Canadian Imperial Bank of Commerce (CM) 2012 Q3 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 now like to turn the meeting over to Mr. Geoff Weiss. Please go ahead.

Good morning and thank you for joining us. This morning, CIBC's senior executives will review CIBC's Q3 results that were released earlier this morning. The documents referenced on this call, including CIBC's Q3 news release, investor presentation and financial supplement, as well as CIBC's Q3 report to shareholders, can all be found on our website at www.CIBC.com. In addition, an archive of this audio webcast will be available on our website later today.

This morning's agenda will include opening remarks from Gerry McCaughey, CIBC's President and Chief Executive Officer. Kevin Glass, our Chief Financial Officer, will follow with a financial review and Tom Woods, our Chief Risk Officer, will close the formal remarks with a risk management update. After the presentations, there will be a question-and-answer period that will conclude by 9.30 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 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, I will also remind you that my comments may contain forward-looking statements.

CIBC produced strong results in Q3. We reported net income for the quarter of CAD841 million and earnings per share of CAD2. Return on equity for the quarter was 21.8%. Adjusting for items of note, earnings were CAD2.06. Our capital ratios are strong. We finished the quarter with a Basel III pro forma common equity ratio estimated at 8.9% and a Basel II Tier 1 ratio of 14.1%.

We continue to make progress on our strategy, which has three underlying elements. Our first principal is to be a lower risk bank. We remain focused on delivering consistent and sustainable earnings and we have a strategic plan to deliver managed growth for CIBC.

This growth plan is grounded in four main workstreams. First, we will strengthen our core Canadian retail and business banking franchise with a particular focus on deeper client relationships. Second, we will grow our wealth management platform in Canada and internationally, particularly in the United States. This involves limited M&A activity such as our investment in American Century last year and our recent acquisition of McLean Budden's Canadian Private Wealth business.

Third, we will grow our client-based wholesale banking business in targeted industries within our defined risk appetite. These will involve crossing borders in four key areas of expertise -- oil and gas, mining, real estate finance and infrastructure. Today's announcement regarding our acquisition of Griffis & Small, which I will touch on shortly, is an example of supporting this strategy.

And fourth, we will strengthen our offshore Caribbean banking business.

This plan balances our lower risk approach with sustainable strategic growth and does not include large and transformational acquisitions. This morning's announced capital actions are consistent with our strategic plans. Today, we declared a CAD0.04 increase in our quarterly common dividend. This increase leaves us within our payout range of 40% to 50%. We also announced our intention to commence a normal course issuer bid to repurchase up to 8.1 million common shares or approximately 2% of shares outstanding. And lastly, we announced our plans to redeem 300 million of Series 18 preferred shares at the end of Q4.

I will now review the financial results and strategic developments for each of our businesses. Retail and Business Banking reported net income of CAD594 million for the third quarter of 2012, up 8% from Q3 of last year. Revenue for the quarter was CAD2.1 billion, up 2% from a year ago. Credit quality in our retail portfolios continues to be stable. Provisions for credit losses were relatively flat year over year. Operating leverage remained positive despite a planned increase in investment initiatives that support our client focus.

Our strategy in Retail and Business Banking is focused on enhancing the client experience and accelerating profitable revenue growth. Supporting these objectives are three main priorities -- building deeper relationships with our clients, enhancing our sales and service capabilities, and acquiring and retaining clients consistent with our objectives.

Deeper relationships are foundational to what we are trying to achieve. In April, we launched the Total Banking Rebate offer, which provides discounted fees for clients who hold four or more products with CIBC. The second priority in retail is to serve our clients better by improving our sales and service capabilities. To meet this objective, we continue to invest in technology to enhance client onboarding and sales, as well as origination capabilities. This initiative is progressing well.

Also, during the quarter, we announced that effective July 31, 2012, we will no longer be excepting mortgages through our broker mortgage brand, FirstLine. Exiting this single product channel is consistent with our strategy focused on deeper client relationships, particularly through the branch channels.

Consistent with that emphasis, we've continued to invest in our branch distribution network. This year, we have added 16 new, relocated or expanded branches and continue to provide our clients even greater access by expanding our business hours.

In recognition of our customer-focused strategy, we were recently named The Best Commercial Bank in Canada by World Finance magazine. 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 CAD76 million, up 9% from the third quarter of last year. We continue to make progress in support of our strategic priority of building our Wealth Management platform. Subsequent to the quarter-end, we announced the acquisition of the Canadian private client wealth business of MFS McLean Budden. With approximately CAD1.4 billion in assets under management, this transaction will serve to build on our strategic priority of strengthening relationships with high net worth clients. Victor Dodig is here this morning to answer questions about our progress and strategic direction in Wealth Management.

Wholesale Banking reported net income of CAD156 million in the third quarter. Excluding items of note, net income was CAD175 million, up 14% from the previous quarter. Subsequent to the quarter-end, we strengthened our Wholesale Bank with the acquisition of Griffis & Small. Griffis & Small is a Houston-based oil and gas advisory firm specializing in acquisitions and divestitures. This transaction supports CIBC's strategy of targeted growth in businesses and geographies where it has strong existing client relationships and capabilities. It also creates opportunities to serve new and existing Wholesale Banking clients in the United States and complements our energy-focused teams in Calgary.

In the Caribbean, while the economic environment remains challenging, we are beginning to see signs of improving market conditions. As conditions continue to improve, we expect our Caribbean operations to return to historic levels of profitability. Richard Nesbitt is here this morning to answer questions regarding our progress and strategic direction in Wholesale Banking, as well as our Caribbean operations.

In summary, we have delivered results this quarter that are on track with our strategy. Let me now turn the meeting over to Kevin Glass. Kevin?

Thanks, Gerry. So I'm going to refer to the slides that are posted on our website starting with slide 5, which is a summary of results for the quarter. As Gerry said, our results for the third quarter of 2012 were strong. On a reported basis, net income after tax was CAD841 million and adjusted net income after tax was CAD866 million. This resulted in reporting earnings per share of CAD2 and adjusted earnings per share of CAD2.06. The details of our items of note are included in the appendix to this presentation.

Our Retail and Business Banking franchise experienced strong revenue growth across most of its businesses. Wholesale Banking's capital markets in the corporate and the investment banking businesses both performed well and our capital position is strong with a Tier 1 capital ratio of 14.1%. In addition, our Basel III common equity ratio is estimated to be 8.9%.

Moving onto 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 CAD2.1 billion, up CAD50 million or 2% from the same quarter last year. Personal Banking revenue of CAD1.66 billion was up CAD23 million or 1% 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 higher fee income.

We continue to focus on strengthening our CIBC-branded products. In particular, our CIBC mortgage portfolio continues to gain marketshare with 9% year-over-year growth. As Gerry mentioned, we announced the decision to exit FirstLine and focus on driving renewals from this platform into our CIBC brand. We are making good progress in meeting the renewal targets we communicated last quarter.

Business Banking revenue with CAD382 million, up CAD22 million or 6%, compared with the same quarter last year due to a combination of higher volumes and fees. Our lending balances have grown 8% year over year and operating account deposits were up 12%.

Other revenue of CAD44 million in the quarter was up CAD5 million or 13% compared with the same quarter last year, but down slightly from the prior quarter and these were helped by treasury allocations. These allocations remained somewhat higher than what we would expect going forward.

The provision for credit losses of CAD273 million was down CAD18 million from the same quarter last year due to lower write-offs and bankruptcies in the cards portfolio partially offset by higher losses in the business and personal lending portfolios. Tom Woods will discuss credit quality in his remarks.

We continue to remain focused on our expenses while continuing to invest in strategic business initiatives. During the third quarter, our operating leverage was positive with non-interest expenses of CAD1.035 billion, an increase of CAD22 million, or 2%, versus the prior year. Our reported net income was CAD594 million, up CAD43 million or 8% compared with the prior year.

Our margins were up slightly quarter over quarter at 257 basis points. The benefit from lower funding costs and improved business mix due to the FirstLine exit were partially offset by the impact of lower interest rates on deposit account revenue, as well as the seasonally lower cost to revolve rate. We expect this level of margins to remain relatively stable with improving business mix helping to offset the industrywide impact of lower interest rates.

Turning now to slide 7, revenue for Wealth Management in the quarter was CAD401 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 CAD246 million was down CAD17 million from the same quarter last year. Market conditions continue to drive lower trading volumes and lower new equity issue activity. Asset management revenue of CAD130 million was up CAD14 million or 12% from the same quarter last year. The primary driver of the increase was the inclusion of our equity ownership in American Century investment.

Non-interest expenses of CAD299 million were down 2% from the prior year and down 4% from the prior quarter mainly as a result of lower performance-based compensation. On a reported basis, net income after tax was CAD76 million, up 9% from the same quarter last year.

Turning to Wholesale Banking, reported revenue this quarter was CAD527 million or up CAD64 million, or 14% compared with the prior quarter. Capital markets had a strong quarter. Revenue was up CAD23 million versus the second quarter as lower equity issuances and interest rate trading was more than offset by higher revenue from equity derivatives trading, debt issuance activity and foreign exchange trading.

In Corporate and Investment Banking, revenue of CAD223 million was up CAD48 million compared to the prior quarter. This was driven by a combination of higher merchant banking gains and higher revenues from both corporate credit products and US real estate finance. Provision for credit losses was CAD34 million in the quarter. The quarter-over-quarter increase was due to higher losses in the US real estate finance portfolio on loans that were originated pre-2009, as well as loans in the Canadian credit portfolios.

Non-interest expenses were CAD284 million, up slightly from the prior quarter. In the quarter, our structured credit runoff business generated a net after-tax loss of CAD19 million. On a reported basis, net income for Wholesale Banking was CAD156 million this quarter and adjusted net income was CAD175 million, up CAD21 million or 14% from the prior quarter on the same basis. This reflects strong performance given the quarter's challenging market conditions.

So we can conclude this is our third quarter of continued strong performance in 2012. Retail and Business Banking generated strong revenue growth in the quarter. Wholesale Banking delivered solid performance within both business lines and we see this as evidence that our client-focused strategy is working. And our capital position is strong and we are well-positioned for the Basel III requirements. And this provided us the opportunity to return capital to shareholders through the dividend increase and normal course issuer bid that were announced today. So thanks for your attention and let me now turn the meeting over to Tom Woods.

Thanks, Kevin. Hi, everybody. Slide 18, loan losses in Q3 were CAD317 million versus CAD308 million in Q2. Loan losses were up in Q3 mainly for the following reasons -- CAD20 million higher losses in Commercial Banking; CAD9 million higher losses in US commercial real estate; CAD11 million loss from a single obligor in the Canadian corporate credit portfolio partially offset by CAD10 million of lower losses in CIBC FirstCaribbean; and CAD21 million of lower losses in our cards business and other retail portfolios.

Slide 19, our cards portfolio net credit loss rate in Q3 was 4.4% versus 4.7% last quarter. Our cards delinquency rate remains stable quarter over quarter.

With respect to our Canadian residential mortgage portfolio on slide 20, 77% of our Canadian residential mortgage portfolio was insured with over 90% of the insurance being provided by CMHC. The average loan to value of our uninsured mortgage portfolio based on June house price estimates is 49%.

Slide 21 shows our Canadian residential mortgage portfolio by region. The size of this portfolio is CAD145 billion with approximately 46% in Ontario, followed by B.C. at 20% and Alberta at 16%. 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 portfolio with about 70% in Ontario and B.C. Similar to our total portfolio, our condo subportfolio has a high insured mix at 77% with an average loan to value of 50% for the uninsured portfolio.

This slide also shows our condo developer exposure. At July 31, our drawn loans to construction projects were CAD594 million, or 1% of our business and government portfolio. The exposure is diversified across 60 projects.

Slide 23 shows our exposure to the European peripheral countries and countries in North Africa and the Middle East. As you can see, we have no peripheral sovereign exposure and very little peripheral non-sovereign direct exposure. Only CAD26 million net exposure after deducting the collateral we hold. We have CAD298 million indirect exposure to corporates in the peripheral countries in our structured credit runoff book, down CAD34 million quarter over quarter, where our interests benefit from significant subordination to our position, but here too, none of this exposure is to peripheral sovereigns.

Slide 24, our US real estate finance business had CAD3.8 billion of drawn exposures and CAD424 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 Q3, we had loan losses of CAD24 million, up CAD15 million -- up from CAD15 million last quarter, all on loans that were originated pre-2009. We had CAD146 million of net impaired loans.

Slide 25, our European leverage finance runoff book had CAD319 million in drawn exposures and CAD74 million in undrawn. In Q3, we had a net reversal of provisions of CAD1 million. Our US leverage finance runoff book had CAD142 million in drawn exposures and CAD42 million in undrawns and in Q3, we had no provisions in this portfolio.

Slide 26, turning to market risk, this slide shows the distribution of revenue in our trading portfolios. In Q3, we had positive results every day but one, the same as in Q2. Our average trading VAR was CAD5.6 million compared with CAD4.6 million in Q2. The low VAR levels reflect our continued low-risk positioning given market conditions.

On slide 27, our Tier 1 ratio was 14.1% at the end of Q3, the same as at the end of Q2. The phased-in effects of IFRS and higher RWAs were offset by earnings net of dividends. CIBC is well-positioned for the Basel III transition. Our pro forma Basel III common equity ratio at the end of Q3 was 8.9%, exceeding the Basel III minimum requirement of 7%. I will now turn the meeting back to Geoff Weiss.

That concludes our prepared remarks. We will now move on to questions. Operator, can we please have the first question on the phone?

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

Thanks very much. First question for David Williamson please. David, now that you have had a bit more experience, can you, one, update us on how retention efforts are going, are you getting more or less than your 50% target and can you also maybe just quickly refresh us on your margin outlook assuming no change in rates?

Certainly. I would be pleased to, Steve. So on FirstLine, I am pleased to report that we are achieving the objectives that we outlined when we announced our decision to exit this business back in the first quarter. Our conversion efforts in franchising FirstLine customers into CIBC continue to be good with it seems a strong propensity to renew into CIBC. Since we introduced our capability for FirstLine customers to renew into CIBC-branded mortgages back in April, we have been meeting our migration targets that we had originally outlined and that you just referred to.

A second point I would make is that the spreads that we are achieving on the converted mortgages are also hitting our targets. I won't, for competitive reasons, outline what those NIM targets are, but they are substantively higher than what we were achieving in 2011 and we are hitting those targets.

And then the third important component is building deeper relationships with those customers as they come into CIBC. And we have, in June, initiated a process to facilitate that where we send leads to the front line and make sure we welcome these customers on, including a bit of a promotion on banking fees for the first while if they do decide to bank with CIBC. So all in all, that process still early days, but it is going as we would like.

And then, Steve, you also mentioned NIM. So this quarter, NIM is up slightly from the prior quarter. As you know, similar to industry trends, we are experiencing headwinds related to the continued low interest rate environment both on business banking deposits and personal banking deposits. But we have the benefit of the shift in asset mix due to the exit in FirstLine and our faster than market growth in our own CIBC-branded mortgages. So taken together, these factors result in a slight improvement in margins for this quarter.

Now looking forward, we expect margins to be near flat as the benefit from improvements in asset mix work to mitigate the impact on rates. It depends what rates do and that is always a strong headwind, but we do have the benefit of this offset. So thanks for the question, Steve.

One more on -- I noticed credit card marketshare continues to decline modestly. Are you starting to feel like it is getting closer to be time to -- it's getting closer to be -- the time to step in and start defending marketshare or are you happy to let that drift a little bit in the near term?

A couple of factors there. One, and I think we have seen it in the industry questions, just level of outstandings generally in the marketplace and consumers do seem to be paying off credit card balances, but you are talking relative marketshare. One other factor there is the Citi acquisition, so that acquisition has gone well. There will be some runoff of that book as we embed those customers into CIBC.

As far as the overall marketshare, I think it is a good business and it is something that we want to continue to support. So Citi is a factor to keep in mind and we are comfortable with how that business is playing out right now.

Okay, thank you.

Gabriel Dechaine, Credit Suisse.

Good morning. Fine print on page 48 of your MD&A -- no, I'm just kidding; I didn't get that far. The tax rate, can you quantify how much your EPS benefited from the tax rate this quarter? Expenses in Canadian retail up 2% year over year. That's a bit up from what you've had in the previous couple quarters, but David, you had already kind of signaled that. I was just wondering is this kind of the sustainable level we should expect from here on out with no major improvement in the revenue outlook?

And then commercial lending. Last quarter, I recall you were flat. Talked about pulling back because the competitive spreads were unattractive and now you're up 2% quarter over quarter. Wondering if that changed for the better this quarter, that would possibly explain that change.

Gabriel, this is Kevin. Why don't I start with the tax question and then I can hand over to David. So as you know, the tax rate can be quite volatile quarter to quarter and in this particular quarter, we had a few items going our way and it looks like that is consistent with our peer group who also had lower tax rates in the quarter.

So in the current quarter, there are a couple of things that I can talk about. One was the results of the Ontario tax legislation, which impacted tax rates and as a result of that, we revalued our future tax asset and that generated credit for us. Also, we finalized some tax audits done in the states that went back a number of years and that also generated certain tax credits and we had a bit of a favorable earnings mix as well.

So if you put all of that together and look at where we are going forward, I think that that would have helped us by perhaps CAD0.07, CAD0.08 in the quarter and I think that moving forward where we would look for tax rates to end up is more like it was in the first half -- first part of the year, which would have that same level of impact.

So like 20%, 21% typically?

Depends on if you are talking about TEB or non-TEB. So I mean on a TEB basis, we were at about 21.5%. In the past couple of quarters, we were at 24%, 25%, so maybe a difference of around 3%.

So I will, Gabriel, pick up on the other couple points -- expenses and commercial banking growth. So on the expenses front, we are up quarter over quarter both -- well, it is CAD37 million expenses. So two factors there. One is seasonality and the other is, as you said, is higher spending on our strategic investments in support of our retail strategy that Gerry outlined in his opening comments. The seasonality is part extra days and part advertising costs were higher this quarter than the preceding quarter. And then the other bit is the investment.

So as far as looking forward, Q4 of last year, we had an expense growth of 1.5%. We indicated that is probably a good number to have in mind. For the first half of this year, we were lower than that. For the overall year, we anticipate it will come inside that level. And going forward, we continue to invest in pursuit of our two objectives -- to accelerate profitable revenue growth and enhance the client experience. But we will do that within the current economic context. So our guiding principal is to look for positive operating leverage on an annual basis for our continuing business activities.

So on the Commercial Banking side and the growth we experienced quarter over quarter, so that was not supported by commercial mortgage growth. The margins there continue to be thin and we are continuing to focus on profitable revenue growth, so we have not accelerated our growth in that space. If spreads widen out, and there are signs that they are starting to, then we will accelerate growth again in commercial mortgages, but currently the growth we are achieving quarter over quarter is not from that.

Everything other than commercial mortgages basically and you see that being maintained, I guess?

Yes, actually, for the last couple years since we identified Commercial Banking as an area we wanted to grow, we have been either first or second depending on whether it was fiscal '10 or '11 in growth. We have grown the book by 20% over that period, picked up 40 basis points in share. More recently, the growth has moderated like high single digits in part because of pulling back on commercial mortgages. But no, we -- and we'll go again in that space if margins come up, but I think that kind of area is where you'd expect to see growth and high single digits growth with good margins.

Thank you.

Peter Routledge, National Bank Financial.

Hi, thanks. A question for Richard Nesbitt. Richard, I noticed or I was wondering have you looked at the challenges that Knight Capital had in August. And maybe can you differentiate how CIBC might be managing operational risk presumably at a lot lower level than say Knight Capital had? I am looking to try and differentiate why CIBC would not fall prey to this sort of event.

Sure. I will start and then I will let Tom follow on on operational risk. Well, we don't have any proprietary activities in this area. As a matter of fact, we don't have hardly any proprietary activities at all in the Wholesale Bank. That was a proprietary activity that they were undertaking. So we do provide a lot of technology-based solutions for our clients. As you know, we have a leading market share. But the way we handle it here is there is complete independence of the technology group from the business and the technology group has to sign off and approve any release of any product, any new product, any modification to a product.

What I believe likely happened at Knight was when you mix those two things together, it becomes very dangerous in this sort of drive to get to market by the business. So that is one of the main controls that we would have and I will turn it over to Tom for the rest.

Yes, Peter, I mean there's three sort of defenses on something like this and as you know, and I am not going to comment specifically on Knight, but the whole issue here surrounds introducing new software into a production environment. And as Richard said, technology is completely independent. They have got sole control over when to give the go-ahead.

Secondly, software is developed completely separately from the production environment. And third, we have got circuit breakers or they are sometimes called kill switches in place to ensure that we have mitigants in place to prevent unintended trade flows on something like this. So we have done a full postmortem on this situation. We are comfortable that our policies and practices are adequate to prevent something like this.

So just to put a point on it, if you had a new piece of software that went in supporting this business the first day, someone's got their figure finger on the switch to turn it off --.

Absolutely.

Okay. Thanks very much.

Robert Sedran, CIBC.

Hi, good morning. Tom, I haven't had a chance to get into the details behind the numbers, so I apologize if the answer is obvious. But I look at a flat Tier 1 ratio and a Basel III Tier 1 common up 40 basis points and I am just wondering if there is any changes to the underlying assumptions or models regarding Basel III or if this is just stuff that is going to be in the Tier 1 and not in Basel III?

Yes, I mean they are different calculations. I will just hand it over to Brian O'Donnell to provide some more detail.

So probably the key difference is, in the Tier 1 ratio, there continues to be the IFRS transition adjustment, which hurts the ratio a little bit each quarter. And then in terms of the Basel III, very strong at 8.9%, continued strong capital generation. No changes to assumptions, but there were updates to the deduction from capital for deferred tax assets, which helped us by about 15 basis points this quarter.

And then, Gerry, I am just wondering how -- if you can give a little insight as to how the Board kind of looked at the buyback and how the size was chosen, like in terms of 2% of outstanding and perhaps how you plan to execute this, if it is just going to be a gradual steady buyer through upmarkets and downmarkets or if it is going to be more opportunistic?

We tend to historically, and I am not going to lay out the terms of the buyback outside of what is going to be in the press release, and there are some details in there, but historically we have not been opportunistic. We have tended to do this on a formulaic steady basis. And I wouldn't go any farther than that because the press release is intended to speak for itself. That is part one. That is just in terms of the -- and I don't particularly see within the nuances of the marketplace as we see it today any particular rationale for deviating from historic practices. Is that good enough on that part?

Yes.

Okay. The next thing is is that, on the 2% -- I want to start off first with -- we have very strong capital generation at CIBC and we are positioned well in terms of Basel III. That is our starting point. Good positioning because we got here fairly rapidly through actions that we took, number one. Number two, expectation of strong capital development in the future. So that is the capital side and positioning and future availability.

Then there is the usage side. We do have a number of elements to the usage side. The buyback is one of them and we also have a strategy and our strategy is something that we have been outlining to the marketplace, but the strategy will result in some usage of capital and that is anticipated to be mostly within organic growth of the business.

We have got an appetite for limited acquisitions in the area of Wealth Management, but I will tell you that, at this time, there is nothing of size on the horizon and we have defined what size is for us. Size is anywhere from the McLean Budden-type transactions up to an American Century size of transaction. And I would again say that we don't see anything at the moment at the upper end of that range.

All that having been said, we do have some view of organic growth possibilities in the business as a result of our strategy and we do require some capital for that. Those possibilities that we have are subject to, I think, the vagaries of market conditions, but all of them are intended to be above our hurdle rate. That is a very good use of our capital and it is the first use of our capital that we emphasize, capital usage within our strategy.

Then we look at our dividend, our payout ratio and we have taken action today to optimize that within our range.

Lastly, if you look at excess, after we have paid our dividend and we have planned for our strategy over the course of the near and medium term. And when we look at this, we think that the 2% is a good start and it is something that is a first step. And in the context of first and foremost our strategy, 2% is a good start on the excess that is there. We will review what the excess is for further opportunities, but that is where we are at at this time.

I assume you are not going to tell us what that excess is today?

I think that would be a little bit more in the forward-looking department than has been our habit, so I think that we are not particularly expecting large deviations from our strategic imperative, which is consistent and sustainable earnings. Our context of our strategy is -- our positioning is to be a lower risk bank. We try to deliver value to our shareholders by consistent and sustainable earnings. We have a strategic plan and we do think that, at this time, conditions are reasonable so that we would be looking at more so the consistent sustainable element as a generator of capital and the plan as a primary reinvestment of capital.

Okay, thank you.

John Reucassel, BMO Capital Markets.

Thanks. Gerry, just following up on Rob's question, maybe I will ask it a little differently. If you look at the payout ratio, let's call it 45% now and the buyback, let's call it roughly 20% of earnings, should we think of CIBC as a low-risk bank trying to over time returning 60% to 65% of earnings to shareholders or are we inferring too much from what you have laid out here?

The reality of it is that our primary return mechanism to our shareholders over time is the dividend. I agree that it is a bit of a mathematical exercise, but the reality of it is is that to the extent that you have a buyback, that does allow you to raise your dividend more rapidly and stay within your payout ratio. And the primary target on this is our dividend level and the ability to raise dividends over time and I think that is what I would keep my eye on.

Obviously, if organic growth opportunities that were within our core competencies that were well risked and hit our hurdle rates presented themselves and of course, were within our strategy, that is our preferred method of growing earnings and growing dividends. At this time, we do not require all of our capital and the buyback is a balanced way to control the float so that the amount of dividends that are available for distribution to shareholders can rise more rapidly than it would under a baseline approach.

Okay, thank you, that's helpful. Just a clarification or some numbers questions for David Williamson. When you talk about your CIBC-branded loan growth, mortgage loan growth of 9%, does that include the renewals from FirstLine?

Hi, John. Yes, it does. So let me parse it out a bit. So the key point we are trying to make, because we are continuing to grow faster than the market, we are picking up marketshare in our CIBC-branded mortgages and at 9.4% year-over-year growth versus a market growth of about 7% does include FirstLine. But if you pull out FirstLine, it is approximately near enough about 0.5% of that growth. So even taking out the wind assist of FirstLine, which we are going to have for a while, even putting that off to the side, just our own branded machine alone is chugging along at a rate faster than the market by a fair margin.

Okay. And the CIBC-branded mortgages of CAD90 billion, are about 77% of those insured as well and what is the LTV on the uninsured at the CIBC-branded mortgages?

Yes, those are insured as well and maybe I will hand over to Tom to give a few more details as to the level of the LTV on the uninsured.

Yes, just hang on, let me track this down.

And sorry, David or Tom, it is -- about 75% is insured in the CIBC-branded like the FirstLine?

John, it's Tom. Yes, the LTV is the same on the uninsured as the insured. Is that right, Raza?

(Inaudible - microphone inaccessible)

I will just hand it over to Raza.

Yes, so just in terms of the loan to value on the uninsured, it is the same as what Tom disclosed, roughly about in the 50% range.

Okay. And sorry, the CIBC-branded, the CAD90 billion, is that also 77% insured?

In that range, yes.

Okay, thank you.

Darko Mihelic, Cormark Securities.

Hi, thank you. Also a question for David. Actually real quickly, I will throw all of them together into one big question. It looks almost as though you may have benefited from some fee increases in the quarter, but I think you have a couple of initiatives on the way in terms of bundling and lowering the fees that people pay. And then you also have longer branch hours. Can you help me understand first, A, the benefit of any possible fee increases in the quarter and then secondly how much you expect to give back on a go-forward basis with the bundling exercise? And are the longer branch hours and weekend openings, is that actually material?

Certainly, so I will take a crack at that because you are right; there are a few moving pieces. Fees, first off. So, yes, that is helping because, in the second quarter, we only had one month of the fee adjustment because that was put through in April. This quarter, we have three months, so that has helped.

The Total Banking Rebate offer also went in at the same time. So whatever benefits we are seeing is kind of net. So the Total Banking Rebate, we made the decision to give that to our existing customers that already met the guidelines of the four products that Gerry mentioned. So that kind of hit right upfront for the clients that had that kind of relationship with us as did the fees. So it did help quarter over quarter, but the key thing to see is that is kind of a net one that affects the Total -- the Total Banking Rebate and the fee increases are both in that quarter-over-quarter help.

The other thing you mentioned was hours of business. So that is to come; that is going to happen in September. It is pretty significant. We are going to add -- for Saturday, we are going to open another 90 branches on Saturday. That takes us up to about 650 open Saturday. We are going to open another 50 on Sunday. That will take us well over 100 and then we are going to adjust the weekday hours for 670 branches to extend weekday hours. So the financial impact of that hasn't occurred. That is going to start in the next quarter, but it will be positive both on revenue and NIAD.

How that will be achieved is the weekday hours, we have been working on productivity and workflow and we believe we can meet those extra weekday hours with existing staff levels. We will have to add staff, FTE, for the Saturday and Sunday. But our review of the branches, the returns on those branches and where we are going to add the hours would cause us to forecast that it will be helpful to revenue and helpful to NIAD. Hopefully that hits the mark.

Yes, that is interesting. Lastly, David, just if you are growing your mortgage book faster than peers in a world in which the powers that be actually want mortgage growth to slow, can you talk about what it is that you are doing differently and is it really something that you should be doing now given that we're making a lot of changes to mortgages and the outlook for real estate isn't all that benign? It just seems very out of character for CIBC. Can you maybe talk to that?

By all means. I mean you raise good points as to what we are all about, which is lower risk and the consistent and sustainability that Gerry talked about. We have to remember the macro picture here. The macro picture is we will be the only bank that is actually reducing our mortgage balances over the next few years. We have got FirstLine, which is near enough to CAD50 billion that is burning off. So although our own brand, which has fatter margins, allows for deeper relationships and cross-sell, that will be growing, but the CAD50 billion-ish is going to be burning off.

So as you say, the powers that be or the general market environment. CIBC over the next few years will be the only bank that will actually see aggregate total mortgage balances declining over the next while, which we spoke of when we talked about the exit of FirstLine. Back in Q1, we said expect single-digit drops in our overall mortgage balances on the balance sheet.

How we are doing it is sensible. We are focused on our client, we are increasing how we service our clients. So the mobile advisers have been growing and that has facilitated our CIBC-branded growth. And we are not reaching for it. You can see our NIMs are expanding, so we are not -- we are certainly not trying to reach for that growth by taking lower prices.

So your point is entirely valid, but I think that is exactly what CIBC is doing. We are pulling back in overall mortgage exposure, if you will and we are trying to get the right kind of balances with our clients, we are going to have deeper relationships and wider NIMs and exiting the business that doesn't have those attributes.

Thanks very much for your comments.

Michael Goldberg, Desjardins Securities.

Thank you. Good morning. A question for Victor. How much are you paying for the McLean Budden individual business acquisition? Do you see cross-selling opportunities with these clients and how much should this increase, the CAD25 million quarterly private wealth revenue that you are generating?

Michael, we didn't disclose the price and don't plan to. The acquisition is very much in line with our strategy. It is in market. It grows our fee-based business. It has CAD1.4 billion in assets under management and typically those assets can generate fees that are kind of in line with market fees for higher net worth individuals and they are obviously opportunities for cross-selling, as well as expense synergies. So net net, it is a positive benefit to CIBC and it strengthens our franchise.

Thanks.

John Aiken, Barclays Capital.

Good morning. I do apologize if I missed it in the prepared commentary, but, Richard, can you give us some commentary about the loan growth you're getting in the Wholesale Banking side, particularly relative to what has been going on in the provisions and as well as what looks like a little bit of compression on the margin side?

Sure. So we have been growing our client business in the corporate credit products area is what we call it, that is our corporate bank, both in Canada, but also in the United States and to some degree outside of North America, but on a much lesser basis. The loan losses that you are seeing relate primarily to what we call pre-2009 real estate finance losses. And then in addition to that, this quarter, there was a single obligor that has decided to try to restructure their affairs.

So I would not say that there is any particular relationship between the elevated loan losses in Q3 and the activities that we are seeing in growing our lending books here at the Wholesale Bank. There has been, as you can see in some of the information that is public, small compression in spreads. We are talking a few basis points over the past several quarters. Still a profitable business. As a matter of fact, I would say that the real estate finance business that we are doing in New York today is some of the most profitable business we are doing relative to the risk weightings of those clients.

So I don't think we are in the zone yet where the margins have declined to a point where they are unprofitable. If they are, we would have to take a look at our growth rates and our expectations there. Remember what we are doing is we are generally adding new clients, clients we haven't had a relationship with before and we only do that where we could achieve a particular credit-only return and we think the client is a candidate for doing additional cross-sell business.

Thanks, Richard. Is it fair to extrapolate from your commentary that the strong growth that we saw in the average balances sequentially is rather broad-based, but maybe a little bit more focused on the US real estate side?

I would say certainly it is broad-based. I would say we have been growing in the United States, particularly in the energy area. I would say that that growth is still a fairly small part of our overall portfolio. I would think that, over time, it will become a slightly larger part of our overall portfolio, but I would agree with your first comment that it is very broad-based.

Thank you.

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

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