my -- I am very pleased with the performance in August, so far, so good. While it has been -- certain of the books have had little challenges on an overall basis I would say so far, so good.

Okay, thanks very much.

Andre Hardy, RBC Capital Markets.

For David Williamson please, on slide seven just a couple quick clarification and then a more important question. So on business banking you talked about 10% loan growth and deposit growth, but your revenues didn't change much year over year. Is that all spread compression?

Then in personal banking, if you take out the beneficial impact of the acquisition of the MasterCard portfolio I would think you basically had no growth. Can you please confirm that? And then the more important question is starting from revenue growth of next to nothing, what is going to change going forward? I am sure your plan is not to have a business that is stagnant from a revenue growth perspective, but what will help that revenue growth, which is very, very small, get better over time?

So in the personal banking side it was offsetting dynamics, so good volume growth, good growth in fees, cards, and also on the deposit accounts and the impact of the acquisition. And you are right, the headwind against that was the dynamics and spreads, which we spoke of, both the compression on deposits and on the lending side.

So a couple of things there. One is our book in mortgages is substantive, so that puts some pressure on our relative results when there is pressure in the mortgage market. There are some signs that some of that recent pressure is abating a bit and that would help going forward.

On the business banking side different trends, good volume growth, some offsetting spread compression, but again I refer to, on a quarter-over-quarter basis, even expansion on the lending side. Still seeing pressure on the deposit side. I think that is a trend that will be throughout the market until rates start to increase. But on the asset side different dynamic and we are seeing some uptick there.

Beyond that what can we do for growth? I think within the context of competitive pricing we can look to optimizing our own pricing. What you will see in some of our results, in the market share we are expanding branch market share and giving up market share in some of the broker-related channels. Speaks to a couple of things.

One is there is enhanced returns on the branch side, enhanced opportunities to engage with our customers and clients more effectively. We are finding some of the broker space more competitive and hence we are maybe not pushing out as hard in that space but accelerating our growth on the branch side.

We also have been pushing hard on the mobile banking front. We have been recognized, as Gerry said, recently for our leadership in that space and I think that is an area that we will continue to explore for growth.

We have recently been expanding on the branch side. We have put 16 branches in so far this year with a plan for 27 for the rest of the year, so that is an opportunity for growth as well. I spoke about the business banking growth, the 10% year over year, picked up 17 basis points on a market share basis, so it seems like we have got some growth there.

Then we have -- deploying capital effectively as well. We talked about American Century, but in my business unit we have got the cards acquisition. We are now a dual issuer. We have got our conversion done. We have introduced four PayPass cards that are now contactless, so we are very well positioned for growth in the card space. We have got the work done, the conversion done; we are now a dual issuer and I think positioned well for growth.

So I think some of the platform changes we have got and some of those dynamics position us well to accelerate growth.

That is very helpful, thank you. And would it be fair to summarize your comments by saying the balance growth, volume growth you are still fairly comfortable with and hopeful that spread compression will decline?

That is right. We are pleased with the volume growth, that has been consistent. On the personal side it has even picked up recently. Business banking has been for a while now fairly consistently strong.

On the NIM side look forward on interest rates, does look like that for the whole industry is going to continue to provide pressure. But on the asset side that is different and I think there is an opportunity there. One is there is some telltale signs of the markets. Some of the competitive pressures may be coming off, but even not I think it's down to us to optimize our pricing within that context and I think there is scope for us to do that.

Thank you very much.

Brad Smith, Stonecap Securities.

Sure, thanks very much. I had a question with respect to the trading activity in the quarter and this rather large loss, I guess it's on page 10, in the structured credit and other, CAD129 million loss this quarter versus CAD50 million. I was wondering if you could put that in context.

On the one hand we have what we call a run-off structured credit business that lost CAD18 million I think it was in the quarter, and we are showing here in trading something referred to as structured credit that is producing much larger losses. I am just wondering are there two structured credit businesses being operated here, one that is in run-off and one that isn't.

Brad, it's Kevin. No, the answer to that is absolutely not. We have -- one structured credit business is enough, but what you are seeing is just some accounting geography issues. So going through trading is where we have some of the underlying collateral and the trading positions that are in structured credit, but that has shown growth on our balance sheet.

So mark-to-market movement on that collateral and some of the losses on particular unwinds would go through trading. So that is why you have had a big negative impact on trading. However that is offset in our FVO revenue line almost exactly where we have gains on the protection side of things, where we have got instruments that are designated as fair value option, and they essentially offset those.

So it's -- those two lines have to be taken together. They essentially offset and that is why in structured credit overall you see that way smaller loss.

So the CAD18 million is the net number between those two then, is that correct?

Yes, that is correct. And then obviously there would be a couple of other things in there, but big picture that is exactly correct.

Okay, thanks very much.

Robert Sedran, CIBC.

Thanks, good morning. My question is about securitization revenue. Kevin, when I think about 2012 IFRS earnings versus 2011 GAAP earnings is this higher securitization revenue that we have seen in the last couple of quarters turning into a headwind for next year's earnings? And I can appreciate that there is a lot of moving parts here in IFRS and you probably don't want to comment on the specifics, but even directional comments would be helpful.

Sure, we won't give guidance but I mean the short answer to your question is no. There is a lot of noise in securitization so I think a lot of people will be pleased when that is gone. What you will see from an overall securitization point of view is I think less volatile earnings, so we won't have some of the gains on sale that you see periodically. But NI will be far more even.

So I think what you will see is, as a result of the NI drag that we are seeing today, that will flow through earnings on a regular basis once we are under IFRS. Rob, you still there? I think we seem to have lost Rob.

This will conclude the question-and-answer session. I will now turn the meeting back over to Mr. Weiss.

Thank you for joining us this morning. We will be posting the transcript on our website and please call Investor Relations if you have any follow-up questions. Have a good day.

Thank you, Mr. Weiss. The conference has now ended. Please disconnect your lines at this time and thank you for your participation.