Canadian Imperial Bank of Commerce (CM) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CIBC quarterly results conference call. Please be advised that this call is being recorded. I would like to turn the meeting over to Geoff Weiss, Vice President, Investor Relations. Please go ahead.

Good morning and thank you for joining us. This morning, CIBC's senior executives will review CIBC's Q2 results that were released earlier this morning. The documents referenced on this call, including CIBC's Q2 news release, investor presentation and financial supplement, as well as CIBC's Q2 report to shareholders, can all be found on our website at www.CIBC.com. In addition, an archive of this audio webcast will be available on our website later today.

This morning's agenda 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 close with 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, Richard Nesbitt and David Williamson, as well as other senior officers.

Before we begin, let me remind you that any individuals speaking on behalf of CIBC on today's call may make forward-looking statements that are subject to a variety of risks and uncertainties. These statements may include material factors or assumptions that could cause CIBC's actual results in the 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 also remind you that my comments may contain forward-looking statements. Today, CIBC reported net income for the second quarter of CAD811 million and earnings per share of CAD1.90. Return on equity for the quarter was an industry-leading 22.1%. Adjusting for items of note, earnings were CAD2.00 per share.

We continue to lead the industry on the capital front. We finished the quarter with a Basel III pro forma common equity ratio estimated at 8.5% and our Basel II Tier 1 ratio was strong at 14.1%.

Earlier this month, Bloomberg Markets magazine recognized CIBC as the e strongest bank in North America and the third strongest in the world. This recognition underscores our first principle of being a lower risk bank. As a lower risk bank, we target value creation for our shareholders by creating generating consistent and sustainable returns. Our strategy is to grow by investing selectively to expand our client franchise where we have a competitive opportunity.

We are taking steps to strengthen retail and business banking by shifting to more of a customer-focused strategy to deliver profitable revenue growth. With this strategic shift, it is our objective to achieve industry revenue growth rates in our retail banking franchise.

Our Wealth Management and Wholesale Banking businesses continued to perform well. We see opportunities to grow their relative contribution to CIBC earnings to both 15% and 25% respectively. Objectives, which we have discussed in prior recalls.

Now turning to our business results in the second quarter. Retail and Business Banking reported net income of CAD556 million for the second quarter of 2012, up 12% from Q2 of last year. Revenue for the quarter was CAD2 billion, up 4% from a year ago. Credit quality in our Retail portfolios continues to be strong. Provisions for credit losses were relatively flat year-over-year.

Retail and Business Banking also delivered positive operating leverage again this quarter. We continue to manage our expenses prudently while increasing our investment in strategic business initiatives that accelerate profitable revenue growth. In support of our priority to deepen relationships with new and existing clients, we launched our CIBC Total Banking Rebate offer. This offer will reward clients who hold multiple products with monthly fee discounts.

We continue to invest in our strong distribution platform, adding 11 new or renovated branches in the first half of 2012, bringing our total number of branches to 1091. To provide our clients with increased opportunities to do their banking, we will be expanding hours of operation in our branches with many more open later on weekends and more of our branches open on Saturdays and Sundays. We implemented interbranch banking capabilities for small business clients and launched a new cash management solution to better serve our business banking clients.

We continued our leadership in the mobile banking space with the launch of a mobile banking app designed for the iPad. And recently, we announced a partnership with Rogers Communications allowing customers to make CIBC credit card purchases using their smartphone. This announcement further builds on our industry-leading position in mobile innovation.

As we discussed last quarter, our focus is on increasing share in our CIBC-branded channels where we can form deeper relationships with our clients, earn higher NIMs and elevate levels of client satisfaction.

CIBC branch-originated mortgage growth continues to outpace the market, growing at 10% from last year. While we continue to explore strategic options, including the sale of our first-line broker mortgage business, we have recently started to offer CIBC-branded mortgages to first-line mortgage customers coming up for renewal. While this activity is still in its early days, initial results have been positive. David Williamson is here this morning to answer questions about our progress and strategic direction in Retail and Business Banking.

Wealth Management earnings for the quarter were CAD79 million, up 8% from the second quarter of last year. During the quarter, Wealth Management continued to make progress. We were presented with the Deal of the Year Award at the 19th Annual Mutual Fund Industry Awards for our acquisition of an equity stake in American Century Investments. The award recognizes the merger and acquisition deal that has changed the landscape of the fund industry in 2011.

In Canada, our long-term mutual fund net sales of CAD1.5 billion for the quarter were the highest on record. Victor Dodig is here this morning to answer questions about our progress and strategic direction in Wealth Management.

Wholesale Banking reported net income of CAD131 million in the second quarter. Excluding items of note, net income was CAD154 million, down slightly from the previous quarter. During the quarter, Wholesale Banking continued to deliver excellent service and value to our clients, acting as, among other deals, co-lead arranger, joint book runner and syndication agent for the pro rata portion of Telesat Canada's CAD2.5 billion credit facility, joint book runner on Wells Fargo Canada Corporation's CAD1.5 billion bond offering and exclusive financial advisor to Pan American Silver Corp. on its CAD1.5 billion acquisition of Minefinders Corp. Richard Nesbitt is here this morning to answer questions regarding our progress and strategic direction in Wholesale Banking.

In summary, CIBC has delivered a solid quarter of consistent and sustainable earnings growth. We experienced strong results in each of our business units, generated positive operating leverage and underpinned our performance with strong fundamentals, particularly capital. Let me now turn the meeting over to Kevin. Kevin?

Thanks, Gerry. I am going to refer to the slides that are posted on our website starting with slide 5, which is a summary of results for the quarter. So overall, as Gerry said, we had strong results for the second quarter of 2012. On a reported basis, net income after tax was CAD811 million and adjusted net income after tax was CAD840 million. This translates into reported earnings per share of CAD1.90 and adjusted earnings per share of CAD2.00. The details of our items of note are included in the appendix to this presentation.

While market conditions remain challenging, we generated good results in each of our business units. Our capital position remains strong with a Tier 1 capital ratio of 14.1%, the highest among our peers. In addition, our Basel III common equity ratio is estimated to be 8.5%. We continue to maintain discipline in the management of our expenses while also investing in strategic business initiatives. Our reported efficiency ratio was 57.2% and on an adjusted basis, it was 55.1%. We are very pleased with this outcome as it contributed to positive year-over-year operating leverage.

Moving to the details for each of our strategic business units, I will start with the performance of Retail and Business Banking on slide 6. Revenue in the quarter was CAD2 billion, up CAD72 million or 4% from the same quarter last year. Personal Banking revenue of CAD1.59 billion was flat compared with the same quarter last year. Revenue was hurt by narrower spreads, but helped by strong volume growth across most products, as well as by higher fee income.

Our focus remains on strengthening our CIBC-branded products where we continue to see success, particularly in our mortgage portfolio, which grew 10% year-over-year and continued to exceed industry growth rates. Business Banking revenue was CAD368 million, up CAD26 million or 8% compared with the same quarter last year, mainly due to strong volume growth. Our lending balances have grown 8% year-over-year and deposits were up 14%. In both cases, growth exceeded that of the industry.

Other revenue was up CAD50 million from the same quarter last year, down CAD4 million from the prior quarter, primarily driven by treasury allocations. These allocations are still somewhat higher than what you would expect going forward. The provision for credit losses of CAD271 million was in line with the same quarter last year. Higher losses in the personal lending portfolio were largely offset by lower net writeoffs in the cards portfolio. Tom Woods will discuss credit quality in his remarks.

We continue to have good expense performance. Non-interest expenses were CAD998 million, flat versus both the prior year and prior quarter as increased spending on strategic business initiatives was partially offset by operational efficiencies. This effective expense management, together with solid revenue growth, resulted in a positive year-over-year operating leverage of 3.4%. Our reported net income was CAD556 million, up CAD60 million or 12%.

Net interest margins increased by 4 basis points quarter-over-quarter. We are starting to see a shift in our balance sheet to higher margin products, consistent with our strategic objective of accelerating profitable revenue growth. The benefits of the change in focus have offset the impact that the lower interest rate environment is having on margins. The quarter's Retail margins also benefited from lower mortgage prepayments costs paid to treasury. Our outlook for margins is that they will remain relatively stable for the remainder of this year.

Turning to slide 7, revenue for Wealth Management in the quarter was CAD418 million, relatively flat compared with the same quarter last year. Looking at the results of the specific business lines on this slide, retail brokerage revenue of CAD263 million was down CAD19 million from the same quarter last year. This is driven by market conditions where we experienced lower trading volumes and lower new equity issue activity.

Asset management revenue of CAD130 million was up CAD16 million or 14% from the same quarter last year. The primary driver of the increase was the inclusion of our equity ownership in American Century Investments. In addition, CIBC asset management had record net sales of long-term mutual funds of CAD1.5 billion. Non-interest expenses of CAD313 million were flat compared with both the prior year and the prior quarter. On a reported basis, net income after tax of CAD79 million, up 8% from the same quarter last year.

Turning to Wholesale Banking, reported revenue this quarter was CAD402 million, down CAD36 million or 8% compared to the prior quarter. Capital markets revenue was down CAD22 million versus the prior quarter, mainly due to lower global derivatives and fixed income revenue driven by reduced client activity and commodities and foreign exchange and lower debt issuance activity. This was partially offset by higher equity and new issuance revenue.

In Corporate and Investment Banking, revenue of CAD175 million was down CAD22 million compared with the first quarter of 2012, primarily due to higher merchant banking gains in the prior quarter. Within this line of business, the revenues attributable to our Investment Banking and Corporate credit activities remained relatively flat quarter-over-quarter. Credit quality remained strong with a provision for credit losses of CAD16 million this quarter compared with CAD26 million in the prior quarter, driven by lower losses in our US real estate finance portfolio. Non-interest expenses were CAD279 million, down CAD10 million from the prior quarter, primarily due to lower performance-related compensation.

In the quarter, our structured credit run-off business was a net after-tax loss of CAD7 million. On a reported basis, net income for Wholesale Banking was CAD131 million this quarter and adjusted net income was CAD154 million, both in line with the prior quarter. This reflects strong performance given the continued challenging market conditions during the quarter.

So generally, our second quarter continued our strong performance in 2012. In the face of challenging market conditions, we produced good results in each of our businesses. Our Tier 1 capital ratio remains the strongest among our peers and we are well-positioned for the Basel III requirements. We are very pleased at our efficiency ratio and operating leverage, which are the result of our continued expense discipline, even as we invest in strategic initiatives. Thanks for your attention and I would now like to turn the meeting over to Tom Woods.

Thank you, Kevin. On slide 18, loan losses in Q2 were CAD308 million versus CAD338 million in Q1. Loan losses were down in Q2, mainly for the following reasons -- first, CAD14 million lower losses in our cards business and CAD11 million lower loan losses in our US commercial real estate business.

On slide 19, our cards portfolio net credit loss rate in Q2 was 4.7% versus 5.0% last quarter. Our cards delinquency rate trended down quarter-over-quarter.

With respect to our Canadian residential mortgage portfolio on slide 20, 78% of this portfolio is insured with over 90% of the insurance being provided by CMHC. The average loan-to-value of our uninsured mortgage portfolio based on February house price data is 49%.

On slide 21, you can see our Canadian residential mortgage portfolio by region. The size of this portfolio is CAD145 billion with approximately 46% in Ontario, followed by BC at 20% and Alberta at 17%. The credit quality of this portfolio continues to be high with a net credit loss rate of approximately 1 basis point per annum.

Slide 22 shows our Canadian residential condo mortgage exposure. Condos account for approximately 12% of our total mortgage exposure with about 70% in Ontario and BC. Similar to our total portfolio, our condo sub portfolio has a high insured mix at 78% with an average loan-to-value of 51% for the uninsured portion. This slide also shows our condo developer exposure. At April 30, our drawn loans to construction projects were about CAD500 million or 1% of our business and government portfolio. The exposure is diversified over 50 projects.

Slide 23 shows our exposure to the European peripheral countries and countries in North Africa and the Middle East. Direct exposure to the eurozone was down CAD405 million quarter-over-quarter. As you can see, we have no peripheral sovereign exposure and very little peripheral non-sovereign direct exposure, less than CAD25 million net exposure after deducting the collateral we hold. We have CAD332 million indirect exposure to corporates in the peripheral countries in our structured credit run-off book where our interests benefit from significant subordination to our position. But here too, none of this exposure is to peripheral sovereigns.

On slide 24, our US real estate finance business had CAD4.1 billion of drawn exposures and CAD609 million of undrawn. As mentioned last quarter, about 70% of this has been originated since 2009, which benefits from higher credit quality standards due to better loan-to-value metrics and tighter adjudication criteria. In Q2, we had loan losses of CAD15 million in this portfolio, down from CAD26 million in Q1. We had CAD184 million of net impaired loans here.

Slide 25, our European leverage finance run-off book had CAD401 million in drawn exposures and CAD93 million in undrawns. Our US leverage finance run-off book had CAD139 million in drawn exposure and CAD49 million in undrawns. In Q2, we had no provisions in either portfolio.

Turning to market risk, slide 26 shows the distribution of revenue in our trading portfolios. In Q2, we had positive results every day but one. Our average trading VaR was CAD4.6 million compared with CAD4.0 million in Q1. The low VaR levels reflect our continued low risk positioning given market conditions.

Slide 27, our Tier 1 ratio was 14.1% at the end of Q2, down from 14.3% last quarter. The Tier 1 ratio decrease was mainly due to the redemption of preferred shares, the phase-in of IFRS and higher RWAs, partly offset by earnings net of dividends and capital issued. CIBC is well-positioned for the Basel III transition. Our pro forma Basel III common equity ratio at the end of Q2 is 8.5%, exceeding the Basel III minimum requirement of 7.0%.

I will now turn things back to Geoff Weiss.

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

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

Thanks very much. For David Williamson, David, you've started making outbound retention calls and Gerry alluded to this at the top of the call. Can you share your thoughts on the preliminary success rate you have? I know it is a small sample, but are you more or less confident in your 50% retention target?

And then a related question on the mortgage side. Can you give us a sense, in your base case, how much margin improvement you get over, say, the next three years from the mortgage broker business running off, all else equal? So no rise in interest rates, no change in mix outside of mortgages.

Good morning, Steve. So on the first question, which is our efforts to renew from the first-line channel into the CIBC brand. So first comment I would make, very early days. We have just started that renewal process. We reach out well in advance of the actual renewal. So this is a pretty preliminary result. However, it is going well. The propensity to renew into the CIBC brand seems to be quite high. So at this point, it looks like we should be confident in the 50% target that I outlined last quarter. So early days, but our confidence regarding that target has increased.

So on the margin front, there is no doubt that there is a spread enhancement. One of the reasons we are looking to make this shift is to increase the number of clients we have in CIBC, have deeper relationships with those clients and expand them. So you are speaking about the NIM component. To actually give a three-year impact is tough because it depends on competitive pricing and the broker market competitive pricing or not and let's call it the direct market. So it is hard to give that kind of projection.

What I can speak to is what we actually experienced this quarter because we did have a decline in the first-line outstandings as we affected our strategy. And the upshot is that we did see enough uptick in spreads as a result of that mix change that it completely negated the impact of the lower interest rate environments on NIM. So the last many quarters, we have seen compression on NIMs due to the low interest rate environment. This quarter, that was completely offset by the positive impact of this mix change into our own branded mortgages. So hopefully that helps, Steve.

That's helpful. If I could, one quick follow-up, again for David. The deal with Rogers, is there any exclusivity to that arrangement, and if so, how long?

So no, the intent with that is really to see if we can, for Canadians and CIBC customers, get something going that is universal. So the intent with us and Rogers working together was to get it to market. Frankly, our hope is that other telcos, other banks and so forth would participate so that CIBC customers can pay with their phone, whether they are with Rogers or TELUS and it becomes more of a broadly-based capability. And Rogers has a similar mindset of innovation and wanting to also lead in this space. So they were a good partner for us to work together with. It has been a great partnership. So the intent here is to get it out into the market and hopefully it scales up from there.

Great. Thanks for the time.

My pleasure. Thanks.

Peter Routledge, National Bank Financial.

Hi, thanks. Just a couple questions. Just, first of all, on the Basel III ratio, how much higher will risk weights be under Basel III? We know we had the boost just recently because of Basel 2.5, but is there going to be a material increase in RWA from where you are right now, which is I think 113?

Hi, Peter. It is Brian O'Donnell; I will take that question. The RWA has definitely increased under Basel III. And while we haven't given the number, it is likely in the CAD7 billion to CAD8 billion range, but the bigger impact for sure is the deductions from capital under Basel III.

So I guess the next question would just be related to your preferred share redemptions. You did them last year. There is some preferred shares that are going to lose utility as capital instruments starting in 2013, the Series 33, 35 and 37. And I know it comes up in 2014, but under what conditions would you do or are you at all considering tendering those early?

We have been proceeding with the following on our capital as pertaining to the preferred shares. What we have told the market is that we intend to redeem all of our preferred shares or we expect to, subject to all of the appropriate conditions being met that must be met. And that we, at a minimum, intend to do that at their earliest redemption date. And so therefore, last year, we redeemed Series 30, CAD400 million and this year so far, we have redeemed Series 31 and 32 for CAD450 million and CAD300 million. We do have Series 18 at the end of the year, which is CAD300 million.

And as you mentioned, in 2014, we have Series 33, 35 and 37, which are CAD825 million and actually the most expensive of our preferreds. These are the rate resets. Their redemption date does come up in 2014, so we do not expect, again subject to all of the conditionality that I attached, that we will let them go any longer than '14.

Would you rule out tendering early for those?

I would not rule that out.

Okay. And then any prospects of share buybacks just given how strong you are on Basel III?

Well, again, we have laid out in terms of our capital first and foremost to take out our preferred shares. Secondly, as we announced last quarter, we have stopped issuing -- well, we haven't stopped issuing shares, but we have removed the discount on our dividend reinvestment program and that will reduce dramatically the amount of share dilution that has been taking place. We had that in place, so we would have a very, very strong capital position.

The other item that is very important in terms of our progress on the capital front is that there is still an evolving regulatory environment and I don't mean just domestically. I do mean the interplay between domestic requirements and what develops internationally. We are keeping an eye on that and would prefer a little more clarity in terms of both the international environment and how it might affect Canada prior to proceeding any further in terms of our capital activities.

However, I would mention that CIBC has a very strong position in terms of our total common equity ratio in relation to the Canadian industry and internationally at 8.5%. There is another requirement, which is the Tier 1 -- effectively the Tier 1 ratio under Basel III, which when one adds that, we have incremental strength because we have more than CAD800 million of qualifying capital for that, which is our --.

The NBCC.

Yes, which probably makes your question even more pointed is that, on the Tier 1 level, we are at 9.25 if you add on -- approximately 9.25 because the NBCC is worth CAD0.70 to CAD0.75. And so I do believe that this topic will be receiving increasing attention from us in conjunction with clarity that we hope will emerge internationally and domestically as to requirements. It is an important topic.

Okay, thank you.

Michael Goldberg, Desjardins Securities.

Thanks. First of all, can you explain what the commodity tax is that you referred to in the MD&A comments on non-interest expenses? And is there anything unusual in the second-quarter tax rate or should we be modeling in a tax rate of about 22%, 23% going forward? And then just following up on the capital question, given the strong capital position that you have, why no dividend increase this quarter? Is your 40% to 50% payout ratio objective based on reported or adjusted earnings?

Michael, first of all, we do look at both reported and adjusted earnings for purposes of payout. And I won't belabor it, but one would presume that adjusted earnings is the most indicative. However, if there was a wide variation of adjusted and reported on a continuous basis that one expected to continue, you would have to keep an eye on your reported because that is what drives the actual amount of capital available.

However, in our case, we do not have a wide variation in that department. Over the last four quarters, the payout ratio on both a reported or adjusted basis has generally been somewhere -- if there is a variation, it has been in the area of less than 2% on average for the last four quarters. And so we do look at our payout ratio at this time as being the midpoint of our range. And therefore, we will be in the process of reviewing our dividend for an increase in the coming months.

Okay. And my tax question?

It's Kevin. I can take that. The first one with respect to the MD&A, that would just have related to HST credits as we trued up our estimates in the quarter, Michael. Could you please just repeat your income tax question?

Sure. I am just wondering whether there was anything unusual in your second-quarter tax rate on a tax-equivalent basis or should we be modeling in a tax rate in the neighborhood of 22%, 23% going forward?

I think big picture there wasn't anything particularly unusual. There is always a bit of movement relating to resolving tax issues, but that seems like a reasonable number to move forward with.

Thank you.

Gabriel Dechaine, Credit Suisse.

Good morning. Just on the Canadian margin, you mentioned the lower prepayment penalty cost paid to treasury. I assume that relates to the breakage of funding for mortgages that terminate before term. Could you quantify that? And then also that would indicate that your prepayment penalties are, as a revenue item in the segment, are somewhat elevated. Is there -- can you quantify what the prepayment penalties are relative to your normalized rate?

Hi, Gabriel. I will take the question -- David Williamson. So the -- yes, you are exactly right, so in relation as to the charge on early prepayment of mortgages. So if you eliminate that from NIMs, the quarter-on-quarter improvement in NIMs, effectively it takes us to flat. It was about a 4 basis point impact, so a significant impact this quarter. That takes us to flat NIMs.

Now you're -- now, when you look at NIMs at flat, that is what I think Kevin put in his comments. A couple things come out of that. One is it compares well to our recent history. I think it compares pretty well to our peer group as well. And that is very much a function of this shift we are making to higher NIM CIBC-branded products or out of the broker market. So that was the comment in our prepared remarks.

Regarding -- you made the point about what does that mean to overall revenues. Strangely enough, that doesn't have any impact on Retail and Business Banking revenue because of the fact that treasury results get allocated back into us in Other. So there is that NIM impact. I've been pretty transparent about what that is. As far as the impacts on revenue, we don't need to worry about it because less money that goes into treasury means less allocations come back to Retail. So net net, it is a wash.

Okay. So prepayment penalties -- you are putting them in treasury? I am confused there, sorry.

Sorry. We do pay that to treasury and then treasury's results at the end of the -- treasury's results get allocated back into Retail and the Other line, which is in revenue. So that part -- I think what your question was -- does this impact aggregate Retail and Banking revenues?

I am asking if you get like the benefit of the prepayment penalty lift in the revenue line in Canadian Retail, but not the cost allocation back from treasury.

And the point I am making is that, although there is a lesser payment into treasury, it gives treasury less results this quarter. So therefore, less is being allocated back to Retail. So the specific answer to your question is no, it does not have an impact on the Retail and Business Banking revenues. It does have on NIMs and that one we've been pretty transparent about.

And can you give me a sense of the evolution of mortgage spreads in the CIBC-branded book. And I have asked you this before, like the percentage that renews each year, what those spreads were like a couple years ago versus what they are today and if there is a significant component of your book that has yet to reprice in today's environment?

Okay, so you have got a few themes in there, Gabriel. So let me just parse it a bit. So if -- we've got -- if I just go big picture just a bit because you do have a few themes there. I mean fundamentally what we are trying to do is accelerate our revenue growth. And in so doing, we are trying to focus on building our client base, deeper relationships. So that is the whole shift to focusing on CIBC-branded mortgages and de-emphasizing broker.

Now why I am highlighting that, that has a lot of impact when you look at our growth in overall balances. We need to start to parse out the decline in broker relative to the gains in our own brand. So that is in marketshare, it shows up in our balanced growth as well and is showing up in NIMs.

So I think you were specifically talking about NIMs. You also talked about macro factors. The macro factors are it is a competitive marketplace in mortgages. Particularly competitive I would say in the broker side of the world for those looking for volume out of the broker channels, particularly thin margins there. As you know, there has been competitive pressures putting margin pressure on the CIBC-branded mortgages. We haven't pushed in that space and still the margins are stronger in the CIBC brands.

So big picture, we are seeing better than market growth in our brands, definitely seeing balanced reduction in the broker side and net net, what that is doing is it's getting the NIM expansion that we were looking for early days.

And then I think the other point you touched on was renewals and what we said last quarter still holds. Normally 50% of the balances renew, so there is no reason for us to feel differently about that in the fullness of time or over a reasonable period of time. And the part of that we are hoping to get into our brand is 50%, so 50% of 50%, if you will. And it is early days, but it feels like that is still the right target.

Okay, well, we'll maybe follow up after the call.

Okay. Thanks, Gabriel.

John Aiken, Barclays.

Good morning. I think we all appreciate the additional disclosure that we are getting on the condo developers. But Tom, can you talk about the drawn versus the undrawn and what would need to happen for the drawn to tick up to the full amount and over what timeframe that could occur?

Yes, John, let me just go to that slide so everyone has it. So it is slide number 22. We are showing total exposure of CAD2.2 billion with about a quarter of that being drawn. The way it works is, of the three quarters that it is undrawn, probably about half that there is -- those are on projects that haven't begun. Okay? Projects typically take about two years, but nothing really happens in the first year and the construction actually only occurs in the back end. So we fully expect those to be drawn, but with the passage of time as those are drawn, then the amount that is currently drawn would be paid off. So we are showing about a little over CAD500 million of drawn. Like that is a reasonable -- maybe creeping up a little higher -- amount that would be drawn on a rolling basis.

So I guess what I am saying, as you look at the CAD1.7 million undrawn, half of that are on projects that have not yet begun and the other half is on projects that have begun, but have not yet required the funds.

So Tom, you wouldn't expect that to tick up to like CAD1 billion anytime soon or ever?

Not -- no, I think that is right.

Thank you very much.

John Reucassel, BMO Capital Markets.

Thank you. Just back to David Williamson for a second. You talked about the mortgage side, the spreads there. Could you talk about deposit side? And it looks like your deposit growth is a little slower, but could you talk about the difference in CIBC-branded deposits versus elsewhere, the growth rates you are getting in those deposits and trends there?

Okay, John, yes, I will do that. So again, for growth in deposits, same type of deal. We need to parse out broker from CIBC brands, which is exactly where you were going. So on the SFIs, you can do that, but maybe I can help a bit. In the personal banking side on deposits quarter-over-quarter, the growth is about 1.2%.

Now how do we get there? There is a couple things that we need to adjust for. There is broker GICs, broker-based high interest savings accounts, which don't really help liquidity as much as pure deposits and have thinner margins. So we are really not focusing on that. In fact, in those areas, there is a decline in balances and we are okay with that given the spreads and given the liquidity value that provides. So that is where I am parsing that back and saying the growth actually, I think at 1.2, compares quite well to our peer group.

The other thing I would highlight, John, is that we kind of look at it on a money in basis and with money in, we look at branch deposits. We also look at branch-based mortgage -- sorry -- mutual fund sales. It doesn't help the liquidity of the bank, doesn't show up on our balance sheet. It helps more in Wealth Management. But as far as funds in and overall P&L impact, it is the right thing to do for the bank.

And is the pickup on in-branch deposit spreads as dramatic as under the mortgages or no?

No, because -- that is an interesting question. The shift is more profound in mortgages where we are really proactively running off the broker mortgage book and growing at a quite good rate relative to the industry on our own brand, on our own mortgage brand. So that is a pretty profound impact. On the deposit side, we are not as aggressively running off the high interest savings balances or the brokered GICs, so the shift wouldn't be as profound.

Okay, maybe still to come?

I would say just an ongoing current trend, but probably not as an aggressive a shift in balances.

Okay. And then last question, in the outlook section, it was commented that you expect decelerating commercial loan growth for the rest of this year. Is there something unique happening there or just punching above your weight over the first half of the year or could you talk about that statement in the outlook?

Certainly. So as far as overall Business Banking, we are really quite happy with the growth levels that we have got there. We now for four quarters consecutively have picked up marketshare in our business banking loan growth. So what I think the outlook is speaking to is we are going to strive to continue that better-than-industry growth in our commercial lending. We are continuing to pick up marketshare. In fact, over the past year, we are up 8%, almost 30 basis points, in marketshare.

What the point is in the outlook is, in the specific area of commercial mortgages, it is just a risk return calculation. It is a thin margin business right now, commercial mortgage is. So we have just really taken our foot off of the accelerator there and in fact, quarter-over-quarter, we have had zero growth in that book, which pulls down our overall growth. So if you look at Business Banking quarter-over-quarter growth, it is being impacted by us currently just pulling back in commercial mortgages and unless spreads get fatter, we will continue to pull back there and that will impact our Business Banking aggregate loan growth numbers. But that is just some of the feels in the current context the right thing to do.

Okay, thank you.

You're welcome.

Brad Smith, Stonecap Securities.

Sure. Thanks very much. I have two quick questions. First, I was wondering if we could get a little bit of colour on your Caribbean business that is included in the Corporate and Other in terms of -- I understand that provisioning was up there, if you could quantify and maybe talk just a little bit about the revenue progressions there, if that is possible.

Also I was just wanting to clarify, when you make your adjustment for your premium on the repurchase of the preferred shares, where is that running through the profit and loss statement? Thank you.

That's not a P&L item. It's just a premium that we pay, but obviously it impacts funds available for common shareholders. So it does impact EPS, but it doesn't flow directly through the P&L, Brad.

But am I correct in thinking that it is an addback in your adjustments?

Yes, it is. It is an item of note that we have added back.

But it is not a deduction in the P&L itself?

It is not a P&L deduction, but we reflect it as an item of note so that we can reflect the appropriate EPS number.

Right, but has it reduced the common equity shareholder income in the profit and loss statement?

Yes, it does and it reduces the amount available for distribution to common shareholders.

I see, okay. Great. Thank you.

Brad, it is Tom Woods. I will start on the provisioning in the Caribbean and hand it over to Richard Nesbitt on the broader outlook. We have provisions in Q2 of CAD35 million, which was essentially the same number as in Q1.

I would point out, if you are looking at page 9 in the supplementary, provision for credit losses in Corporate and Other are actually going down. But you have got to remember that that 21 is a combination of the FirstCaribbean 35 and less the IFRS equivalent of what used to be called the general loan loss provision of 14. Whereas in Q1, the FirstCaribbean was 34 less the general of 3.

Our feeling is that, both with respect to net impaireds, as well as loan losses, we are getting -- and we may well be at the top. I don't want to say that Q3, Q4 are going to be down, but I think the tendency is for it to be down a little bit, but there is no certainty on that. There is half a dozen projects that we are working through and some of the other banks you have heard on their calls the same thing. But it feels like there is a chance that those numbers could come down in the rest of the year. Richard?

Just on the business performance and the revenue, the revenue has actually been very stable over the last six quarters and that is in spite of the fact that we have these very low interest rates coming out of the United States and a lot of the interest rates on the activities of FirstCaribbean are related to US-style interest rates, so the margins are compressed.

I don't think it is likely that we will see a bounce in those revenues in the near term simply because the Caribbean -- it continues to have been more affected by the credit crisis than even North America was and they continue to work through those issues. We are seeing some early signs of daylight at the end of the tunnel and as long as something like Europe doesn't sideswipe the whole world economy, we remain optimistic.

So we have been profitable through the entire credit crisis, through the entire situation that they have had to deal with. Revenues have remained stable and we are just going to work on it quarter-by-quarter and we do believe that, as the world heals itself, the Caribbean will benefit from that.

So just a supplementary then, if you are seeing greater stress in that region, is that creating and do you have appetite for additional expansion through acquisition in that region?

I would say not at this time. It wouldn't be the right time to do that.

Okay, great. Thanks very much.

Mario Mendonca, Canaccord.

Good morning. One -- a couple of quick ones. The commercial mortgage growth, obviously commercial mortgages, the growth we saw quarter-to-quarter on Q2 was lower than what we saw last quarter. Business lending, for example, was up. I think it was -- looks like a full CAD1 billion last quarter and only CAD300 million this quarter. So what would be helpful, knowing that you are going to slow down your commercial mortgage growth, is how important it is to the entire piece from a quarter-to-quarter perspective. Say last quarter, how much did it contribute to that say CAD1 billion lift?

Hi, Mario. David Williamson. So I haven't got specifics, but it is material to the growth rate. We are one of the banks that are active in the commercial mortgage business and as we mentioned in the outlook, just because of current spreads, we are going to pull back in our participation.

But we will watch it. That is a business that you can adjust your participation fairly readily. So we will give you updates as to whether we change it or not, but it is a significant portion of the book, so it did impact the growth rate. I haven't got on hand the specific amount that it has pulled back this quarter's growth rate for Business Banking. When you adjust into what the Business Banking growth rate was this quarter, we say it is about 2.5%, which compares well to peers, but is off our more recent run rates and of course, mortgage was part of that.

So this quarter will probably be more indicative of the growth, sequentially that is, that we will see going forward than say the previous quarter?

Yes, I think that is right, assuming -- because right now the commercial mortgage NIMs or -- sorry -- spreads are quite low and we are trying to, as you know, accelerate revenue growth, but in a profitable way. So we are -- if those spreads stay where they are, then this would be more indicative of growth rates.

Okay. And then another quick question. On expenses in Retail, you talked about CAD50 million in expenses over the next three quarters, CAD30 million in cash expenses, CAD20 million capitalized. But it didn't seem like we saw any of that this quarter. Could you sort of educate me on that? Did much flow through this quarter and how much of that presumably was offset by cost-cutting elsewhere?

Yes, Mario, be happy to talk to this. So we are investing and we are making those investments we spoke of last quarter. So project spending is up. Our sales, FTE are also up and costs associated with branch builds are up. So the investment is occurring. But you are right, we did have offsets from process efficiencies.

I won't get into specifics of the nature of those efforts because there are many and varied, but there's two buckets. One is we are trying to move FTEs from the back office to client-facing. We call it back to front, and there has been a few efforts, successful efforts in that regard. And then we are trying to optimize the effectiveness of that front line and there is efforts underway in that regard.

So the initiatives are actually aimed at enhancing client experience versus cost reduction, but usually there is a correlation. And to give you an example of one initiative that we have fired up more recently, and that is looking at our end-to-end lending process. And again, the intent is, from a client perspective, just to have a tighter, crisper, faster experience. But my guess is if we lean out that process, we might have cost savings there as well.

So we are making the investments we spoke of; they just were offset by process efficiencies this quarter. I would give a bit of an outlook on that. Back in Q4, our expense growth was about 1.5% and I said at that point that is a pretty good kind of indication of what we are expecting. We have done better than that the last couple of quarters, but I do think that that is a reasonable target for us to have.

So really good operating leverage this quarter. Love to believe we would be able to maintain that, but we won't because we are going to continue to make these investments. I think you are reasonable to see some uptick in expenses.

And the 1.5 quarter over -- sorry -- was the 1.5 quarter-over-quarter in Q4 or was that year-over-year?

It was year-over-year.

Okay. And you're saying that sounds more reasonable to you then?

Yes, given the investments we are making, that sounds more reasonable. Now we are going to keep working on process enhancements, so there is this investment in growth and process improvement dynamic. But I think 1.5% is a pretty good kind of target to have in mind.

Thank you.

Thank you.

Darko Mihelic, Cormark Securities.

Hi, thank you. Actually my question was also related to expenses in the Retail division. I guess my question more revolves around your FTEs, your longer hours. Where are you with respect to mobile specialists, David, and can you give us an outlook for when will you -- how far are you taking the expanded hours relative to some of your peers? Do you have a metric for us?

Yes, Darko, so a couple of things there you've mentioned, sort of investment in front line, investment in sales. We will continue to do that. So on the mobile advisers front, we are continuing to push forward. A couple of objectives we have in that regard. One, is just sheer numbers. I think we are up around 600, much higher than we were before. Obviously not near the levels of some of our peer groups. So probably continued scope for growth there.

And two, on the kind of systems front, we want to overtime-enable them to be able to do more and more products so they can offer a diverse product range, which again feeds into our objective of deeper relationships. In the past, our focus has been on mortgages. So that is one area we are going to be investing.

On hours, yes, we are going to be moving forward. A couple of things, we are going to be adding to a number of branches open on Saturdays, a number of branches open on Sundays. That will be happening later this year. We need to just get it in effect, get things organized. We are also going to expand our hours during the week. And that's something that is frankly not an insignificant change that we are going to be making over the next little while.

So we are going to -- in aggregate, two reasons. One is client experience. We think that our branches during the week should be in a position where we are open till five or later and during the weekends, it has proven to be a time where we have higher value conversations with our clients. So we want to expand our Saturday and Sunday openings. The numbers we have run would indicate we will need to have more people in place, so there will be costs, but our experience historically indicates it will more than self-fund. So good for client experience and good for the target of accelerating revenue growth.

And the timing for this is -- sorry -- you said later on this year?

Yes, it will be in the autumn of this year, September of this year, that type of timeframe.

And there is no lag? You mentioned it is self-funding, but is there like a lag, so at the beginning, we should see some expense bump and then revenues shortly thereafter?

This one is an interesting comment because some of the investments we are making definitely do have a lag, especially the more systems-oriented ones where we make the spend. It takes a while for the system to get built and then revenues kick in. Others are faster. I would put this in the faster category. We are putting steps in place to have our front-line teams have better information, be better placed for effective sales. I think with extra people in the branch, this will have a fairly quick pickup on revenues.

And frankly the impact on expenses here isn't that significant. A lot of what we are going to be working on here is just working with our teams to try to balance the hours that we have for our folks in the branches. So certainly the weekday hours and so forth won't be a big impact on expenses and weekends, there will be some. But it is not a big expense impact, but a reasonable revenue lift off of it.

Okay, thank you.

Thank you, Darko.

Thank you. This is all the time we have for today. I would like to turn the meeting back over to Mr. Weiss.

Thank you very much for joining us this morning. That concludes our call. Please contact Investor Relations with any follow-up questions. Have a good day.