Canadian Imperial Bank of Commerce (CM) 2012 Q4 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. To reduce the audio interference, please turn off your BlackBerry off for the duration of the meeting. I would now like to turn the meeting over to Mr. Geoff Weiss. Please go ahead, Mr. Weiss.

Thank you. Good morning, and thank you for joining us. This morning, CIBC's Senior Executives will review CIBC's Q4 and Fiscal 2012 results that were released earlier this morning. The documents referenced on this call, including CIBC's Q4 news release, investor presentation, and financial supplement, as well as CIBC's 2012 financial statements and MD&A, 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 along with CIBC's full 2012 annual report which was he released earlier this morning with our results.

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 a.m. Also with us for the question-and-answer period are CIBC's business leaders, including Victor Dodig, Richard Nesbitt, and David Williamson, as well as other Senior Officers.

Before we begin, let me remind you that any individual speaking on behalf of CIBC on today's call may make forward-looking statements that are subject to a variety of risks and uncertainties. These statements may include material factors or assumptions that could cause CIBC's actual results in future periods of 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. I will also remind you that my comments may contain forward-looking statements. Today, CIBC reported net income for the fourth quarter of CAD852 million and diluted earnings per share of CAD2.02. Return on equity for the quarter was 21.7%. Adjusting for items of note, earnings were CAD2.04, up 15% from a year ago. For fiscal 2012 overall, CIBC reported net income of CAD3.3 billion and diluted earnings per share of CAD7.85. Return on equity for the year was 22%.

During 2012, we strengthened our capital base while investing for strategic growth and returning capital to shareholders. We finished the quarter with a Basel III pro forma common equity ratio estimated at 9% and a Basel II Tier 1 ratio of 13.8%. We increased our quarterly common dividend to CAD0.94 per share effective October 2012 and announced a normal course issuer bid to repurchase up to 8.1 million common shares or approximately 2% of shares outstanding. As of October 31, 2012, we have repurchased in excess of 2 million shares.

Our progress in 2012 reflects our strategy, which is to be a lower risk bank, to deliver consistent and sustainable earnings, as well as our strategic plan, which has four work streams. The first two elements are conditions precedent to our strategic plan. The third, our strategic plan, is how we deliver value.

Our strategic plan has four work streams. Strengthening our core Canadian retail franchise, growing our Wealth Management business, growing our Wholesale Banking business and strengthening our Caribbean operations. What unites each of these work streams is a focus on deepening the relationship we have with our clients. Our strategy balances our lower-risk approach with consistent and sustainable strategic growth. We believe this is the right strategy for this environment, and we believe it is a strategy that will be proven to do well in the years to come.

Now, turning to our business results. Retail and Business Banking. Retail and Business Banking reported net income of CAD569 million for the fourth quarter of 2012. Personal banking revenue of CAD1.6 billion was the highest reported revenue for a quarter on record. Credit quality in our retail portfolios continues to be strong. In Q4, provisions for credit losses decreased from a year ago, largely due to lower losses in our credit card portfolio. Loss rates in our credit card portfolio are at the lowest level since the fourth quarter of 2008. Strengthening our core Canadian retail franchise is centered on deepening client relationships with an emphasis on improving sales and service capabilities, cross-selling, and acquiring and retaining clients.

Retail and Business Banking made good progress in 2012. We continued our leadership in mobile banking announcing in partnership with Rogers Communication the first-point-of-sale mobile credit card transaction in Canada. We continued to invest in our branch network with 28 new branches across the country this year and expanded hours of service. We launched our CIBC Total Banking Rebate to recognize and reward clients with fee discounts for a deeper relationship with CIBC. We were named Best Commercial Bank in Canada by World Finance magazine for our strong client focus. Looking forward, it appears the current headwinds that are negatively impacting industry profitability, such as lower interest rates and a slowdown in consumer credit growth, will continue to be with us in 2013. David Williamson is here this morning to answer questions about Retail and Business Banking.

Wealth Management earnings for the quarter were CAD84 million, up 20% from the same quarter last year. In 2012, we made good progress in support of our strategic priority of building our Wealth Management platform. We acquired MFS McLean Budden's Canadian private wealth business, adding CAD1.4 billion to our domestic assets under management. Our investment in American Century Investments is generating solid results, and we delivered our third consecutive year of record mutual fund long-term net sales. Over the course of 2013, to the extent we see a gradual resolution of global uncertainties, we should see further improvements in demand for equities in Wealth Management. Victor Dodig is here this morning to answer questions about Wealth Management.

Wholesale Banking reported net income of CAD193 million in the fourth quarter, our highest results in the past four years. Excluding items of note, net income was CAD192 million, up 10% from the previous quarter. During 2012, Wholesale Banking reinforced our energy advisory business with the acquisition of Griffis & Small, a Houston based oil and gas advisory firm. We rank number one overall in loan syndication by number of deals and number two by volume, and we received Best Bank of the Year - Project Finance and Infrastructure Canada - by Dealmakers Monthly. While the outlook for Wholesale Banking in 2013 will depend on market and economic conditions, we believe that our client-focused, low risk strategy, along with the investments we've been making, position us well to continue delivering risk-controlled earnings as we grow with our clients.

In the Caribbean, we had stronger results in Q4, reflecting improved performance. As conditions improve, we expect our Caribbean operations to return to historical levels of profitability. Richard Nesbitt is here this morning to answer questions about Wholesale Banking as well as our Caribbean operations.

In summary, 2012 was a good year for CIBC and our shareholders in what continues to be a challenging environment for banks globally. Our lower-risk strategy delivered consistent, sustainable earnings, and our capital strength positions us well in the unsettling environment we and other banks are operating in. Before I close, I would like to take this opportunity to thank our shareholders for their continued support and all of CIBC's 42,000 employees for their ongoing dedication to serving our more than 11 million clients. Let me now turn this meeting over to our Chief Financial Officer, Kevin Glass. Kevin.

Thanks, Gerry. My presentation will refer to the slides that are posted on our website starting with slide five, which is a summary of results for the quarter. My comments will focus on the fourth quarter and will conclude with an overview of our full-year fiscal 2012 performance.

Overall, we produced solid results this quarter. Net income after tax was CAD852 million on a reported basis and CAD858 million on an adjusted basis. This resulted in reporting earnings per share of CAD2.02 and adjusted earnings per share of CAD2.04. Our Retail and Business Banking franchise experienced solid revenue growth and is successfully executing on its strategy focused on accelerating profitable revenue growth and deepening client relationships. Wholesale Banking delivered strong results in challenging market conditions. Wealth Management had record net sales of long-term mutual funds, and we had another quarter of positive operating leverage even as we continued to make incremental investments in our business. Our capital ratios continue to lead the industry. We finished the fourth quarter with a Tier 1 Capital Ratio of 13.8% and a Basel III Common Equity Ratio estimated at 9%.

During the quarter, we had five items of note. A loan loss provision in our exited US leveraged finance portfolio of CAD0.08 per share; a gain from the structured credit runoff business of CAD0.09 per share; a loss of CAD0.06 per share related to a change in the methodology used to value collateralized derivatives; a gain on sale of interest in entities in relation to the acquisition of TMX Group by Maple Group Acquisition Corporation, a net of CAD0.05 per share; and the amortization of intangible assets, which is a loss of CAD0.02 per share. In aggregate, these items decreased our earnings per share by CAD0.02.

The balance of my presentation will be focused on adjusted results which exclude these items of note. We have included slides with reported results in the appendix to this presentation. Moving to the details for each of our strategic business units, I'll start with adjusted results for Retail and Business Banking on slide 6. Revenue in the quarter was CAD2.04 billion, down CAD40 million or 2% from the same quarter last year, with gains in our core business lines being more than offset by lower Treasury revenue in the other segment. Excluding Treasury revenue, Retail and Business Banking revenue was up 3.3%. Before turning to our individual line of business results, I'd like to highlight a change in our reporting of the runoff of first-line mortgage broker portfolio. In order to better reflect the results of our core operations, the results for the exited first line channel have been reclassified from personal banking to other this quarter. Prior quarters have also been restated on this basis.

Now, moving to our lines of business. Personal Banking revenue of CAD1.62 billion was up CAD48 million or 3% compared with the same quarter last year. This revenue was the highest on record for Personal Banking. Performance benefited from volume increases across most products and also from higher fee income. Consistent with our strategy, our emphasis continues to be on CIBC branded products. Our CIBC mortgage portfolio had year over year growth exceeding 10%, which is well above the peer average. With respect to the exit from FirstLine, we continued to make good progress on retention with both volumes and spreads exceeding the targets we established earlier this year.

Business Banking revenue was CAD378 million or up CAD20 million or 6% compared with the same quarter last year due to a combination of higher volumes and higher fees. Business Banking continues to experience good growth with average deposit and lending balances both up 8% year over year. The other segment had revenue of CAD42 million in the quarter, which was down CAD108 million compared with the same quarter last year and down CAD66 million from the prior quarter. The decrease versus prior periods is largely due to lower Treasury revenue, which was higher than normal in the fourth quarter last year and lower than normal this quarter. Going forward, we expect Treasury revenue to be somewhat higher than the current quarter.

The provision for credit losses of CAD255 million was down CAD11 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 Commercial Banking portfolios. Our Canadian consumer lending portfolios, including Cards, continued to perform well. Tom Woods will discuss credit quality in his remarks.

We remain focused on our expenses while continuing to invest in strategic business initiatives. During the quarter, non-interest expenses were CAD1.03 billion, up 0.8% from the prior year. This resulted in positive operating leverage of 2.5% excluding Treasury. Our adjusted net income was CAD571 million, down CAD29 million or 5% compared to the prior year. Adjusting for the lower Treasury revenue, our earnings growth was approximately 9%. Our core net interest margin, or NIM, was 258 basis points for the quarter. This is up 1 basis point from the prior quarter and 5 basis points from the prior year. The net interest margin has been helped by the improvement in our business mix driven by growth in higher-margin CIBC branded products. We expect this level of NIM to remain relatively stable with improvements in business mix helping to offset the ongoing negative impact of low interest rates that has been felt throughout the industry.

So turning now to slide 7 and the results for Wealth Management, revenue in the quarter was CAD420 million, up CAD24 million or 6% from the same quarter last year. Looking at the results of specific business lines on this slide, Retail Brokerage revenue of CAD256 million was flat compared with the prior year, as higher new issues revenue was offset by lower trading volumes. Asset Management revenue of CAD138 million was up CAD23 million or 20% from the same quarter last year. This was due to a combination of an increase in average client assets under management driven by strong net sales of long-term mutual funds and income from our proportionate share in ACI which has been included since acquisition in September 2011. Non-interest expenses of CAD308 million were up CAD9 million or 3% from the prior year, mainly as a result of higher performance-based compensation. Net income in Wealth Management was CAD84 million or up 20% from the same quarter last year.

Turning to adjusted results for Wholesale Banking, we continued to deliver strong performance in challenging market conditions. Revenue this quarter was CAD522 million or down CAD29 million or 5% compared with the prior quarter. Capital Markets revenue of CAD303 million was down CAD5 million from the third quarter due to lower revenue in fixed income and foreign exchange trading partially offset by higher revenue from equity new issuance activity and equity derivatives trading. Corporate and Investment Banking revenue of CAD194 million was down CAD29 million from the third quarter, driven by lower merchant banking revenue partially offset by higher equity and new issuance activity. Adjusted provision for credit losses of CAD13 million was down CAD21 million from the prior quarter, mainly due to lower losses in the US real estate finance and Canadian credit portfolios. Non-interest expenses were CAD249 million this quarter, down CAD33 million compared with the prior quarter. On an adjusted basis, net income for Wholesale Banking was CAD192 million for the quarter, up CAD17 million from the prior quarter on the same basis. Given the challenging market conditions in the quarter, this reflects solid performance for Wholesale Banking.

The fourth quarter was a strong finish to 2012. Our lower risk strategy delivered consistent sustainable earnings in 2012 in all of our businesses. Retail and Business Banking delivered strong performance, including strong core product volume growth and improving margins. The shift to a client centric strategy and investment in strategic initiatives are starting to deliver. In Wealth Management, solid investment performance above-market asset growth, and growing fee-based and international revenue streams have driven strong results. And Wholesale Banking delivered solid results in a challenging environment, evidence that our client-focused model continues to perform well. Thanks for your attention. I would now like to turn the meeting over to Tom Woods.

Thanks, Kevin. On slide 20, loan losses in Q4 were CAD328 million, or CAD275 million on an adjusted basis, versus CAD317 million in Q3. Reported loan losses included a CAD53 million provision in our run-off US Leverage Finance portfolio. This was due to a provision in a single account. The balance on this loan is now CAD71 million, and the balance in the US Leverage Finance portfolio, including this loan, is now CAD91 million. Loans to these companies were made before 2008, and we have exited this business.

We had good credit performance in our retail and wholesale portfolios. In US Real Estate Finance, loan losses were down CAD14 million versus Q3. In Cards, losses were down CAD11 million. In Commercial Banking, losses were down CAD7 million. And in CIBC FirstCaribbean losses were down CAD6 million.

Slide 21, our Cards portfolio continues to perform well. The net credit loss rate in Q4 was 4.1%, versus 4.4% last quarter. Our Cards delinquency rate remains stable quarter-over-quarter.

With respect to our Canadian Residential Mortgage portfolio on slide 22, 76% of our Canadian 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 September house price estimates is 50%.

Slide 23 shows our Canadian Residential Mortgage portfolio by region. The size of this portfolio is CAD144 billion, with approximately 46% in Ontario, followed by BC 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 24 shows our Canadian residential condo mortgage exposure. Condos account for approximately 12% of our total mortgage portfolio with about 70% in Ontario and BC. Similar to our total mortgage portfolio, 77% of our condo sub-portfolio is insured, and the uninsured portfolio has an average loan to value of 51%. This slide also shows our condo developer exposure. At October 31, our drawn loans to construction projects were CAD701 million or approximately 1% of our business and government portfolio. The exposure is diversified across 70 projects.

Slide 25 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, about CAD28 million next exposure after deducting the collateral we hold. We have CAD297 million indirect exposure to corporates in the peripheral countries in our structured credit runoff book where our interest benefit from significant subordination to our position. But here, too, none of this exposure is to peripheral sovereigns.

Slide 26, our US Real Estate Finance business had CAD4.2 billion of drawn exposures and CAD445 billion of undrawn. About 79% 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 Q4 we had loan losses of CAD10 million, down from CAD24 million last quarter, all on loans that were originated pre-2009. We had CAD106 million of net impaired loans.

Slide 27, our European Leveraged Finance runoff book had CAD404 million in drawn exposures and CAD60 million in undrawns. In Q4, we had no provisions in this portfolio. Our US Leveraged Finance runoff book had CAD91 million in drawn exposures and CAD19 million in undrawns. In Q4, we had provisions of CAD55 million in this portfolio, including the provision on the account I mentioned earlier of CAD53 million.

Turning to market risk, slide 28 shows the distribution of revenue in our trading portfolios. In Q4, we had positive results on all but three days, or 95% of the time, compared with 98% of the time in Q3. Our average trading VaR was CAD5.5 million compared with CAD5.6 million in Q3. The low VaR levels reflect our continued low-risk positioning.

Slide 29, our Tier 1 ratio was 13.8% at the end of Q4 down from 14.1% at the end of Q3. The phase-in effects of IFRS, redemption of preferred shares, and repurchase of common shares were partially 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 Q4 was 9.0%, exceeding the Basel III minimum requirement of 7.0%. I'll now turn things back to Geoff Weiss.

That concludes our prepared remarks. We'll now move to questions. To give everyone an opportunity to participate, please keep it to one question and then requeue. Operator, can we please have the first question?

Certainly.

(Operator Instructions)

The first question's from Steve Theriault of Bank of America Bank of America-Merrill Lynch. Please go ahead.

Thanks very much. I'll have a question, please, for David Williamson. David, could you give us a bit of an update on your retention efforts with respect to FirstLine? How are you doing relative to targets? What kind of spreads are you getting on renewals? Are you getting closer to broker type or closer to branch type pricing? And if you could also speak to your outlook for the margin next year, that would be helpful. Thanks.

Certainly, Steve. So really pleased with how the conversion of FirstLine is going into the CIBC branded product. The clients are showing a strong propensity to convert into the CIBC brand, so as far as conversions go, we're at this point significantly exceeding -- it's early days, but significantly exceeding the conversion target that we shared when we outlined our decision to exit FirstLine as a channel. So that's -- the conversion level's going very well. And on spreads, we haven't given the actual target on spreads. But we did have an internal target, and we're exceeding that by a fair margin as well and quite frankly are doing quite well compared to the branch spreads. So FirstLine couldn't be going much better, frankly, as far as the conversion's going.

As far as looking forward into next year on spreads, the way things are going so far, there's no reason to believe it wouldn't really just now link to how the overall market's doing and degree of competitiveness in the market. Because it's shown that there is that propensity to convert, it's going better at levels we would have hoped, and spreads, as I say, are going well. So I think we're now just going to tie in to where the market goes. The other thing I'd highlight is one of the key elements of what we're trying to do here is when the clients come in to CIBC is to then build a deeper, more sustained relationship. So we have put in place a leads program and some incentives to make sure that when those clients do get a CIBC mortgage, we're welcoming them warmly and building that multi-product relationship. So I'm happy to report it is going well.

Thanks, David.

Thanks, Steve.

Thank you. The next question's from Gabriel Dechaine of Credit Suisse. Please go ahead.

Good morning. Just looking at Retail and Business Banking, your expenses are down -- sorry, up, less than 1% year over year, yet you talk about expenses being up due to investments in strategic businesses initiatives. I get the sense that you're investing but you're also generating some cost saves along the way. Is that a trend you expect to continue in 2013, like that level of expense growth? And I've got a follow-up.

Okay. So let me take that first question. Yes, you're absolutely right, our expense growth in the fourth quarter relative to the year before is 0.7%, and for the whole year it came in at 0.6% year over year, 2012 compared to 2011. So you're absolutely right, that is low relative to expectations, and we have been over the last few quarters, been able to identify offsetting efficiencies. As we're working through process improvement opportunities, items have surfaced that have allowed us to offset the elevated spending. So two comments going forward. One is that we announced earlier this year that we had elevated our level of spending to invest in Retail and Business Banking. We're going to maintain that elevated level into 2013. To your point, it can't be sure if we'll find offsetting process efficiencies. So I would expect the expense level to come up from the level it's at now. That 0.6 or 0.7 is, let's call it unnaturally low, given that we are investing a bit more in the business unit. Having said that, we'll maintain expense discipline and stay with the message that I provided last quarter, which is that we'll keep operating leverage positive on an annual basis. This quarter, operating leverage, when you adjust for Treasury, which Kevin commented in his remarks, operating leverage this quarter was positive 2.6%. So particularly strong. So to your point, I think we just need to moderate expectations. Expenses will come up, and operating leverage might not be at such a robust level in future quarters.

Thanks. My other question is for Gerry. On the buyback, I guess over time as your capital ratios keep going up, people might expect that to be enhanced or increased. Do you think leverage is a constraint against upping your buyback or the pref share repurchases you have earmarked in 2014. Just want to get a sense for the upside potential, if any, to your existing NCIB.

Our leverage ratio is in line with the industry at this time. We are keeping an eye on the eventual destination of leverage ratios under Basel III, but I don't see it as a constraining influence to our actions today, and in the future when we look at offsetting activities in terms of changes that are taking place when Basel III comes in from a leverage ratio viewpoint, we also believe that we have a fair bit of room to move.

Thank you.

Thank you. The next question's from Peter Routledge of National Bank Financial. Please go ahead.

Hi. A quick couple questions for David just on the flows of loans in your business. Looks like the runoff from FirstLine was CAD3.3 billion, and then you filled it in, pretty strong quarter in terms of origination at the branch, CAD2.7 billion. And what put you into positive loan growth was quite strong business credit of I guess net new loans, looked like they were around CAD1 billion. So I'm just trying to play forward next year. If household borrowing, household demand for credit really does fall off, couple questions. Is that CAD3.3 billion runoff from FirstLine a pretty good run rate for the next two years? And if household credit demand falls off, are you confident you can fill in the gap with business?

Hi, Peter. Yes, so the dynamics you've got there are right. When we exited FirstLine, we said that overall mortgage balances would be down, percentage terms low single digits as FirstLine grew -- sorry, as our CIBC branded grew offset by FirstLine, and that's what's playing out now, although it actually was down like 0.1% net-net. And that's because the stronger conversion experience that we've had.

So to your point about looking forward, FirstLine is -- that is indicative of the burn-off rate, like it's going to be some degree of variation. But over a multi-year period, FirstLine will burn off at a rate, and recent experience is probably indicative of that near-term rate. So then it just comes down to what's the industry going to grow in mortgages, and my job is to grow at industry or better type of rates. Can't really control for macro factors. And what we did this quarter is did just that. So in mortgages on a year over year basis, we grew over 10% in our own brand. Now there's a wind assist there as far as the FirstLine mortgages converting over, but if you pull that out, we were still substantively ahead of the industry growth rate in mortgages, which for the first three quarters was over 6%. We were well clear of that, even excluding the FirstLine.

So I can't speak to what the economy's going to do going forward, but we do seem to be set up well to grow at at least industry rates, whatever they may be. And we're not doing it by giving it away, either. Our NIMs are up quarter over quarter, and they're up year over year. We haven't had that NIM growth for some extended period of time. So right now, can't speak to the economy going forward, but we seem to be well-positioned both on spreads and volumes to do relatively well as the FirstLine book burns off.

The other thing I'd point out is we've now introduced Home Power Plan. We've now got the product that everyone else had before, which is the mortgage and the home equity line of credit. So now that that's been rolled out nationally, that will help our HELOC growth as well.

How sustainable was the performance in business credit? Can you get CAD1 billion in net new a quarter, or is that an outperform kind of quarter?

No, I think this quarter actually was slightly less a raise than what we've grown over the last couple years. We've had two, three years of comparatively quite strong growth in business lending. This quarter, the same again. Maybe I should do a bit of decomposition here. We have made the proactive decision to take the foot off the gas, so-to-speak, in commercial mortgages. So when you look at our market share in business lending and our volume growth, that's with us pulling back in commercial lending. If you strip that away, our business lending growth on an average basis in Q4 relative to year-ago was over 11%. So team's good. Focus is good. I'd like to believe that we'll be able to continue that kind of relative peer growth rate.

Thanks for your time. Appreciate it.

Thanks, Peter.

Thank you. The next question's from John Aiken of Barclays Capital. Please go ahead.

Good morning. No offense, David, but I actually don't have a question for you. Richard, can you talk about, within your segment, the growth in trading securities and essentially what's underlying that and whether or not that's the main principal attraction for the common equity growth that your segment has had year over year?

First, I'll let Kevin take that question, then I can follow up.

John, let me just chat briefly about trading, and if you go to page three, I think we've got pretty high trading interest income, which is up a lot, and then non-interest income is down, so you need to look at that on a consolidated basis. If you do look at it on that basis, that's -- we had particularly strong trading revenues this quarter, so that's what drove a slightly lower tax rate, but also higher trading revenue, particularly in our equity derivatives book.

More specifically, though the trading security balances are up almost 30% year over year.

So I'm just going over this with our CFO here for the wholesale, John, and so really the answer is, markets are up and we had higher levels of activity. Quite low level of activity in the first half of 2012, much higher levels of activity in the second half of 2012, plus the markets are up.

So, Richard, this is all largely client balances related and not taking on positions yourself?

Yes. Absolutely. Yes, we're engaged, as everybody else is, in facilitation trading. Those have not gone up materially, and those are just transitory balances that we would maintain.

I apologize, I have not leafed through the MD&A, but Tom, has this had any impact on average VaR levels?

No, the VaR is still under CAD6 million. It's been sort of CAD6 million to CAD7 million for the last couple of years.

Great. Thank you very much.

Thank you. The next question's from Brad Smith of Stonecap Securities. Please go ahead.

Yes, thanks very much. Just wanted to get back a little bit to the FirstLine mortgages and to the total mortgages. If I'm reading this correctly, the aggregate mortgages of CAD145.2 billion at the end of the quarter were basically unchanged from a year ago, and the FirstLine has come down quite significantly, about CAD7 billion. The earlier comment about how that conversion is working well, I'd like a little bit more clarity on that because if the total is not growing at all, then where are you going to end up at the end of the day on a market share basis? Or maybe another way to say it is, when do you think your aggregate mortgage balance is going to actually start to rise?

So, Brad, I guess the key thing we're looking for in some respects, quality versus quantity type of thing. The FirstLine conversion, when you think about it, if we take -- we were talking about 25% staying with us and at a markedly higher margin. What we're actually seeing is quite a bit more than 25% staying with us, and the margin's quite a bit higher than what we expected. So if you start retaining substantive amount at a higher spread and you have reduction in your expense base because of the cost of this two kind of platform, two product base goes away, the actual -- what you end up seeing is that the impact on NIAT all in from taking this CAD50 billion off and replacing it with CIBC branded mortgages is pretty moderate, and that's even putting aside the fact that we're no longer wholesale funding CAD50 billion of balance sheet. So this conversion completely syncs with the strategy of saying let's not have single product relationships and get deeper relationships, in so doing, less attrition, wider margins and both sides of the balance sheet type of thing. So when I talk about the FirstLine going well, it's higher percentage of them staying with CIBC, great, spreads being quite a bit wider and getting up to branch levels, and then losing the expenses associated with FirstLine, and then just the side benefit associated with being a lower risk bank of just having less balance sheet to fund. Just net-net, just adds up to a whole lot of good things.

Can we just sort of square that in with your earlier comment about your NIM outlook? Like the way I interpreted what you said, David, was that you didn't see any real lift coming from the conversions and that you were more likely to see your NIM move with the market. So is that consistent with what you just said about higher conversions and higher margins on the conversions?

No. No, let me clarify a bit. What we've got is two offsetting forces, and luckily it's offsetting the right way, one negative force being the lower interest rate environment was just compressing our net interest margins, which you're seeing in the whole industry, in the reported results today. But we've got the offset that by making this move, taking what was CAD50 billion of assets and swinging a big proportion of them into higher margin product, that's giving us the lift to our net interest margin. So that's the fuel that's allowing us to show a comparatively stronger spread. So as we -- our mission is to accelerate revenue is -- this fits right in with it, where we've got a lower quantity of mortgages to fund. So to your point, that mortgage line's not going to be moving very much over the next three years. But what's going on is we're placing single product, low spread, wholesale funded mortgages with deeper relationship, CIBC branded, higher spread product, and that's what's helping our NIM elevate relative to peers.

So in a nutshell, then, you would expect your net interest margin performance next year on a relative basis to outperform your peers because your conversions are ongoing?

That's right. That's right, yes.

Okay. I must have misinterpreted what you said earlier.

We've got pressure like everyone else as far as the low interest rate environment, but we do have this tailwind that's being provided by the conversion out of FirstLine.

Great. Thanks very much, David.

Thanks, Brad.

Thank you. The next question's from Michael Goldberg of Desjardins Securities. Please go ahead.

Thanks. On the Treasury impact on Retail and Business, I want to clarify. Is there an impact on consolidated net interest revenue and net interest margin? And if you think of a consolidated Treasury impact as being the impact of being unmatched on a consolidated basis, what's the impact of that unmatched on net interest revenue, and how does it compare with where it's been in the past?

Michael, it's Kevin. In terms of the impact on overall interest margins, the answer is, it doesn't really impact overall interest margins because the big delta on a year over year basis was AFS gains. Q4 of last year we had very high -- higher than usual AFS gains, whereas this quarter, we've had very low AFS gains, and that doesn't flow through NII. So on a consolidated basis, it's not going to have an impact.

But just in terms of the impact of that unmatch, would it alone have been a positive or a negative?

Michael, I think probably best if we take that offline and work through the reconciliation together.

Sure. Okay.

Thanks.

Thank you. The next question's from Brian Klock of Keefe, Bruyette & Woods. Please go ahead.

Good morning. Thanks for taking my question, guys. I was wondering if I could follow up on the earlier question on the trading revenues, just obviously, it was a pretty significant spike on the NII side from the trading book. When I look at the total securities portfolio, which would include AFS and your trading book, the yield in the quarter went from 2.47% in the third quarter to 3.38%. So I'm just wondering, what kind of securities actually did you put in the trading portfolio that actually helped to drive that yield up so much higher?

It's Kevin. Kevin Glass. When you look at trading, you've got to look at both interest income as well as non-interest income, and so if you put them together, it wasn't a particularly big spike in the revenue, but we did have a change in business mix. Our equities derivatives business was particularly strong in the quarter, and as a result of particular transactions that the guys did, didn't particularly drive up the balances, and that's what probably drove the higher yield.

Okay. Thanks. That's helpful. Thank you.

Thank you. The next question's from Darko Mihelic of Cormark Securities. Please go ahead.

Hi. Simple question for David. What are your plans for branch count and employee count in 2013?

It's always the simple questions that are tricky, Darko. The branch counts, we're now at just over 1,100 branches. We've been adding about 25 to 30 branches per year. When I say adding, that's including relocations and renovations and net new branches. So we just cleared 1,100. We've introduced a new concept branch in east end of the city, actually out Oshawa way, new configuration, more technology for clients in the branch. So we're trying out new formats as well. So that run rate we're going to stick with for the near term, that 25 to 30 kind of level of net new and relos and that type of thing. As far as FTEs go, you'll see our numbers over the last little while have elevated a little bit but not a lot. And what's going on there is what we talk about back to front. So we're finding opportunities to be more efficient in the back office, and we're actively hiring in the front office, and net-net, trying not to have the total number elevate too much, but it probably will come up to some degree. And by that I mean we just -- we want to -- we're focused on the client more so, making the pivot to customer, and that just requires a stronger sales force, whether it's through the call center channel or the branch channel, so we are adding there. But we are finding efficiencies in the back office. So you'll probably see FTE float up but not as much as it otherwise would do if it wasn't for efforts on process improvement.

And with respect to branch hours?

Branch hours, sorry, missed that part. In the autumn of this year, we increased that quite substantively. So about 700 branches had their weekday hours increased, and then in our -- for Saturday hours, over 50% of our branch network now is open Saturdays, and we took our Sunday openings to over 100 branches. So that was done in the autumn, quite a substantive lift in total hours of business.

That's helpful. At some point, I'd like to talk to you later on about expenses with respect to these plans because it keeps coming up as a question is how you keep expenses down. Where are you finding -- if you could give examples of where you're finding cost saves to help fund this sort of growth.

I'll give you a couple of examples. On the weekday hours, that we're primarily doing just through more thoughtful, more efficient use of our teams during the day, so we're covering those hours without increasing FTE. The weekend hours do require FTE increases. But one of the ways that we're finding efficiencies is we've been looking at our staff counts in branches and rather than doing across-the-board reductions or increases, we're looking at branches and saying, where are the clients telling us that we need more staff, and where are the clients us telling us we might be over staffed? And in those places where we're over staffed, we're just freezing staff levels and through attrition reducing. And then in branches where clients are saying we need more staff, then we're hiring more. So that would be one example where we are rebalancing our staff count across the branch network just using productivity metrics that we've been introducing the last little while. And then, as I say, the first part for the extra weekday hours, which is a substantive lift, just that longer day permits more efficient distribution of staffing during the course of the day. And there's other things we're doing, too. I'd be happy to meet with you to take you through some of that.

That would be great. Thanks, David. And just lastly on fees, is there any room for more fee increases in the Retail Banking, whether it be checking, deposit, any kind of fee increases in Cards? Is there any room for that?

I think the thing on fees is we need to remain and want to be competitive on those levels. So we'll watch what's happening. We'll look at our margins and spreads in our various products and make sure that we're getting adequate returns. But we'll definitely want to and will continue to competitive. Our fees and rates right now show well compared to our peers. By well, I mean not off base either way. So we'll just have to monitor the situation before we make a decision there.

Okay. So no immediate plans then?

That's right.

Okay. Thanks very much, David.

Thank you. The next question's from Michael Goldberg of Desjardins Securities. Please go ahead.

Thanks. Again on the FirstLine rollover to the CIBC brand, are you also getting more creditor life sales? How does that compare with what you're doing through the branches directly? And are these cross-sales in line with going -- in line with, better than, or worse than your expectations?

Hi, Michael. On the creditor life sales, we are doing well on penetration rates. Pretty happy with the penetration rate we had before. But where we're seeing some lift recently is in our mobile sales force, which we've been increasing a fair amount over the last while, and what we're trying to do is enable that sales force to be more effective in those ancillary product types of sales, such as creditor life. So yes, we are seeing some improvements in penetration.

So are you saying that the mobile sales force is getting more penetration on creditor life or is it other products that they're cross-selling?

I was speaking to your question specifically on creditor life. So they're focused right now on mortgages, and we're trying to bolt on that ancillary product, but to where you're going with that, it would -- I'd like all the channels that we have to be multi-product channels. We're not there yet on the mobile sales force, but that's definitely the direction I'd like to be going.

How far off is the mobile sales force from the other channels?

As far as the multi-product element of it?

Yes.

A fair distance off right now. It was a mortgage-only channel, and we're needing to work on technology to facilitate that channel to be multi-product.

Thank you.

You're welcome. Thank you.

Thank you. The next question's from Gabriel Dechaine of Credit Suisse. Please go ahead.

Just a couple follow-ups here. Credit card balances, looks like you had negative growth quarter over quarter. Just wondering if that's any reflection of MasterCard runoff or de-emphasizing some products because it does -- it is essentially a single product relationship in Cards. I'm wondering if there's a bit of a shift in strategy there. And how does that factor into your margin outlook going forward if you have ongoing negative credit card growth? And then IAS19, National Bank took a charge to retain earnings this morning. They updated their valuation assumptions, I guess. Is that -- you put that through retained earnings at the start of the year. There's no anticipated change next quarter, right?

Gabriel, I'll start with the Cards question and leave it to my colleagues for that second part. You're right, our Cards -- let's talk -- a couple of factors to talk about cards, and also I'll touch on the strategic plans for that product line, too, that you referred to. So one factor is purchase volumes are up industry-wide, but what we're seeing is outstandings levels being down industry-wide. So there's an industry phenomenon of clients apparently revolving less. CIBC is more skewed to the premium client base, and arguably, premium clients might have more ability to either pay off balances or revolve to lower forms of debt.

Got you.

So that's one thing. Now, on a relative basis, you'll also see we're down in market share points. So that's now not an industry phenomenon, it's an us phenomenon, so what's happening there? One factor is that some of our competitors -- couple large competitors are right now pretty aggressive on balance transfers where it's either low interest or frankly even no interest for an extended period of time on balances that transfer over. And some of them are doing it for new clients as well, which is a higher-risk move. You just don't have the same knowledge about new clients. So we in that place have traded off volume for lower risk and higher spreads because we haven't pursued that approach. In fact, on the Citi portfolio that we acquired, we actually raised rates and lost volume as a result.

Actually, just -- sorry to interrupt you, but using other sources of credit to pay down the credit card like HELOCs, I imagine, are one source. Is what's happening, people may have a HELOC with another bank, and they're using that to pay down their CIBC credit card, and are you taking action to keep it all in house or something like that?

They could be doing that. They could be just -- it's hard to track, to be perfectly honest. So we're looking at our own HELOC balances. Now, they're still starting to be impacted by the introduction of the new Home Power Plan. And it could be people are paying off rather than revolving to another form of debt. So it's a good point, but very hard to track as to what the dynamics are. Obviously, we'd by trying to take steps to keep it in house.

And why don't I now just talk about strategically what we're looking to do. We've got -- you mentioned MasterCard. No negative action there. In fact, the Petro-Canada MasterCard's a growth engine for us. That's a good product. What we are trying to do, because you also mentioned a single product relationship, we're trying to have less of that. We're trying to proactively right now bring Cards closer into the fold of Retail and Business Banking, to more effectively use our branch channel, more effectively use our call centers, marketing, all on a build-a-deeper-relationship basis as opposed to focus on having a big percentage of single product. So we're still focused on growth. We're not doing it through some of the balance transfer activities that are currently happening in the market, and there is this rebalancing industry phenomenon that's affecting us as well, but we are still very keen to see, on the right basis, our Cards business flourish. So on that second point, I'll now hand over to Kevin.

Hi, Gabriel, it's Kevin. I can't speak for National because I'm not sure what their adjustment would have been in the current quarter. We certainly don't have an IAS19 adjustment in the current quarter. Back when we converted to IFRS, we would have had an adjustment, but we've used corridor method going forward, so I can't speaking to their adjustment, but we certainly have no retained earnings adjustment in the current period for IAS19.

Thank you.

Thank you. I would now like to return the meeting over to Mr. Weiss.

Thank you, operator. That concludes our call. Please contact Investor Relations with any follow-up questions. On behalf of the Team at CIBC, I'd like to wish everyone a happy and safe holiday season and new year. Thanks very much, and have a good day.