Canadian Imperial Bank of Commerce (CM) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CIBC quarterly results conference call. Please be advised that this conference call is being recorded.

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

Thank you. Good morning and thank you for joining us. This morning CIBC senior executives will review CIBC's Q1 results that were released earlier this morning. The documents referenced on this call including CIBC's Q1 news release, investor presentation and financial supplement as well as CIBC's Q1 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. David Williamson, our Head of Retail and Business Banking will follow with a business update. Kevin Glass, our Chief Financial Officer, will provide a financial review, and Tom Woods, our Chief Risk Officer, will close the formal remarks with a Risk Management update.

After the presentations, there will be a question-and-answer period that will conclude by 9 a.m. Also with us for the question-and-answer period are CIBC's business leaders, Victor Dodig and Richard Nesbitt, as well as other senior officers.

Before we begin, let me remind you that any individual speaking on behalf of CIBC on today's call may make forward-looking statements that are subject to a variety of risks and uncertainties. These statements may include material factors or assumptions that could cause CIBC's actual results in future periods to differ materially. For more information, please refer to the note about forward-looking statements in today's press release.

With that, let me now turn the meeting over to Gerry.

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

Today CIBC reported net income for the first quarter of CAD835 million and earnings per share of CAD1.93. Return on equity for the quarter was 22.4%. Adjusting for items of note, earnings were CAD1.97.

We finished the quarter with a Basel III pro forma common equity ratio estimated at 8.3%. As previously announced, we completed the redemption of 450 million of preferred shares on January 31. We announced this morning our intention to redeem a further 300 million of preferred shares on April 30. Together these redemptions are approximately CAD0.06 accretive to earnings on an annualized basis.

We also announced this morning that commencing with the dividend to be paid on July 27, 2012, shares issued under a dividend reinvestment program will no longer be issued with a discount for market prices. We introduced the discount in late 2009 and it has been generating approximately CAD100 million of common equity per quarter.

Given our strong capital position, we believe that this additional share issuance is no longer required.

Now turning to our business results in the first quarter. Retail and Business Banking reported net income of CAD567 million for the first quarter, up 5% from Q1 of last year. Revenue for the quarter was CAD2 billion, up 1% from a year ago.

Credit quality in our Retail portfolios also continues to be strong. The revenue headwinds continue to prevail in Retail, however, and we were also starting to see some new ones emerge. Continued low interest rates are negatively impacting spreads and will continue to do so for the balance of the year.

In terms of consumer debt levels, we are continuing to see growth albeit at a slower pace. In our credit card business, while purchase volumes continue to grow, we are starting to see an acceleration in the pace consumers are paying off their balances as evidenced by lower revolve rates. Recent credit card market share data suggests that this is an industry trend.

During the first quarter, Retail and Business Banking continued to strengthen our focus on building deeper relationships with our clients. We continued to lead in mobile innovations launching a new mobile version of CIBC.com that optimizes the user experience on any mobile device.

As part of our commitment to building the CIBC brand, we launched a new marketing campaign to highlight our market-leading Imperial service offer and continued our brand campaign with new ads that focus on the importance of a strong financial foundation to help Canadians achieve their financial goals.

This morning we also announced that CIBC will be exploring strategic options in our brokered residential mortgage business including the potential sale of our FirstLine broker mortgage channel.

As we discussed during our Q4 call and have discussed in public investment forums since then, our focus is on increasing our emphasis on our CIBC branded channels where we have the greatest potential for deeper client relationships and profitability while deemphasizing non-CIBC branded channels. Our announcement today on FirstLine is consistent with that focus.

David Williamson, our Head of Retail and Business Banking, will address this announcement in more detail and provide an overview of the retail strategy and priorities later in the call.

Wealth Management earnings for the quarter were CAD100 million. Excluding a nonrecurring gain related to our investment in American Century, earnings were in line with the same quarter of last year. During the quarter, Wealth Management continued to make progress.

CIBC Asset Management added American Century Investments as sub advisor leveraging our equity stake in ACI and the strength of their proven investment management expertise to further enhance the quality of our client offering. And CIBC Global Asset Management expanded its institutional offering with new and enhanced pools to provide a range of investment management solutions to meet the evolving needs of our clients.

These actions reinforce our strong capabilities in Canada and internationally as Wealth Management continues to be an integral part of our plans for growth at CIBC. Victor Dodig is here this morning to answer questions about our progress and strategic direction in Wealth Management.

Wholesale Banking reported net income of CAD133 million in the first quarter. Excluding items of note, net income was CAD159 million. Our core Wholesale Banking business in capital markets and corporate and investment banking achieved very strong results in market conditions that continue to be volatile.

The trend of business levels at CIBC toward the end of Q1 and early indications this quarter suggest market conditions are trending less favorably than in Q1. During the quarter, Wholesale Banking continued to deliver excellent service and value to our clients acting as joint lead and lead coordinator on Canada Housing Trust's CAD5.5 billion five-year bond offering and co-lead arranger for Suncor Energy's CAD5 billion corporate revolving facility.

Also exclusive financial advisor to Rogers Communications Inc. on its joint acquisition of Ontario Teachers' Pension Plans; 79.5% stake in Maple Leaf's Sports & Entertainment for CAD1.3 billion. Richard Nesbitt is here this morning to answer questions regarding our progress and strategic direction in Wholesale Banking.

In summary, we are off to a strong start to the year. While the financial landscape is difficult given the low interest rate environment, we believe we are building the right foundation for a very strong position in the future.

Let me now turn the meeting over to David Williamson. David?

Thank you, Gerry. Good morning, everyone. Before I begin, let me remind you that my comments may contain forward-looking statements.

As Gerry mentioned, we are pleased with the start to the year in Retail and Business Banking. As we have previously discussed, CIBC Retail and Business Banking strategy is focused on two objectives. They are to enhance the client experience and to accelerate profitable revenue growth.

We will achieve these two objectives through a fundamental shift to a focus on the client from our previous more product oriented focus. Where going forward, our decisions, processes and initiatives are all viewed from a client perspective.

We have three priorities that we are executing on to facilitate this shift. First, building deeper relationships with our clients. Second, enhancing our sales and service capabilities. And third, acquiring and retaining clients consistent with our objectives. I will briefly touch on each of these priorities.

Our first objective of building deeper relationships with our clients is in recognition of several significant potential benefits. Deeper client relationships result in less velocity in our client base due to lower rates of attrition; are positively correlated to higher client satisfaction; have higher NIMs; result in the ability to derive more revenue from an existing base of clients; and more fully engage both sides of the balance sheet.

The second priority is to serve our clients better by improving our sales and service capabilities. This priority will involve an emphasis on continuous process improvement to derive a better and more consistent client experience. We anticipate that our efforts to streamline our processes will also provide increased revenue or lower cost structures as a byproduct over time.

Our third priority is to acquire and retain clients that are aligned to our strategic objectives. Our existing client base is relatively large but is has not shown the appropriate levels of growth. In addition, the degree of depth of some of our client relationships is comparatively low due to our prior product orientation and our historic involvement in channels that typically result in a single product client relationships.

We want to shift to deeper relationships as they provide a lower rate of client attrition leading to better client retention and satisfaction.

Consistent with this strategy, we announced this morning our decision to explore options including a potential sale of our broker mortgage brand called FirstLine where clients are sold single products and where margins continue to be compressed relative to our other channels.

We have initiated a sale process which we don't expect to be lengthy in nature as FirstLine is a well-run channel with rigorous and effective credit adjudication and substantial origination capability supported by highly capable mortgage brokers.

Once this process is complete, we plan to increase renewals into our CIBC brand from this FirstLine platform and over time. Benefits of this will include higher NIMs and deeper relationships as these clients enter into CIBC branded channels.

We believe the time is right for us to make this move. Over the past number of years, we have invested in our branch-based mortgage business including a substantial build of our mortgage advisors. The results of these investments are paying off as evidenced by our growth rates over the past year.

CIBC branded mortgages have grown at a rate of 10% over the past year compared to an industry average of 7%. We expect to continue to grow our CIBC branded mortgages at above market rates for the foreseeable future.

In addition to the actions we are taking in our mortgage business, we are also increasing our investment across Retail and Business Banking to build capabilities to fund profitable revenue growth and enhance the client experience while at the same time maintaining an overall approach to disciplined expense management.

In 2012, we are investing an incremental CAD50 million relative to last year and projects designed to strengthen our foundation and improve our competitive position. These projects are aligned fully with our strategic shift from product to client.

For example, we are currently building our system capabilities to change how we onboard our clients. Currently, we sign customers up by product which is cumbersome for our front lines, takes time for our clients and restricts the development of multiproduct client relationships. After this project is fully complete and implemented across our front line systems in 2014, we will collect data by client. And we will have an integrated adjudication ability so that certain preapproved credit products can be offered as the client is being signed up.

Another investment we're making is to build an integrated lending product. Once implemented late this calendar year, it will allow us to increase the client's home equity line of credit as the client's mortgage is paid down.

These first two projects are catch-up investments. Our competitors currently have these capabilities so these are lag areas for us which have affected our growth rates in the past. Increasing our investment so that we can accelerate the introduction of these types of capabilities is important to helping us close gaps to the competition.

A third investment is an initiative we call next best offer. Currently, our sales leads to the front lines are by product. Under next best offer, our leads will be client based and will identify the next product a client should have based on an analysis of that specific client's current product holdings. This information will be automatically forwarded to our front lines to assist in building deeper client relationships. The project will come on stream in Q4 of this year.

Unlike the first two investments I mentioned, this project will bring our capabilities closer to the forefront of the industry.

Collectively, they will all lead to deeper client relationships and an enhanced client experience thereby supporting our objective of accelerating profitable revenue growth.

In summary, Retail and Business Banking is a strong franchise featuring a large client base, a competitive distribution network, leadership in key products and a history of innovation. We're going to build on our existing product strength by overlaying a client focus in everything we do going forward. We have taken actions to execute on our shift to a client centric focus and to launch several major initiatives that will accelerate profitable revenue growth and enhance our clients' experience.

With that, let me now turn the meeting over to Kevin Glass. Kevin?

Thank you, David. I am going to refer to the slides that are posted on our website, starting with slide 6, which is a summary of results for the quarter.

As a reminder, the 2011 results that are discussed today have been restated on an IFRS basis. The details of the restatement exercise were released on January 27 this year.

The first quarter of 2012 provided a strong start to the year. On a reported basis, net income after tax was CAD835 million and adjusted net income after tax was CAD833 million. This translates into reported earnings per share of CAD1.93 and adjusted earnings per share of CAD1.97. The details of our items of note are included in the appendix to this presentation.

Key business drivers in the quarter included first of all, a low interest rate environment which continues to put pressure on spreads in Retail and Business Banking. However, we have managed to offset this by generating solid year-over-year volume growth driven by our CIBC branded products.

Modest TSX volumes and new equity issue activity reduced revenue in our retail brokerage business within Wealth Management. The asset management business helped offset these challenges by continuing to show strong fundamentals in mutual funds including strong long-term net sales.

The uncertain economic outlook has reduced activity in certain Wholesale Banking businesses but provided opportunity in others. We continued to execute our client focused strategy and our capital markets businesses successfully increased revenues in the quarter as our clients increased their trading and hedging activities.

We had strong expense performance with a reported efficiency ratio of 56.7%, or 55.3% on an adjusted basis. We continued to have a strong capital position as evidenced by our Tier 1 Capital ratio of 14.3%, the highest among our peers. In addition, our Basel III common equity ratio was 8.3%. Tom Woods will discuss our capital position in more detail during his remarks.

Moving to the details for each of our strategic business units, I'll start with the performance of Retail and Business Banking on slide 7. Revenue for Retail and Business Banking in the quarter was just over CAD2 billion, up CAD27 million or 1% from the same quarter last year.

Personal banking revenue of CAD1.61 billion was down CAD51 million, or 3% compared with the same quarter last year. Revenue was hurt by narrower spreads but helped by solid volume growth across most products as well as higher fees.

Business banking revenue was CAD373 million, up CAD22 million or 6% compared with the same quarter last year mainly due to strong volume growth. Within the Personal Banking and Business Banking segments on a year-over-year basis, funds management were up CAD15 billion or 4% with the growth coming from CIBC branded products which are up 6%.

Other revenue was up CAD56 million from the same quarter last year and down CAD55 million from the prior quarter primarily driven by treasury allocations. These allocations while lower than the prior quarter, are still somewhat higher than what we would expect going forward.

The provision for credit losses of CAD281 million was up CAD9 million from the same quarter last year as a result of write-offs from the acquired MasterCard portfolio, as expected, partially offset by lower bankruptcies in the other credit card portfolio. Tom Woods will discuss credit quality in his remarks.

Expense performance continues to be strong and non-interest expenses were CAD996 million down CAD7 million from the same quarter last year. On a reported basis, net income from Retail and Business Banking was CAD567 million, up CAD27 million or 5% compared with the same quarter of the prior year. Net interest margins declined 1 basis point quarter over quarter as a result of the continued low interest rate environment.

Turning to slide 8, revenue for Wealth Management in the quarter was CAD435 million, up CAD19 million or 5% from the same quarter last year.

Looking at the results of the specific business lines on the slide first of all, retail brokerage revenue of CAD249 million was down CAD32 million from the same quarter last year as a result of market conditions which drove lower TSX trade volumes and lower new issue -- lower new equity issue activity.

On a reported basis, asset management revenue of CAD162 million was up CAD51 million from the same quarter last year. As noted in our appendix, asset management results include an item of note this quarter of CAD37 million. Excluding this item, revenue was up CAD14 million or 12% year-over-year primarily due to the inclusion of our equity ownership in American Century Investments.

CIBC mutual funds continued to generate strong investment performance with over 60% of retail funds ranking for or five star by Morningstar. This helped drive strong net sales of long-term mutual funds of over CAD900 million.

Non-interest expenses of CAD312 million were down CAD12 million or 4% year-over-year mainly due to lower performance-based compensation. On a reported basis, net income after tax was CAD100 million, up CAD34 million from the same quarter last year. Adjusted net income was CAD65 million, flat versus the same quarter last year.

Turning to Wholesale Banking on slide 9, reported revenue this quarter was CAD495 million. Capital Markets revenue was CAD307 million, up CAD65 million compared with the prior quarter. This was the result of higher revenues particularly in the fixed income area as well as higher debt new issues.

As noted on the bottom of the slide on an adjusted basis, which excludes the structured credit runoff portfolio, trading revenues of CAD218 million were up CAD61 million or 39% from the prior quarter primarily as a result of higher revenues from our suite of interest-rate products.

On a reported basis, Corporate & Investment Banking revenue of CAD197 million was down CAD131 million versus the prior quarter. But the prior quarter included an item of note related to merchant banking. Adjusted revenue was up CAD10 million or 5% quarter-over-quarter mainly due to higher revenues from the real estate finance business.

Reported loan losses for the quarter totaled CAD26 million, a reduction of CAD6 million compared with the fourth quarter. Loan losses adjusted for an item of note in the prior quarter were up [CAD19] million due to higher losses in the US real estate finance portfolio which Tom will discuss later.

Noninterest expenses were CAD289 million, down CAD58 million or 17% from the prior quarter mainly due to lower performance-based compensation. Structured credit this quarter was a net loss of CAD26 million after tax, details of which are included in the appendix to this presentation.

On a reported basis, net income after tax was CAD133 million, up CAD11 million from the prior quarter. Adjusted net income was CAD159 million, up CAD31 million or 24% from the prior quarter on the same basis.

So our first quarter represented a solid start to the 2012 fiscal year. While we continue to operate in a challenging rate environment, we had strong volume growth in both Retail & Business Banking as well as Wealth Management. This is indicative of the strength of these businesses and provides a solid base for future growth and performance. And as a result of our client-focused strategy, Wholesale Banking continues to provide consistent results.

Our efficiency ratio improved as a result of our continued expense discipline. And finally, our capital position remains the strongest among our peers and we are well-positioned for the Basel III requirements.

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

Good morning, everybody. My comments will also include forward-looking statements. Actual results could vary materially.

On slide 19, total reported loan losses under IFRS in Q1 were CAD338 million versus an IFRS equivalent of CAD306 million in Q4. Q1 loan losses excluding the IFRS equivalent, the general loan loss provision under Canadian GAAP, is shown on the slide at CAD341 million. The comparable Q4 number was CAD307 million, excluding the CAD25 million reserve we took on our European runoff portfolio last quarter.

Loan losses were up in Q1 mainly for three reasons. First, CAD24 million higher loan losses in our US real estate portfolio. Second, CAD13 million higher losses in our cards business mainly due to seasonality. And third, CAD4 million higher losses in FirstCaribbean due to a methodology change in the way we report interest earned on impaired loans.

Looking ahead for the rest of the year and subject to the usual caveats on forward-looking statements, the first two items I just mentioned, that is US real estate and our cards business, should run slightly lower. The third item, the methodology change should run at about the same level. In other words, we currently see our loan-loss rate for the rest of the year being down from the Q1 number.

A complete reconciliation of our Q1 loan losses under IFRS versus our Q4 loan losses under both IFRS and Canadian GAAP appears on slide 28.

On slide 20, our cards portfolio net loss rate in Q1 was 5.0% versus 4.5% last quarter. Losses were up CAD13 million from a seasonal low in Q4. Our cards delinquency rate was stable quarter-over-quarter.

With respect to our Canadian residential mortgage portfolio on slide 21, we have insured 79% of our Canadian mortgage book with over 90% of this insurance being provided by CMHC. The average loan-to-value of our uninsured mortgage portfolio based on November industry product data is 48%.

Slide 22 shows our exposure to the European peripheral countries and countries in North Africa and the Middle East. We reduced our direct exposure to Europe by CAD1.2 billion quarter-over-quarter. As you can see, we have no peripheral sovereign exposure and very little non-sovereign peripheral direct exposure which is less than CAD15 million net after detecting the collateral we hold.

We have CAD325 million indirect exposure to corporates in the peripherals in our structured credit runoff book where our interest benefit from significant subordination to our position. But here too, none of this exposure is to peripheral sovereigns.

Slide 23, our US real estate business had CAD4 billion of drawn exposures and CAD613 million of undrawn. About 70% of this has been originated from 2009 onwards which benefit from higher credit quality standards due to better loan to value metrics and tighter adjudication criteria.

In Q1, we had loan losses of CAD24 million, up from no losses in Q4. As discussed in our Q4 webcast, there continues to be some pressure on the loans originated pre-2009 and we could see some pressure in the next few quarters. But as I said, we expect the run rate going forward for the rest of this year to be less than what we saw in Q1.

Slide 24, our European leverage runoff book had CAD410 million in drawn and CAD88 million in undrawn. Our US leverage finance runoff book had CAD134 million drawn and CAD69 million undrawn. In Q1, we had no provisions in either of these portfolios.

Turning to market risk on slide 24, you can see the distribution of revenue in our trading portfolios. In Q1, we had positive results 95% of the days. Our average trading bar was down 11% from Q4 as we continue to maintain a low risk profile given market conditions.

Our Tier 1 ratio was 14.3% at Q1, down from 14.7% at the end of Q4. The Tier 1 ratio decrease was mainly due to the transition to IFRS, the redemption of preferred shares and higher RWAs, partly offset by earnings net of dividends and capital issued.

CIBC is well-positioned for Basel III. Our pro forma Basel III common ratio at the end of Q1 was 8.3%, exceeding the Basel III minimum standard of 7%.

That concludes my comments. Back to you, Geoff.

Thank you, Tom. That concludes our prepared remarks. We will now move to questions. Before we do, to give everyone an opportunity to participate, please keep it to one or two questions and then re-queue. Operator, can we please have the first question on the phone?

Steve Theriault, Bank of America Merrill Lynch.

Thanks very much. For David to start, please. To get a better sense of the potential near-term impact, can you give us a sense of how much FirstLine is adding to pretax earnings? Is that a material number? If you end up retaining FirstLine, how much do you think you can take out just in terms of expenses?

And then in terms of a related question, in terms of retention, do you have a goal in mind, a preliminary goal at least, or target retention percentage as the broker mortgages come up for renewal? Is there any advantage to ultimately retaining FirstLine? Is there any advantage in terms of the ability to increase the likelihood of attaining the business?

Okay. Good morning, Steve. Yes, let me start in on that. So the best way to approach it, I think, is to rather than giving channel profitability, just speak as to your question which is what is the financial impact of a sale of FirstLine?

So if using Q4 of 2011 and current growth rates as a jumping off point, this is what we'd expect over the next three years if we were to sell FirstLine. So first, we would expect a slight decline in the total mortgage balance. And so that is -- as FirstLine runs off, it is largely offset, not completely, largely offset by the above market growth that we are currently experiencing in our CIBC branded mortgages, supported by renewals from FirstLine into the CIBC brand. So that is what we would expect on balances.

Regarding second thing, that's higher NIMs, so the higher NIMs are due to a mix shift towards CIBC branded mortgages which have higher NIMs, and you have got the opportunity for deep relationships or higher cross-sell.

And then the third point, one you touched on which is lower expenses as we consolidate two mortgage platforms onto one. So the results of all that, if you project it out, is a total NIAT growth from our mortgage business. We would expect with all of those factors combined to be in the mid-single digit range over the next three-year period.

So I will add, this is a strategic choice we are making, we believe it is aligned with our goal, our corporate goal of being a lower risk bank and it will make for more efficient use of our balance sheet. But as you can see the numeric impact is not significant due to the higher NIMs, the offset of better than market growth rates in our CIBC branded channels and offsetting the runoff of FirstLine on the sale. And then lower expenses which is an important factor as well.

Now, you had a follow-on question regarding targeted retention of renewals. So currently about 80% of renewals so about half of the mortgages end up renewing or refinancing. About half run off. That wouldn't change under any scenario. That is just customer behavior. Of that, about 80% of it renews into FirstLine.

So we are assuming that it would be quite a bit less than that into our channels. We are assuming, let's say, 50% of the renewals end up in the CIBC brand, so that would be about a quarter of the book would end up over in the CIBC brand. That is the assumptions we are working off of.

A quarter of the existing FirstLine book?

That's exactly right. Thanks, Steve.

Thank you.

Gabriel Dechaine, Credit Suisse.

Hey, can you give me a sense of the capital that is backing FirstLine? I imagine it's pretty small because mostly insured mortgages. But if I looked at a 3% leverage ratio on -- that you excel, so say three quarters of that CAD50 billion balance or so. Is 3% of that kind of the appropriate number to think of in terms of capital or book value?

Gabriel, it's Gerry here. The capital is not a major factor. It actually would almost fall below a materiality threshold because of the, first off, the risk-weighted asset elements of mortgages is low under all circumstances.

Secondly, we, as Tom mentioned earlier on, insure as much of our book as we can so if you use sort of that 80% number that takes the actual assets that are subject to the RWA calculation down to a very small number and we weren't going to disclose the individual number around FirstLine because there is a variety of ways of looking at it.

We think the benefits of this from a viewpoint of all elements of capital, operational and operational risk are actually higher than a credit capital calculation would throw off. But the number is not big so this isn't going to throw off a large capital benefit. That is not what this is about.

I was more wondering about the -- I didn't think that the RWA was high at all. It was more of the leverage, the leverage approach to kind of determine the capital consumption, if that's at all appropriate.

Yes, okay. Well, the first thing that I would want to emphasize is that leverage we always look at as a gating restriction as opposed to an absolute restriction. And here is what I mean by that is most of our activities we start off with risk capital as the way of looking and our opportunity for growth in the future, and if you look at CIBC's net capital generation after dividend, and under Basel III then multiply out by the inverse of the 3%, we actually have the opportunity from a leverage viewpoint to grow our balance sheet each year by a significant amount. More than I think we would actually necessarily need to.

So it is very useful from a viewpoint of leverage ratios because you can get gated but our primary interest in the bank is to make sure that we have an efficient balance sheet. One factor on efficiencies is the potential gating that comes up from leverage ratios, but the most important factor for us is profit impact per asset -- per dollar of assets. And this activity is very geared towards the fact that the brokered channel had limitations in terms of the efficiency that you could get in relation to the NIMs because of lack of cross-sell capability and the strategy of the bank is to focus on areas where we can have the deep client relationship.

But I can tell you that from a leverage viewpoint, it does provide us with a lot of extra room in terms of what we might do with the balance sheet.

Okay, my second question is on expenses, and a very positive performance here, particularly in Canadian retail, down year-over-year, I think that was the best we saw this quarter. But it seems to be, for me at least, a double-edged sword.

So what do you say to someone that thinks that CIBC has under invested in the past? Has some infrastructure or investments to make to reinvigorate the franchise? And, David, you touched upon a few there during your comments. Those investments are really strategically important for CIBC over the long term, I think. So how do you balance the two and is it appropriate to think of CIBC as a cost-cutting store because I think for some people that might not be something that is viewed necessarily in a positive light.

Well, we have as much as possible where we are improving our NIX as much as possible we are trying to achieve that through activities such as what we just talked about with FirstLine. In the event that there is a sale and we consolidate those assets onto one platform, that provides efficiencies and a positive NIX impact. That is the way that we would like to target expense improvements through reengineering and paradigm shifts.

In terms of our core operations and investment, we are seeking to up investment there, and David just mentioned that that will have an impact on our expenses and that is what his investment portion of his comments was about -- was our way of talking about that phenomenon that you just mentioned that we don't want to end up in that position. And that is what David's comments were about and he highlighted three major projects.

The good news on these projects is that two out of the three are filling gaps and although one would prefer to be at the forefront of the industry in everything, when you invest in dollars to fill a gap, it is tried and true and you have a pretty good idea with a high degree of certainty of what the impact will be because you can observe it in your competitors.

So the discussion -- in the strategic discussion of our overall investment posture, what David has brought forward is on gap filling exercises, the spreading out of the investment over a number of years, when we can accelerate it because sometimes there is only so much you can get done from a technology development. The spreading of it in the end is not positive for the franchise and therefore we are accelerating those expenditures.

On the third one, we actually believe that other than one competitor that the implementation of it, and he described it, would put us at the forefront of the industry, and we decided to move ahead on that also because we don't want to be only in catch-up mode. We want to address where we have gaps and we also want to make sure what is the forefront of the industry will be a gap tomorrow. So we might as well get on with it.

And David has mentioned that will have an expense impact in future quarters over and above our current run rate and the acceleration of those investments and expenses is about exactly what you are talking about.

Well, thanks for the response and sorry about the coughing. I have got to blame my kid there.

Okey-doke.

Peter Routledge, National Bank Financial.

Hi. Just a question for David. David, I understand the strategic rationale behind this shift in how you are going to originate mortgages going forward. It makes sense but there is a transition and there is risk. So two related questions on that.

One, you are shifting apparently away from the brokerage channel at a time when mortgage growth is only 5% to 7%, let's say looking ahead. Whereas several years ago when one of your peers did it, they -- mortgage growth was at 10% to 12%. So I guess the first question would be isn't it more risky now and don't you have more revenue risk just given the external market conditions?

And the second, just picking up on your comment on renewals, if I heard right, renewals right now in the home line channel are 20% to the CIBC brand and you are shifting to 50% and that seems like a big leap. So if you could talk sort of about those two risks?

Certainly I will, Peter. So first off, I guess the point I would make is we have been kind of preparing for this move for a while. So first comment I would make when you referred to one of our competitors, we're sort of jumping off from a different spot and since that right now, our growth in mortgages in the channel we're emphasizing our CIBC branded channel is running at 10% and that compares to an industry current growth rate of 7%. So we are jumping into this from a pretty good starting point, which is our CIBC branded channels are really working right now. They have got momentum and they are growing at a faster rate than our peer group.

So we are coming into this I think from a very different position than the situation you refer to as a comparator.

And the other thing I would mention is we are -- also been preparing as far as say an operational perspective, our mortgage advisor channel, it is newish but it has been built up a fair amount. It is smaller than our peer group so there is more room for us but it is in place, it has been expanded and it is ready to go.

We have just hired a new executive to lead this mortgage, mobile mortgage channel. He starts in the middle of the month.

We have been making investments in our branch channel. We have been doing that for a few years to get that ready to go. And we have recently expanded our outbound call capacity too which is part of the renewal process.

So we are jumping off from good growth in the channel we are emphasizing and taking some strategic steps over the last little while to make sure that when we do this we are well placed to get the renewals and to continue to show above market growth in the CIBC branded channels.

The other point you mentioned about renewals, let's just go through the numbers on that again. What I was saying was about 50% of a mortgage book ends up renewing or refi-ing. The other 50 pays it off, pays early, does whatever. You are left from our experience industry wide about half the book renews or refis.

Currently in FirstLine at the end of the period when it comes to renewal, we get about 80% of that renewing into FirstLine. So what we are saying is given that we are trying to get them into a different brand, maybe it won't be that high. Let's assume it is not 80. Let's assume it is 50.

So rather than currently we're getting 80% of half the balance renewing into FirstLine we're saying let's assume we're only getting 50% of the half that renews. So we are assuming something more conservative and then we have taken these steps I outlined to hopefully achieve that level. (multiple speakers) hope that clarifies it.

Sorry, 50% would renew into the CIBC brand?

Yes, so if CAD100, CAD50 of it will get around to a refi or a renewal at the end of the period, the other 50 pays down, goes away over the course. Of that -- and that is not going to change. That is just client activity, client -- that is what the client does in the normal course, based on our experience.

Then of that, how much of that are you going to keep? In FirstLine, we currently keep 80% of it. What we are saying is let's assume it is not that good, let's assume it is only 50, so under that assumption, it would be 50 of 50 would end up in our brand.

Okay. But it is a brand shift for the client, they will perceive themselves going from FirstLine to CIBC?

That's right, so we are configured to make that happen. We think it's a better offering and we think we can offer them more, but you are right, it is a change. So rather than saying we will be at 80%, we have knocked it down to 50% and we have been getting ready with getting our mobile advisor team expanded, a new leadership of it, and our branches bigger, our outbound call capacity is bigger. So we are ready to go, and we are growing better than market now in that channel, but even irrespective of that, we said well, let's not assume 80%, let's knock it down to 50% and see how we do.

You will have some pricing flexibility if that particular group of folks are more cost-conscious?

Yes, we would. Yes, we would. Just in the normal course as opposed to anything.

All right, thank you.

Rob Sedran, CIBC.

Hi there. I don't want to get too carried away with funds transfer pricing but when I am thinking of the profitability of the mortgage broker channel, one assumes that it is benefiting in some way from cheaper funding from whether it is covered bonds or the CMB program and all of that won't go away.

I guess what I am asking is will the P&L and NIM impact of a runoff in this business be mitigated by the fact that you should be able to reduce more expensive marginal funding or am I getting carried away with something that is not too material here?

It is material and you are accurate, there is a -- all of the -- I have seen no calculations that say that our CMB allocation changes at all. Our covered bond total wouldn't change other than the calculus of total balance sheet size and all of that sort of thing.

So you have identified something that on the margin, if you were to go to a static model, and the reason why I am saying a static model is because in a dynamic model you do max out on CMB allocations, covered bonds and all of the areas that are the cheaper funding. And once you have maxed out, then the utility of that block of funding, it's -- all other things are equal, and therefore it is not a measurable improvement, FirstLine or to CIBC branded.

So on a dynamic model, if you take the next mortgage issued, this advantage is something that is a little bit elusory, but on a static model where you look at a block of mortgages, if you were to just run off and presume that you looked at both books, and the dollars that you would lose as you ran down in FirstLine, the funding costs that are the very advantageous funding costs through the securitization of mortgages, all are retained by CIBC, and therefore the profitability of that is retained within the branch channel.

Furthermore, there are elements to the block mortgage book that have limitations as to liquidity that you presume around your stamped MBSs, and that also is limited and stays entirely with the branch channel. When you add all of that up, it is actually a significant NIM advantage when you translate out the funding that was retained by the bank. And when we have done our calculus of the risks around this channel, we have done the calculation on targeted allocation of if we keep the funding regardless of what we do with the channel, then let's recalculate the profitability of the channel assigning to it the most expensive funding because it is the last dollar in.

When you do that, it is a significant risk mitigation on an activity such as this and if you start to allocate other costs into those channels, such as if you were gated on leverage and other elements, you find that the risk of this type of activity is significantly mitigated by the fact that we do retain almost all of the benefit that I just described. You are bang on.

Well, that's nice for a change, I guess. David, just a follow-up on one question on your expense spend. Is there going to be any attempt to offset any of those higher costs with savings elsewhere or are you comfortable that run rate expenses are about the right level and so these investments will be additive to the expense line?

Yes, Rob, the latter so we have continued to work on our discipline (inaudible) expenses and we had a good quarter in that respect and actually a good run over the last while. So we will maintain our expense discipline. But what we are saying here is we do see opportunities to invest in the Retail and Business Banking franchise and, Gabriel mentioned it as well, opportunities to build the foundation and to invest in a way that accelerates profitable revenue growth. So we will be disciplined but I think we see an opportunity for appropriate additive spend.

Thank you.

Brad Smith, Stonecap Securities.

Great, thanks very much. I had two quick questions. First, I was wondering if, David, maybe you could comment on the deposit falloff in the average balances in your retail segment disclosure? Looks like it is down about CAD12 billion, 5.5%. Just wondering what was going on there because I note that the total deposits for the bank actually didn't fall by more than about 1.5%.

And then also I was wondering if we could just get some sort of reconciliation on the net interest margin falloff in the retail of 1 basis point? Because I am looking here and I am seeing net interest income down 3.5%, average loans up 1.5% and I am not sure how that reconciles with a 1 basis point only decline in NIM. Thank you.

Okay, no trouble. So on the first fund deposits, yes, you're right, because our deposits all in all right now are growing quite well and we are happy with our momentum. So what that is is just a treasury allocation of treasury assets into that number. So it's the core Retail and Business Banking is as you expected, it is growing along quite well on the deposit front.

David, could you just explain that to me a little bit? The treasury allocation on deposits? I mean are those -- is that a wholesale deposit being taken back into treasury out of the retail division?

I will just, maybe if I could, hand over to my colleagues in treasury on that front.

Thank you.

Sure, good morning. It's Andrew Kriegler. We have a fair number of wholesale deposits obviously the bank is active in a wholesale markets but over periods of time, the levels of wholesale deposits fluctuate a fair bit. You have seen that from time to time in the past. And so in this particular case, you saw a decline in some of the wholesale deposits which took the averages for the whole bank down.

So given that loans averages didn't fall, are we really saying that the retail division operated under a much higher leverage during the quarter?

I'm sorry. Could you say that again please?

I am just saying, given that the loans, the average loans didn't change, deposits went down substantially. Like where did the difference get made up?

The difference is effectively in the tenor of the securities that are being funded by the wholesale deposit.

Right. And then can we talk a little bit about why net interest income declined when deposits and obviously the cost of the deposits would have gone down?

It is the matching of the assets that are being funded by those shorter term wholesale deposits. So if you are boosting the bubble of short-term securities you are holding, then the net interest margin that is going to be generated by them is also going to reduce.

Okay, so just getting back to the net interest margin reconciliation, the 1 basis point decline.

Yes, so on that front when I just look at the Retail and Business Banking activities, that's our best NIM decline over the past four quarters and it really is just reflective of the phenomenon we have spoken of before which is just the lower interest rate environment and the impact on the retail deposit.

On the asset side, we are not -- that area has stabilized both in the mortgages and in our residential and business lending where we are seeing business spreads continue to behave well. So on the asset side, spreads are behaving well. And that 1 basis point is more reflective of the interest rate environment on what is going on on Retail and Business Banking.

Thank you.

John Reucassel, BMO Capital Markets.

Thank you. Just, David, back to you. I just want to go back to your original comments on improving client depths and reducing attrition. Can you give us a sense of where CIBC is on some of those metrics today? And where you would like to be three to five years from now? Just give us an idea of what your targets are?

Sure, I will do the best I can. Now, I don't have great data on how we compare just because it is not just not generally available. Our intuition given our focus in products before with sometimes more of a monoline kind of mindset is that on client depth we would be behind where we'd like to be. And I think our net client base hasn't shown the historic level of growth that we would have liked as well and I think that is also something that Gerry touched on as far as growth rates in the past and gaps to peer groups.

David, does that mean products per customer, or what does client depth mean? I'm just trying to understand what your parameter is?

Yes, okay. So let me be clear. So it is products per customer, so when you ask what would I be tracking? What will we be tracking? Obviously our aspiration is revenue growth and NIAT growth, but I think what you are getting to are what are the metrics. And there are three key ones I would say.

So first is just the size of the client base. We'd just like to have a deeper pool of clients. Two, what you are asking about is the product use count for these clients. So how many clients do we have and then how much business are we doing with those clients? That is the second metric. That is really a product use count and some reasons we are attending to look at our new clients that we bring on and the product use count there just because that is going to be a little more indicative of progress on that front than looking at our existing client base. And then so I and our team is looking at the product use count for new clients.

And then the third metric is just how happy our clients are with us. So how many clients do we have? How much business are we doing with those clients? That is the product use count. Third, how happy are those clients? And that is the client sat figures.

Okay. Maybe I will circle back. And then just for Gerry, I just want to make sure I understand your point on the securitization and covered bonds, the fact that you have slower mortgage growth, your loan book is not growing as fast but you retain access to that funding, reduces the risk on this transition. Is that what you think, because the costs are so low?

Yes, because the broker mortgage channel, in fact, when you look at our retained securitized funding capability has our highest cost of funding, our highest variable costs because of the cost of the channel both from the viewpoint of the actual broker cost and then there is an extra platform with extra costs. And so when you and all of that up, if you were going to put at risk a portion of our assets in mortgages, the risk of the transition, this is where you want to do it, because if every mortgage you lose, number one, there is no cross-sell with it so there is no other client relationship involved, which is another area of NIM issues.

Number two, it has been funded with the most extensive funding that the bank has. And number three, it has the highest cost from a viewpoint of the variable cost of the incremental efforts that go on by the broker for their selling efforts. And there is a platform cost that exists because it is a completely separate business.

So if we don't roll those into the branch channel, the reality of it is that it's the opportunity costs that is important to us, just retaining those mortgages through our branch channel for all of the positive reasons that I just described is something that I think is the way you should look at the risk.

Okay, and then David, one last question to clarify on the costs, operating leverage in this quarter, do you expect 2012 to have positive operating leverage with kind of the things you are discussing today?

So certainly positive operating leverage is what we are targeting and we're going to continue to be disciplined on the controllable expenses and we have had a pretty good run on that front. And what we have been highlighting is just a couple of -- there is the low interest rate headwind and that is going to continue. And then what we have signaled here is when you take that CAD50 million that we spoke of, of incremental investments relative to last year, if you take the expense portion of that CAD50 million and run it over the next three quarters, that is about 1 percentage point of operating leverage kind of knocked off the perch just in doing that

So we are targeting positive operating leverage, but you are hearing a message that we are going to increase our investment here in Retail and Business Banking, but no mistake that we will maintain our expense discipline through the piece.

Thank you.

Andre Hardy, RBC Capital Markets.

Sorry to come back on FirstLine before a question on wholesale but can you clarify what it is that you are selling? Are you only selling the distribution or also the manufacturing and the loans?

Yes, so we are not selling the block of business, so that -- the intent is that we would retain that and it would run off over four to five years. You're absolutely right, what we are selling is the platform to originate, the brand name, the incentive, the point's program, the whole machinery that originates mortgages in that channel.

And that is why I presume, Gerry earlier said we shouldn't expect a big capital impact at the time of the sale?

That's right. I mean the assets will be retained.

Okay. On the Wholesale, the commentary on page seven of the report to shareholders is fairly constructive on the outlook for Wholesale Banking for the remainder of the year. But in your prepared remarks, Gerry, you mention that Q2 is not looking as good as Q1. Can you please be a little bit more specific on what you see in Q2 that's different from Q1 given the commentary that is in the report to shareholders?

I am going to let Richard Nesbitt talk about what he sees in the business trends. My comment was something that existed entirely in the past, meaning I was telling you that the back end of Q1 was softer than the balance of Q1, and was not intending to make a broad-based statement about the rest of the year or the strategy of the business. It was based on seen levels of business and revenues.

However, in terms of the business strategy and the outlook for that, I would like to turn it over to Richard Nesbitt.

Thanks, Gerry. Yes, so if you look at the first quarter, the experience we had was very much our capital markets trading areas were consistent with expectations and the corporate lending and real estate financial were consistent with expectations but very slow in the equity area.

Volumes in the secondary market are down 40% year-over-year and the new issued pace was only about half of what it was in the previous year. And now, I think things have picked up, certainly in February in the equity markets although I'd still say there is some lag happening in the M&A market. There is some interesting, good signs coming for hopefully for Q3/Q4.

But I think that given the mix of the business certainly is different than it was last year and I think what Gerry's comments were just to say that we can't predict what this mix is going to be for the balance of Q2 and Q3 and Q4 so we have to be cautious on that. We don't know whether this equity market improvement is going to continue and we don't know what the M&A calendar is going to actually look deliver us.

Having said that, we have a lot of initiatives on the go in both our capital markets side and in our corporate credit product side and real estate finance and those are going to also start to kick in in Q3 and Q4 as well. So it is a balanced picture and we will see what the market delivers to us.

Mario Mendonca, Canaccord Genuity.

Good morning. One quick question about the consolidated margin. It looked solid in the quarter. I suspect it relates to what we are seeing on page three of your supplements. If you could just take a look at -- a quick look at page three of the supplement where you look at your interest expense and you see that secured borrowings, the cost there are down fairly substantially. I couldn't really connect that to any significant decline on the liability side. So could you help me understand that decline?

Good morning, Mario. It's Andrew Kriegler here. So yes, what you saw lag happening over the course of the quarter was that in comparison to previous quarters, we had a decline in asset balances in treasury and wholesale banking somewhat. As you will recall, we talked previously that market conditions in previous quarters had provided an opportunity to take some short-term funding at fairly advantageous rates which we did pursue and put into liquid assets. Those liquid assets themselves, by definition are relatively low yielding.

So as that came off, you saw a decrease in the size of the balance sheet for that segment and as a result, pushed the margins up there.

That's helpful. So where would I see the actual decline in the liability side of the balance sheet?

So what you will see -- one second.

Sure.

Because I don't see it on the spot basis or on an average basis.

Why don't I -- it's going to take me a bit to walk you through this. Why don't we take it off-line and I will show (multiple speakers)

Second question then real quickly, is there a limitation right now in terms of covered bonds? Are you at your limit right now?

We are relatively close to our limit. It is, as you recall, it is a 4% of total assets as measured on the capital report to the regulator so with the transaction that we did late last calendar year, December, we pushed up to fairly close to that limit. We have approximately $1 billion worth of room at this stage of the game.

I suppose that is one of the reasons why this potential sale of FirstLine makes a fair bit of sense if you are essentially there anyway?

Well, as Gerry mentioned, the secured funding that we have, be it CMB, be it covered bonds or just outright MBS, is something that is sort of a franchise value, that isn't allocated to the FirstLine channel per se so that is retained by the organization.

Even notwithstanding the limitations on the covered bond issuance capacity though, I would highlight that we do have the ability to stamp additional MBS and create liquid assets in that way.

I Understand. Thank you.

Sumit Malhotra, Macquarie Capital markets.

Good morning. For David Williamson, on your disclosure for Retail and Business Banking loans, the last couple of quarters likely in advance of your commentary on FirstLine this morning, you have been breaking out the mortgage balances between the CIBC brand and the other. Is there anything that FirstLine is doing in regards to the lines you call personal lending or cards or is that all CIBC product and nothing through that channel? And if the answer to that is it is all in the CIBC channel, which I think it is, can you comment a little bit about your growth trends in those portfolios?

Certainly, Sumit. So yes, you're absolutely right. The answer to the question is no, that is one of the issues with FirstLine is they haven't had an impact on growth in lending or cards or other product areas. So that is part of the issue on the cross-sell front.

So what is happening then in our CIBC brand growth space, so you are right, we are separately identifying kind of a brand from broker both -- and in mortgage space, for example, we are running 10% in brand and a negative in broker and that gives our aggregate mortgage growth rate of about 5%.

The lending, looking to accelerate that in the personal side. On the business side, we have -- we jumped on that one earlier, right, so that one we got going on a couple of years ago, new team, new focus, restructured our sales team, how that is set up.

Yes, it is more personal lending and cards, Dave, more so than the business.

Yes, so in personal, we are behind that process. Hopefully we will start to build up the kind of momentum that we got on business but we are not there yet so that is an area of focus. On cards, it is interesting, we -- overall volume purchases are good and at a level that is higher than inflation. But the balance of carried mortgage balances, the overall volume that people are carrying on their cards is down.

Now, what I think what is relevant is our market share in that space, the balance of our cards assets, our market share is up so that would indicate this overall level of cards balances being down as an industry phenomenon and it's interesting because that either indicates the consumer is deleveraging. Still the volume of purchases is there but they are just not carrying the balances, so as they are deleveraging or rebalancing into lower forms of lower-cost forms of debt, we think it is the latter. That there is a re-balancing into other forms of debt as opposed to a deleveraging of the Canadian consumer.

But that is still a story being written, so that is kind of the current view on that. Anyway, so hopefully that helps some of this to where we are on our personal growth rates.

It does. Lastly for Gerry, Gerry, some comments on capital markets still showing some volatility, expenses likely to move a little higher than we saw this quarter. Ws that the reason that we didn't see a dividend increase despite the fact the payout ratio seemed to be right at the midpoint of the range? And then just maybe a quick comment from you on what you are seeing on potential acquisition opportunities in the global wealth management space?

Sure. The dividend, I would not read anything into our non-raising. The major factor there was we raised in Q3, and we hadn't particularly thought of raising every second quarter. We are on a more gradual cycle than that. You are quite correct, we have a 40% to 50% target. We are a little bit above the mid end of the range so that is something that in subsequent quarters we will be reviewing on an ongoing basis.

But it really wasn't something that came up into our review cycle this quarter, because we did raise in Q3, and I would note that the other banks who raised this quarter, one of them raised in Q3 but the others had raised in Q1 of last year. So again it was an annual -- I don't know what their cycle was but it was a year since their last raise.

For ourselves it's been two quarters and we really didn't spend a lot of time on looking at another raise. The reason for that is that this quarter and leading up to this quarter, we have been very focused on the non-dividend components of capital, and I would say that it is relatively important because we have been quite instructive in this space and we just reviewed it a little bit, July 31 we redeemed -- excuse me -- July 31 last year, series 30, $400 million preferred shares, Jan 31, series 31, $450 million, and series 32, $300 million coming April 30. And that was well telegraphed, but we have been taking first opportunity to redeem these.

That is now 1.5 -- 1.5 billion of preferreds that have been redeemed and up until now as we redeemed preferreds, we were allowing our DRIP program to continue. While that strengthens your common equity ratio which is very important for capital -- excuse me -- Basel III, it does dilute away part of the benefit of the redemption of the preferreds.

So the key element and messaging this quarter and I wouldn't underestimate it is the cassation of the volume of issuance through our DRIP program which we have now announced which will permit our non-common capital activities to flow right down to the EPS line.

And that is where the area of focus was to view that. The conclusion was that the DRIP was no longer required and that in fact, the dilutive impact of it was not, we believe, critical to the bank.

I would emphasize again that all preferreds and all non-common equity instruments that we have out there, preferreds, hybrids, on schedule, we do have a target to redeem those, and the reason for that is that they are obsolete under Basel III. And we will continue down that path as a first priority.

Our second priority is to engage in activities that are as much as possible accretive to EPS, and our number one accretive activity right now is to stop the DRIP. And we will continue down that path because we do believe in the world that you just described, which I agree with that description, that the balance sheet of the bank, the efficiency of the balance sheet of the bank, the efficiency of the capital structure, the level of common equity in relation to earnings and the therefore EPS translation are critical elements of how the strategy translates into value for the shareholders.

Number one is strategy and the activities that David has been describing around FirstLine and the deeper client relationships. It's Richard's discussion that he had about how they are growing that business and Victor's are discussions, he didn't talk today, but I will turn it over to him on the acquisition front in a moment.

But, number one is the strategy, but on top of the strategy, we have got to make sure that the transmission mechanism of the value of that strategy to shareholders is right. And much of what you have heard today from me about the DRIP from David about things that affect the balance sheet and that sort of thing are a demonstration of the fact that we do balance those two and we are very focused on the transmission mechanisms.

One of the transmission mechanisms is the dividend and it is and will be reviewed, I would say that while every quarter it's possible we would review it, it is not on the front burner at the moment but that is not for any reason other than we are trying to follow a fairly orderly schedule on these topics in terms of how we address the transmission mechanism.

So with that, I'm going to turn it over to Victor to just talk a little bit about ACI, and as you know, we have a target at CIBC for wealth to grow to 15% over the medium term of CIBC's net income. The organic portion of that is going very well, so I think Victor will talk a bit about that and then he will talk about the type of thing that he is looking at, although we do not have anything in the immediate queue. Victor?

Thanks, Gerry, and good morning, Sumit. A couple things. I would be remiss if I didn't mention the organic growth at home and the opportunity to grow our wealth management business in Canada. This is very much in line with the strategy that David articulated around deepening client relationships and if you look at our asset management flows in the long-term space in particular, we are seeing very strong flows from our branch network, from our core client base and our higher value client base within the Imperial service into asset management product which is clearly in line with the strategy that David articulated earlier.

In terms of our partnership with American Century, we are very pleased with our investment. We are very pleased with their fund performance and their fund flows. Last year, they had booked CAD5 billion in net long-term flows. They have had 12 consecutive quarters of positive long-term flows. They ranked number four in the industry amongst 25 largest fund complexes having 65% of their assets in 4 and 5 star rated Morningstar funds. And importantly, we have added them to our platform. We have added them to our core mutual fund and wrap platforms so our retail clients can now benefit from that strong performance in American Century. We have also launched them into our institutional pools in Canada.

As we go forward and seek out nonorganic growth opportunities, our goal is to strengthen our investment in American Century and build on that. Our goal is to seek out asset management capabilities that we don't currently have because we know that our clients are looking for them and to continue to diversify into distribution oriented fee-based businesses.

We are very pleased with the organic momentum we have at home, very pleased with our investment and we are engaged although nothing imminent as Gerry mentioned earlier on, and looking to grow our Wealth Management business to be about 15% of net income after taxes over the medium term.

Brian Klock, KBW.

Yes, good morning and thank you for taking my question, just a quick question. On page 18 of the sub pack, it shows the geographic breakout of loans and acceptances and the United States portion of that, although it is still pretty small, it is starting to accelerate from a growth perspective, becoming a bigger part of the total net growth, especially with the Canadian growth slowing.

Maybe you can talk about -- it looks like some of that is coming from the US real estate finance book, so I am not sure if Tom or Richard can comment on the outlook for growth and are you taking that opportunity -- are you taking the market share away from global competitors from a Wholesale Banking business that have problems? Or maybe you could just talk about how you are seeing that growth in that loan portfolio?

Okay, it's Richard. We have talked about this strategy for probably 18 months now since we restarted lending. We stopped lending for about 2 1/2 years. We started again late in 2010.

Really what you see that is going on since the credit crisis is obviously a substantial adjustment in values of these properties gone down 30%, 40%. And you have also seen, of course, the removal of the CMBS alternative. So there is quite an attractive market to lend into commercial real estate for high quality properties at very good prices, very good lending spreads.

We are seeing 55% to 65% loan-to-value on the new loans that we are doing at written down asset values and we are getting more attractive spreads on those than we can from lending say to the equivalent risk corporations. And you have it secured by a high-quality building.

We are focusing that lending on very strict and prescriptive portfolio characteristics that we would like to generate which designates the type of property, the region, the type of borrower, loan to value, obviously, and overall quality of the sponsor.

And so where is this business coming from? Well, coming from a number of places, the CMBS market doesn't exist anymore. Somebody has got to lend to these properties. And secondly, there are no European banks that want to do business in the United States anymore. And so as they gradually leave, that is less competition for a bank like CIBC.

And then I know you said the spreads are something that's obviously hoping the total bank level net interest margin as well looking at the kind of pricing you can get on these --

Yes, for the quality of the loan in the Wholesale market and lending to corporations, I would say that this is one of the most attractive areas right now.

All right, great. Thanks for taking my questions.

Darko Mihelic, Cormark Securities.

Hi, good morning and thanks for taking my question. I appreciate the past time. I will be brief. The first question, David, real quickly, the CAD50 million of investment, the way you quoted it, I just want to make sure, are we thinking really about CAD50 million of extra non-interest expenses for your business over a year?

And then my second question is, with respect to you mentioning the NIAT mid single-digit growth is what you are a sort of projecting. That wouldn't jive with the CAD3 billion target you have for earnings out of retail. So are we quietly abandoning the target or is -- should we actually think about this actually having an impact?

And thirdly real quickly, it doesn't sound President's Choice Financial is in the future either. Will that also be a nonnumeric impact if you decide to exit that channel? Thanks.

Good morning, Darko. So first off on the NIAT growth and the CAD3 billion target so we are just-- when we talk about the 5%, that is just isolating the mortgage growth. So I would say that probably is consistent. We are saying that mortgage book, with all of the things we have talked about, would be growing along at 5% CAGR over the next three years.

The other point you raised, PCF, yes, that is -- PCF isn't in any way impacted by the discussions we're having here today. With the PCF customers, they do get a broader range of products. FirstLine is really a single product, mortgage, irrespective of our efforts. And I don't believe any of our peers have been able to get deeper relationships pretty much in any way off of the broker mortgage channel.

But in President's Choice Financial, it is different, there is a suite of products that are provided to customers through that channel. And then I think you had a third point, Darko.

Jut the CAD50 million of expenses, or investment, is that just expenses added on? When should we expect to see that? And if you could just provide better color on that?

Yes, by all means. Yes, the CAD50 million, that is total spend so about CAD30 million or more-ish is the expense component of that and that is talking about '12 relative to '11, so yes, that would run through the course of this year. And that is why I made the comment that if you take that spend and run it over the next three quarters, that is where I was saying you could pretty much amounts to a 1 percentage point on the operating leverage. So the CAD50 million you have to strip that down to what part is expense versus capitalized, run it over the next three quarters and that is the impact of that.

Okay.

As far as looking forward, I am not in a position at this point to talk about what our spend would be next year as we map out our course forward. But I think what you have been hearing is we do see some opportunities to invest in the foundation of Retail and Business Banking and for some opportunities to support accelerated revenue growth.

So to be clear, I thought I had heard you say that your NIAT expectations were for mid single-digit growth?

That is in the mortgage business so what I was trying to do was there is look at mortgages and then when we -- it is just because we've got a lot of moving pieces there, so isolating that space in particular.

I see, okay. That's very helpful. Thank you.

Darko, it's Gerry here. On the CAD3 billion, last September I updated the market on that, and at the time what I said that similar to what I did say today I said that low interest rates, consumer rebalancing and other environmental headwinds were stronger than they were when we originally announced the target.

At that time I said that we expected that the mix of that target would shift and that given that we were talking about the long-term objective of Wealth Management, which was always part of that component, that the target was to reach 15% of net income after taxes of the bank over the medium term.

I said that we expected that the headwinds would reduce the retail component of the CAD3 billion and increase the requirement for Wealth Management to fulfill a larger part of it. Part of that has happened, because of the acquisition of American Century, but at this time I would like to reiterate what I said then is that while the CAD3 billion is intact, it is with a different mix and under more difficult conditions.

And I would stress the conditions are more difficult than they were when we first announced the CAD3 billion and the mix has shifted and is dependent on further acquisitions by Wealth Management.

So while we have, I think, a well-organized plan and strategy around this, I would indicate that the components of it have changed and if you would take a messaging from what I am saying here that the CAD3 billion is somewhat stressed, you would be accurate.

Okay. Thanks a lot for that color, Gerry. I appreciate that.

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

Well, thank you for joining us and staying with us a little longer than we had planned. Please contact investor relations with any follow-up questions and have a great day.