Canadian Imperial Bank of Commerce (CM) 2013 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CIBC quarterly results conference call. Please be advised that this call is being recorded. To reduce the audio interference, please turn 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 senior executives will review CIBC's Q1 2013 results that were released earlier this morning. The documents referenced on this call, including CIBC's Q1 news release, investor presentation, and financial supplement, as well as CIBC's Q1 report to shareholders, can all be found on our website at www.CIBC.com. In addition, an archive of this audio Webcast will be available on our Webcast 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 8.30 AM. 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 to differ materially. For more information, please refer to the note about forward-looking statements in today's press release.

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

Thank you, Geoff, and good morning, everyone. Before I begin, let me also remind you that my comments may contain forward-looking statements. Today, CIBC reported net income for the first quarter of CAD798 million, and diluted earnings per share of CAD1.91. Return on equity for the quarter was 19.9%. Excluding items of note, our adjusted net income for the first quarter was CAD895 million, the highest on record for CIBC.

Adjusted earnings per share were CAD2.15, up 9% from a year ago. We finished the first quarter with a Basel III common equity Tier 1 ratio of 9.6%. During the quarter, we purchased and cancelled over 3.3 million common shares. These actions further our ability to deliver sustainable, long-term, and high-quality earnings growth, and demonstrate the progress we are making executing our strategy and its four underlying work streams, which are -- strengthening our core Canadian retail franchise; growing our Wealth Management business; growing our Wholesale Banking business; and strengthening our Caribbean banking operation.

I will now review the financial results and strategic developments for each of our businesses. Retail and Business Banking delivered net income of CAD611 million for the first quarter of 2013, up 8% from the same quarter last year. Credit quality in our retail portfolios is strong. In Q1, provisions for credit losses decreased from the prior year, due largely to lower losses in our credit cards portfolio. Loss rates in this 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.

During the first quarter, Retail and Business Banking remained focused on deepening relationships with our clients. We continued our leadership in mobile banking with the launch of CIBC mobile payment applications, giving Canadians a new way to pay. Our clients now have the ability to make credit card payments with their smartphones. We launched a new mobile payment app for our President's Choice financial customers. To better serve our clients, we continued to invest in our branch network, with the opening of three new branches in this quarter and as a lead sponsor of the CIBC Pan Am and Parapan Am games, ground was broken on the new athletic stadium at York University. As discussed in previous quarter, our focus is on increasing share in our CIBC-branded channels where we can form deeper relationships with our clients, earn higher NIMs, and increase client satisfaction levels. David Williamson is here this morning to answer questions about Retail and Business Banking.

Wealth Management earnings for the quarter were CAD90 million, down 10% from the same quarter last year as a result of a non-recurring gain related to our investment in American Century in the first quarter of 2012. Excluding this, Wealth Management earnings were up CAD25 million or 38% from the same quarter last year. During the quarter, we made good progress in support of our strategic work stream to grow our Wealth Management platform. Wealth Management achieved an all-time high of CAD223 million in assets under administration, as a result of sustained sales momentum and deeper client relationships. We achieved our highest long-term mutual fund net sales on record with CAD1.7 billion for the first quarter, and CIBC's Investor's Edge launched a new online interface, providing clients with additional tools and functionality to monitor their investment portfolios. Victor Dodig is here this morning to answer questions about Wealth Management.

Wholesale Banking reported net income of CAD91 million this quarter. Excluding items of note, net income was CAD200 million. This represents another strong quarter of low-risk, client-driven, consistent and sustainable results in an environment that remains challenging and uncertain. During the quarter, Wholesale Banking's deal activity included several notable achievements that supported its objective to be the premier client-focused wholesale bank in Canada, acting as lead coordinator for the Canada Housing Trust's CAD5 billion bond offering, joint book runner on Husky Energy's CAD3.2 billion credit facility, and financial advisor to GDF Suez on the sale of 60% in its Canadian renewable generation portfolio. Richard Nesbitt is here this morning to answer questions regarding Wholesale Banking.

In summary, we've had a strong start to the year. We are confident that our lower-risk customer-focused strategy positions CIBC to deliver consistent, sustainable returns for our shareholders.

Let me now turn the meeting over Kevin Glass. Kevin?

Thanks, Gerry. My presentation will refer to the slides that are posted on our website, starting with slide 5, which is a summary of results for the quarter. We are very pleased with our Q1 2013 results. We posted record adjusted net income of CAD895 million, which resulted in adjusted earnings per share of CAD2.15. Reported net income was CAD798 million, generating reported earnings per share of CAD1.91.

Our Retail and Business Banking franchise generated another quarter of strong growth. This segment continues to execute on its strategy, focused on deepening client relationships. Wholesale Banking delivered strong client-driven earnings that are consistent and risk-controlled. Wealth Management grew assets under management via a combination of strong net sales and investment performance, and our credit portfolio has exhibited improving credit quality.

During the quarter, we had three items of note. A loss from the structured credit run-off business of CAD0.27 per share. This included the settlement with the Lehman estate that was announced in December. Secondly, a gain related to the sale of our private Wealth Management business in Asia of CAD0.04 per share. And finally, the amortization of intangible assets, which was a loss of CAD0.01 per share. In aggregate, these items decreased our earnings per share by CAD0.24.

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 CAD2.1 billion, up CAD36 million or 2% from the same quarter last year, with gains in our core business lines, offset by lower Treasury revenue allocations in the other segment.

Moving to our lines of business. Revenue in the Personal Banking segment was CAD1.62 billion, up CAD60 million or 4% compared with the same quarter last year. Performance benefited from a combination of higher volumes across most products and higher fee income. Our exit from the FirstLine mortgage broker business continued to progress well, with both conversion volumes and spreads exceeding our targets. When combined with our focus on growing CIBC-branded products, this contributed to year-over-year growth of 11% in the CIBC mortgage portfolio, which was well above the industry average.

Business Banking revenue was CAD380 million, up CAD7 million or 2% compared with the same quarter last year, due to a combination of higher volumes and fees. Business Banking volumes continued to grow with average deposit and ending balances both up 5% year over year. The other segment had revenue of CAD62 million in the quarter, which was down CAD31 million compared to the same quarter last year, and up CAD20 million from the prior quarter. The main driver of these variances are Treasury revenue, which tends to be somewhat volatile on a quarterly basis. The provision for credit losses in the quarter was CAD241 million, the lowest since the fourth quarter of 2008, and is down CAD40 million or 14% from the same quarter last year, due primarily to lower write-offs and bankruptcies in the Cards portfolio. All of our consumer lending portfolios in Canada have continued to perform well, and Tom Woods will discuss credit quality in his remarks.

Our non-interest expenses for the quarter were CAD1 billion, up 3% from the prior year. This increase reflects our continued investment in strategic business initiatives. Our adjusted net income was CAD613 million, up CAD44 million, or 8% compared with the prior year. Our core net interest margin or NIM was 262 basis points for the quarter. This was up 4 basis points from the prior quarter and 10 basis points from the prior year. This represents the fourth consecutive quarter of increased NIM, which 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 lower interest rate that has been felt throughout the industry.

Turning now to slide 7 and the results for Wealth Management. Revenue in the quarter was CAD432 million, up CAD34 million, or 9%, from the same quarter last year. Looking at the results of the specific business lines in the slide, Retail Brokerage revenue of CAD259 million was up CAD10 million or 4% compared with the prior year, and this was due to an increase in average client assets under administration and higher trading volumes. Asset management revenue of CAD144 million was up CAD19 million or 15% from the same quarter last year. This was due to a combination of an increase in average client assets under management, which was driven by strong fund performance and record net sales of long-term mutual funds as well as higher fee income. Non-interest expenses of CAD315 million, were up CAD3 million or 1% from the prior year, mainly as a result of higher performance-based compensation. Net income in Wealth Management was CAD90 million, up 38% from the same quarter last year.

Slide 8 reflects the results of Wholesale Banking, where we continued to deliver strong performance. Revenue this quarter was CAD557 million, up CAD35 million or 7%, compared with the prior quarter on an adjusted basis. Capital Markets revenue of CAD328 million was up CAD25 million or 8% from the prior quarter, primarily due to higher fixed income revenue. Corporate and Investment Banking revenue of CAD213 million was up CAD19 million or 10% from the fourth quarter, largely as a result of merchant banking write-downs booked in Q4 2012. In Corporate Credit, an increase in revenue due to higher fees and volumes was offset by lower CMBS gains from our US Real Estate Finance unit. Adjusted provision for credit losses of CAD10 million was down CAD3 million from the prior quarter.

Non-interest expenses were CAD291 million in the quarter, up CAD42 million or 17%, compared with the prior quarter, primarily due to an increase in performance-based compensation, and the timing of certain other salary and benefit expenses. On an adjusted basis, net income for Wholesale Banking was CAD200 million for the quarter, up CAD6 million or 4% from the prior quarter on the same basis. Overall we are very pleased with this Wholesale Banking performance and the contributions from each of our Capital Markets, lending, and advisory businesses. The balance results demonstrate the success of our client-driven strategy and the strength of our diversified platform.

In conclusion, we successfully carried over our momentum from 2012 and achieved record net income in the first quarter, providing a strong start to 2013. We remain positioned as a lower-risk bank and our strategy continues to deliver consistent and sustainable earnings in each of our businesses. Retail and Business Banking delivered strong performance, which included volume growth in core products and improving margins. We see this as evidence that our client-centric strategy and investment in strategic initiatives are delivering. In Wealth Management, solid investment performance, above-market asset growth and growing fee-based revenue streams provided solid results, and Wholesale Banking delivered another quarter of diversified and consistent performance, and finally loan loss performance improved as a result of credit quality.

Thank you for your attention. I would now like to turn the meeting over to Tom Woods.

Thanks, Kevin. Slide 20, loan losses in Q1 were CAD265 million versus Q4 losses of CAD328 million reported, or CAD275 million on an adjusted basis. Loan losses were down in Q1, mainly because of CAD14 million lower losses in commercial banking. On slide 21, our Cards portfolio continues to perform well. The net credit loss in Q1 was 4.1%, the same as in Q4. Our Cards delinquency rate remains stable quarter-over-quarter.

With respect to our Canadian Residential Mortgage portfolio on slide 22, 76% 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 December house price estimates, is 51%. 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 one 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 72% in Ontario and BC. Similar to our total mortgage portfolio, 77% of our condo portfolio was insured. The uninsured portfolio has an average loan to value of 52%. This slide also shows our condo developer exposure. At January 31, our drawn loans to construction projects were CAD789 million, or approximately 1% of our business and government portfolio. The exposure is diversified across 73 projects.

Slide 25 shows our exposure to European peripheral countries and other countries in Europe. As you can see, we have no peripheral sovereign exposure, and very little peripheral non-sovereign direct exposure, about CAD18 million net after deducting the collateral we hold. We have CAD281 million indirect exposure to corporates in the peripheral countries in our structured credit run-off book, down slightly quarter-over-quarter, where our interests benefit from significant subordination to our position, but hereto, none of this exposure is to peripheral sovereigns.

Slide 26, our US Real Estate Finance business at CAD4.1 billion of drawn exposures and CAD393 million of undrawns. About 83% 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 Q1, we had loan losses here of CAD9 million, down from CAD10 million last quarter, all on loans that were originated pre-2009. We had CAD109 million of net impaired loans.

Slide 27, our exited European leverage finance book had CAD396 million in drawn exposures and CAD73 million in undrawn. In Q1, we had no provisions in this portfolio. Our exited US leverage finance loan book had CAD77 million in drawn exposures, and CAD19 million in undrawn. In Q1, we had a net reversal of provisions of CAD1 million in this portfolio. Turning to market risk, slide 28 shows the distribution of revenue in our trading portfolios. We had positive results every day in Q1, compared with 95% of the time in Q4. Our average trading VaR was CAD5 million, compared to CAD5.5 million in Q4. The low VaR levels reflect our continued conservative market positioning.

On slide 29, our Basel III common equity Tier 1 ratio was 9.6% at the end of Q1, up from 9.0% at the end of Q4. The quarter-over-quarter increase was primarily due to, first, lower Basel III risk-weighted assets, resulting from OSFI's decision to postpone the implementation of the new Basel III CVA risk-weighted asset charge, related to OTC derivatives, and this helped our ratio this quarter by 45 basis points. Second, earnings net of dividends. This was partially offset by the impact on the ratio of our share repurchase program.

I'll now turn things back to Geoff.

Thank you. That concludes our prepared remarks. We'll now move to questions. As usual, to give everyone an opportunity to participate, please keep it to one or two questions and then requeue. Operator, can we please have the first question on the phone?

(Operator Instructions)

Our first question is from Peter Routledge from National Bank Financial. Please go ahead.

Just a question on retail business -- retail banking and business segment. I notice your net interest income, just in dollar value, is flat the last couple quarters, in the [1,460] range. Your net interest margin has come up 5 basis points. And I can't reconcile that even if you account for the change in average interest earning assets. Can you just help me understand what the dynamics are? Is that all Treasury allocation noise?

David Williamson speaking. Yes it is. When we talk about Retail and Business Banking, we're looking at excluding the Treasury, and when you look at those other numbers, without the Treasury assets, along with the related earnings from it.

Okay. Just thinking about your mortgage book, there's more run-off because you're getting out of the broker market, and your originations certainly in the branch are quite strong. Is that book all in, is it creating, just on an interest income basis, forget spreads for a minute, is that creating flat interest income quarter-over-quarter, or is it rising, or is it falling?

Okay. So starting off on the balances front, as you see, the overall balances in mortgages are declining. Not substantively, but they're declining, as we signaled they would before. Single digits on an overall decline. Within that, you're absolutely right. If you look at the growth in the CIBC-branded space, we're up over 10%. So very substantive growth in the absolute balances of CIBC branded mortgages, and as a result, all-in NII is up.

Just interest income, is it -- are you getting more yield out of this book now after everything's said and done or is it pretty flat?

More yield.

More yield. Okay. And I guess if that's the case, and if you'll get through the probably more intense phase of this change in strategy this year, your revenue outlook probably isn't too bad. The question would then be why not raise the dividend this quarter?

The revenue outlook is -- you're right, it's not bad or good. If we look at this quarter, the results that are coming out of this business unit, I just put off to the side Treasury, our results this quarter are up almost 3.5% on the revenue side. You're right, they are looking strong. So on the dividend front, I'll hand over to Gerry on that if I could.

Yes, I wouldn't read too much into our not raising the dividend this quarter. On the capital front, we're also in the middle of a buyback program that's going at an accelerated pace. As I have said before, to the extent that you have a buyback, it does allow you to raise your dividend more rapidly and stay within your payout ratio. All of those things are being considered, as well as future plans in terms of the buyback area, and we'll discuss that with the market when we concluded on the exact mix that we're going to arrive at.

Thank you.

Thank you. Our next question is from Rob Sedran from CIBC. Please go ahead.

On the loan loss front, economic growth seems to be slowing, consumer debt levels are elevated, they don't seem to be conditions that are conducive to a stepdown in provisioning. We've seen this from the other banks as well so far this quarter. I'm just curious as to what might be driving it and how sustainable a decline in provisioning is, given where we are in the cycle.

Yes, Rob, Q1 we had very good performance across just about every bucket of loan losses. First Caribbean came on right on expectations but just about every other category was down. I don't want to give you specific guidance, but I think you know seasonality in Cards in Q2 normally drives a higher number there. We had recoveries in commercial banking in Q1, and we can't count on that every quarter. We had about CAD10 million or CAD12 million release of generals in Q1. I don't know that's going to continue every quarter. I think it's fair to say that Q1 was an outperformer quarter. I think the run rate overall for the rest of the year however, should still be down versus 2012. But I don't know that you should look at Q1 as necessarily representative of the rest of the year. I think it's likely to be a little higher.

Okay. Thank you. That's helpful. Second question, I don't know if this one's for Gerry or for David, but I noted the language on Aeroplan, and possibly contemplating other options. The bank has made some pretty major strategic pivots in the past couple of years, and I'm wondering if this one might be another one that's coming, or are you happy with the Aeroplan relationship?

Hi, Rob. Let me take that. This is David Williamson speaking. This is a long-standing partnership that we've had with Aeroplan and the reason for the disclosure is just a significant contract, and it's not resolved, so it was appropriate to highlight that in our disclosures. I know the question's out there regarding the status of the discussions, so let me just speak to that. We have a long-standing partnership with Aeroplan which speaks I think partly to your question. It dates back 20 years.

It does expire at the end of this calendar year, unless extended by the parties, or replaced in accordance with its terms. We have been engaged in periodic discussions with Aimia and we anticipate being involved in future conversations with them. However, and to the disclosure, there can be no assurance that the Aeroplan agreement will be extended, so we are exploring alternatives. Of note, CIBC has significant contractual rights if we're not able to reach an agreement on the extension of the current contract, but that's to your question, not the objective. It's relationship that we continue to explore.

So it's still March. When do you get -- or I guess February, officially. When are you hoping to have something done? Middle of the year, or could this be dragging on toward the end of the year?

It's just hard to say. The contract is good until the end of the year, and as I say, we're in periodic discussions with them. I'm confident we'll be in continued discussions.

Thank you.

The next question is from John Reucassel from BMO Capital Markets. Please go ahead.

Thank you. Just a quick clarification, Tom Woods. Just what is the -- what's the impact of the delay of the CVA, again?

Yes, John, in our 9.6 Basel III, as of Q1, it was 45 basis points.

It will be 45 lower.

I just want to clarify and you perhaps know this. If this CVA charge is in fact implemented in Q1 of next year, I think all banks will probably be able to chip away at some of that by model approvals and more trades going through central clearing houses. So to the extent you're modeling that, I think it's reasonable to assume that not all 45 would come in as a drag in Q1 next year. I don't want to give you a number, but it's not a big number but it's not a tiny number either.

Just for Gerry, I guess given the strong capital ratios and the -- looks like the retail repositioning is going very well. You talked about an accelerated buyback. Could you -- why not buy back more stock? What's the reason not to? Can you talk about what an accelerated buyback program means?

Well, what I referred to in terms of accelerated buyback program is the one that's in place today. It has run at an accelerated pace versus when we announced it. The announcement originally encompassed a period of a year, and we will have finished that buyback program much faster. That puts us in a position to, as I said in answer to the dividend question, to weigh up buyback options reasonably soon versus dividend increases, and I want to emphasize that it's not that you are doing a buyback versus a dividend increase, it's that the degree of buyback drives the degree of dividend increase that's available to you, because of its impact on where you'll lie in your payout ratio. So the accelerated buyback reference that I made was to the one that's in place now, which, if it continues at the pace that we've been executing, which was faster than an annual pace, will conclude fairly soon and then will have to speak to the marketplace about our further plans in the future for buybacks. That will be very informative, as to the capacity that we have in total to raise dividend.

Okay. And then just to be clear, you don't anticipate -- your buyback program was obviously cleared by OSFI, and as far as you can tell, there wouldn't be any issues if you had to come up with a new one sooner than expected?

Well, you used the frame if we had to come up with a new one sooner than expected.

Or wanted to I guess I should say.

Okay. Again, I don't want to speak for the regulator and I don't want to speak before we have something definitive to tell you. The key piece of information that we're using today so that we can be very communicative on this discussion is the fact that the buyback that's in place, we are executing effectively as rapidly as possible when one considers -- I suppose you could go a little faster, but there are a lot of considerations including how much of a presence you are in the market and that type of thing, and we've executed this thing quite rapidly. I think that is -- although I don't want to make a forward-looking statement, I think that is at least part of an indication about how we intend to proceed.

Okay. Thank you.

Thank you. Our next question is from Gabriel Dechaine from Credit Suisse. Please go ahead.

Just a numbers question here, actually, on the Cards business. You have got CAD15 billion in balances. I think 80% of that or so is what you call premium. And of that amount, what would be Aeroplan? Just trying to size that portfolio.

Hi, Gabriel. David Williamson speaking. A afraid I won't be able to help you too much there. We don't break out actually the Cards information at all, let alone the sub-segments.

In the past you said 80% is premium, though. Like your last Canadian Investor Day. Is that kind of where you still are at or --?

No, it's quite a bit less than that.

Okay. So my main question, though, is on the Canadian margin. You're an outlier there in a positive sense, the margin's going up. What I'm trying to get a sense for is, is the mortgage repricing powerful enough or impactful enough to offset an acceleration of the declines in the Cards balances? Because they were down 2% quarter to quarter on the spot balance. Commercial growth is flat. Those are two higher margin businesses, wondering if you have no growth in commercial and negative growth in Cards, how that affects the NIM outlook. And then if you could roll into that as well your deposit repricing, what kind of -- is that going to stop being a headwind at some point this year?

That I can help on. So a couple of comments on NIM. So first, we've got the benefit of the move from the FirstLine spreads, thin, to the CIBC-branded spreads which are substantively wider. So that has helped this quarter. But of note, our NIMs would be up quarter-over-quarter, even without the pivot on the FirstLine. So then that comes to how obviously we're being -- there's some downdraft that the whole industry's feeling regarding lower interest rates and our balances in credit cards are down too and you're right, that's a high NIM product. In credit cards right now we have the highest NIMs we've ever had in that portfolio but balances are down.

You've got two headwinds on NIMs. So what's offsetting that are two things. One is the deposit balance growth we've had quarter-over-quarter. That's helping the NIMs, offsetting the interest rate impact. And also, pricing. Now, pricing, not fees I'm talking about, but just how we're pricing in the market different geographies, sensitivity to client profiles and that's having a positive impact too. So you're right, there's some moving pieces in there. FirstLine is going to be something that helps us for a while as we shift into the CIBC brand. But in addition to that, we have other help. So I guess the key point being even without FirstLine, we're still up on the NIM front quarter-over-quarter.

Sorry, deposit balance growth, that's because you're tying a deposit requirement to CIBC-branded mortgage?

On the deposits we're growing along at industry levels. We do have -- we've been pulling, de-emphasizing, if you will, the broker deposit high interest rate space. If you look at the reported numbers, that's impacting our reported numbers but that, again, is kind of a thinner margin space. If you look -- if you adjust for that and look at our branded deposit space, we're growing pretty -- actually, at market and then you overlay on that what's going on in mutual funds. Mutual funds we've got year-over-year growth of like 12%. Really outperforming on the mutual fund front. That's got decent returns on it too.

Thank you.

Thank you. Our next question is from John Aiken from Barclays. Please go ahead.

Good morning. Question for Richard. Richard, a little bit surprised to see the deceleration in your loan book. Granted, it is average balances I parse through on the period end. Is this just a temporary stasis, or is this a reaction to something that you're seeing in the marketplace?

Just trying to look at the numbers. Do you see a deceleration? You're talking about the rate of growth, of increase?

Yes, exactly. Based on my calculations, the average balances were up less than 1% over the last quarter.

Yes. So that really should be looked at -- we had a very strong year in 2012, grew the loan balances quite significantly. We will still have a good year this year but we're not expecting to have as significant a growth as we did in 2012.

Richard, are you seeing anything on the competitive front in terms of pricing or covenants that are being put in place?

So far, pricing has held in the corporate side and we're still getting very good pricing from our corporate clients. In addition, I'd say in Real Estate Finance, that's probably, as I've said here before, that's probably some of the best-quality lending we can do for the levels of credit that's open to us. So far, that's held in pretty well. I think the reason for that is, the dynamics are different right now with the departure of the Europeans leaving, going back to Europe and leaving behind gaps in loan syndicates that have to be filled by people like the Canadians.

Thanks, Richard. If I could sneak in another quick one on the capital ratios, I don't know if Tom or Gerry wants to take this. We're well into the 9% on the capital ratio. The discussion's very different than what we were having two years ago. And to flip that on its ears, when do we get to a level that's too high? When does it get overly punitive? I understand where the European banks are going but I don't think the Canadian banks are operating the same demands in the marketplace as those banks. Do we continue to see growth here, or is this something that will effectively be managed either through growth, or as you're talking about in terms of return of capital?

Tom will touch on some of the movement that's going on right now, because of the ebb and flow of regulatory requirements. And then I'll touch on the generality of the question, because I think you saw a surge in a number of institutions ratios this quarter in relation to some elements like the CVA and one has to consider that there will be some reduction on that later on possible. So Tom will touch on that, and then I'll touch on the generality of how much is enough.

I think first of all, earnings net of dividends every quarter help us by 30, 33 basis points. And that's what we've seen over the last five or six quarters. I've already commented on the impact of the CVA, which at some point will come back. I don't think it will come back nearly to the extent of 45 basis points. We're still awaiting regulatory guidance on buffers. But even factoring all of that in, and then the share repurchase has been a drag every quarter. Notwithstanding that, you're seeing well into the 9s for ourselves and some of the other banks. Flexibility is certainly there to take any number of steps. But 30 to 32 is roughly what earnings net of dividends gives us every quarter.

Gerry here. I think that it's important to -- taking Tom's comments as a base, I think it's important that one looks forward to the dynamic of some of the elements that are changing from a regulatory viewpoint, and Tom touched on buffers. That's one of the dynamics. Keep in mind that right now, if you were to look at the actual pre-buffer total common equity requirement, it's 7%. Buffers do affect that, and I don't think we're completely final by any means, in terms of the buffer discussion, both internationally as well as obviously domestically. And so that is something that is a discussion that's not yet complete. And I think it is leading to, on the industry's part, an incremental level of caution. I believe that clarity around buffers will allow the industry to calibrate and to actually use capital a bit more efficiently than it can during a period of uncertainty, in terms of what the final numbers will be. So that's part one.

Part two is that I think that operating within that dynamic, let's presume that we get to a time frame, where one has absolute clarity. And I think that absolute may not be that absolute, but let's say that we're closer to having the buffer spelled out and having a better idea of what the industry's going to do, in terms of how much it is going to reside above those buffers. Because we always get into that industry dynamic also. Let's presume that we arrive at that period of time. I think then that how you are -- how much you're above the buffer level is going to be determined by the usage of the capital. I think that there will be -- if you're at a very high level and you happen to be engaging in actual business investment, acquisitions and/or investments that require capital, not balance sheet activities, I do believe that from an industry viewpoint, but also from our viewpoint, that one would be more inclined to bring about a decline in capital levels and get closer to the buffers if it was actual investment in the business. If one is involved in capital activities, such as buyback, I think you'd be a little less inclined to bring it down at a rapid pace to what the anticipated buffer level would be.

And I also believe that -- and again this is of course subject to regulatory discussions, which will happen in the years to come, but I also believe that dynamic is something that in the past has been somewhat of a good rule of thumb when one was operating within the discussion with the regulators. That actual business activity that represented investment in the business or acquisition of assets or businesses is looked on somewhat differently than actual capital action such as buybacks, which are an actual planned reduction without a necessarily business dynamic benefit. So all that having been said, the purpose of this entire, giving you the narrative here, is so that -- it's in our mind and in my mind a more refined discussion than more is better. We do believe that at current levels, ourselves and the industry are operating with quite strong capital ratios and we've had those discussions internally so that we can operate within an effective framework for all of our stakeholders. We are approaching levels within the industry at this time that are very robust, and you've got to add in the dynamics that Tom talked about, the dynamic that I talked about to qualify that statement, but I do view current levels industry-wide as quite robust, and that's how we're guiding ourselves at this time.

Great. Thank you for the color.

Thank you. Our next question is from Andre Hardy from RBC Capital Markets. Please go ahead.

Just a question on the tax rate. Looks like it was 14% reported, and correct me if I'm wrong, about 16% excluding unusual items. That would be in line with the prior two quarters. But seems low relative to what the Bank had historically as its tax rate. So what would be your outlook for the tax rate on a sustainable basis?

Andre, it's Kevin. You're right, the tax rate was lowest this quarter. I think your numbers are right. It was lower largely due to business mix. We also had slightly higher tax exempt income. This quarter we actually also had a favorable tax adjustment, so that would have helped us by about a percentage point as well. If we look at it going forward, the rate will be somewhat volatile, depends on business mix and timing of dividends and that stuff. But in the shorter term, we expect a rate on our adjusted earnings of about 17% to 19% on a [non-care] basis, probably rising somewhat towards the end of the year.

Thank you very much.

Thank you. Our next question is from Darko Mihelic from Cormark Securities. Please go ahead.

I'm looking at page 5 of your supplemental. Just looking for a little bit of color on expenses. Looking at it from the overall top level, just two line items in particular that I want to focus on. Your performance-based compensation and your benefits line items, when I look at the CAD344 million for performance-based comp, last year it kind of fluctuated but it wasn't that big of a range, and I look at the benefits expense of CAD142 million, almost similar dynamic last year. Can you speak to whether or not I'm looking at run rate levels of expenses for these two line items? Thanks.

Darko, I think that, again, there are some fluctuations on an ongoing basis. This quarter, our wholesale bank in particular performed extremely well so there was an increase in performance-based compensation over there. A lot depends on how that unit performs. And I mean, I think that's the major explanation for the changes this quarter.

And with respect to benefits costs at CAD142 million, is that fair to say that's a good run rate?

I think it may have been a little higher this quarter and probably come down somewhat.

Okay. Thanks very much.

Thank you. Next question is from Stefan Nedialkov from Citigroup. Please go ahead.

I have two questions. Could you please update us on maybe how much buybacks you have done since 31 of January, 2013, so I guess over the past month, really. Second question is on funding costs. Two quite important things have happened over the past few months. Number one, Moody's downgraded most of the Canadian banks, and secondly, the covered bond framework in Canada has changed. Have you seen any impact already, and if so, is that a positive or a negative impact? Thank you.

Could you just repeat the question around the funding costs?

Sure. So Moody's downgraded most of the Canadian banks back in January. Number two, the covered bond framework has been changed, so that the banks can include uninsured mortgages basically, and just uninsured residential secured lending product overall. If you have had to refinance maturing covered bonds, have you seen any impact from those two actions?

I'll start. In general, we're finding that funding conditions, net of the individual questions that you just had about covered bonds, which I'll turn it over to our Treasurer in a minute to respond to, in general we're finding that funding conditions both on an availability and on a spread basis are quite good at this time. As to the changes that have taken place in the covered bond market and the anticipated future opportunities as a result of the new frameworks that are being introduced, I'll turn it over to Peter in order to discuss that. Peter?

Thanks, Gerry. Yes, as you mentioned, the new covered bond framework was announced in December. We think it's a very robust framework that we do expect to utilize. It is a significant change from the prior framework, so it does require a redevelopment of reporting and technology. We expect to be in a position to utilize it within a couple of months. I expect most of the Canadian banks will be active users of the new covered bond framework.

We do expect to see funding costs to be comparable to the old program, notwithstanding the fact that these will be uninsured mortgages, versus the insured mortgage program we had previously. There are significant credit enhancements in the new framework that will mitigate the change to our insured mortgages. I think that answers the question. Let me go on to your question about share buybacks. I think you asked how many shares we repurchased in February, and that number is about 1.4 million.

Fantastic. I guess just one follow-up. In terms of the covered bonds credit enhancements, what would that be exactly? Is that derivatives that you may have taken, or something else?

No, there -- that's a fairly detailed question I could follow up on. But there are limits on the loan to value ratios of the overall portfolio. There will be a requirement to provide reporting in the future on indexation, where all property values are re-evaluated against current property values, to ensure they still meet the LTV requirements. There's a whole range of things that I'd be happy to follow up on as required.

Great, great. Thank you. Basically you are taking down the risk profile of the mortgages that are going into the pool?

I'm sorry, I missed that.

Sorry. I'm calling from London. Maybe the line's not very great, but in terms of these credit risk mitigations, you are effectively taking the risk of the underlying portfolio down and that's how you're getting to a lower or similar funding cost to what you had before?

Yes, that's effectively right, although I would start with a view, the risk of the underlying portfolio is extremely low to start with. If you look at the loan to value ratio, that was in our report that we just provided, even the uninsured mortgage has an average of 51%. If you look at the loan loss experience of a mortgage portfolio it's extremely low over time, so you're starting with a very, very high quality asset that underlies the structure. And then there's further enhancements within the covered bond framework itself. We are very confident it will be a very effective and low cost funding going forward.

Thank you very much. Appreciate it.

Thank you. Our next question is from Michael Goldberg from Desjardins Securities. Please go ahead.

I'm looking for the number on a pro forma basis that would correspond to your all-in [set one] capital at the end of the first quarter, the 12,077.

Hi, Michael. It's Tom. I'll have to get that number back to you. I don't have it close at hand.

Okay. Would appreciate that. Thank you.

Our next question is from Steve Theriault from Bank of America Bank of America-Merrill Lynch. Please go ahead.

I have a couple of questions for Kevin and a quick follow-up for David. For Kevin, margins in Canadian banking are now up in each of the last four quarters, and I think in your remarks, you said you'd expect flat margins going forward. I guess my question is, are you just being conservative or is there less positive impact from the mortgage broker runoff coming down the pike for timing reasons or something else in the next little bit. I also wanted to ask how much of the FirstLine expenses have now run off thus far? Has that been meaningful yet?

Steve, I think in terms of margins being relatively stable, I think this was a strong quarter. We may be being a little bit conservative but there are low interest rate headwinds coming at us so we certainly don't want to get ahead of ourselves. And then as far as the FirstLine expenses are concerned, we don't really break that out. They are coming down but not significant.

The percentage of the FirstLine expenses, could you ballpark in terms of percentage impact and the reduction of the FirstLine expenses?

Steve, that's a pretty detailed question. Let me take a look at that and I can get back to you.

No problem. And then for David, just a comment you made earlier, you said the highest NIMs you've ever had in Cards. Is that due to mix, so less premium, more mass market and therefore higher yield, or is that more driven by something else?

Yes, Steve, so I guess a few factors. The mix of the Cards come into play, no doubt about it. And a part of it's mix that's lining up for us. On top of that, we've been focused on quality more so than volumes. So we've not been focused very much on the balance transfers. And even on the CD book we brought it across, we took steps to enhance the NIMs on that portfolio. So mix coming into play, but also the upshot of an extended focus on trying to have folks on quality, not volume.

Balance transfers, that makes sense to me too. Thank you.

Thank you. Our next question is from Sumit Malhotra from Macquarie Capital Markets. Please go ahead.

I got on the call late. I apologize if some of these have been already asked. On the buyback question that just came up, so if I've got the math right, since you started the repurchase program in September, you've repurchased 6.6 million shares as of the last February filing, which is more than 80% of the 8.1 million you've been approved for which I think runs through August. So what is the strategy here, if you keep going at the pace you're at you're probably going to be at the 8.1 limit before the end of April. Do you expect to slow that down and stay at the 8.1 pace or are you going to be asking the regulators to let you increase the 8.1 that you're approved for?

Hi, it's Gerry. Earlier on in the call, I basically said I'd rather get a little closer to the end of this program before commenting on future programs. And then in a subsequent follow-up question I did say that we were running this at an accelerated pace versus the original target dates that you talked about, and that unto itself did indicate how we felt about capital levels and our ability to buy back, and so that was information that I think you should take as being indicative in some fashion of how buybacks fit into our future plans. All that having been said, we will look at buybacks, dividend increases, as well as the strategic development of the businesses before making any final decision. This buyback is concluding quite soon and, therefore, we do feel that a further discussion with the marketplace about our plans closer to the end of this buyback is warranted.

Sorry for making you answer that again. And I hope this one hasn't been asked. It's for David Williamson on commercial. If I'm looking at this right in your slides, your commercial loans are flat quarter-over-quarter. I know you've talked over the last year about perhaps being or perhaps pulling back on the commercial real estate portion of business lending that's housed in that. Is that the reason that the loan book balance looks unchanged quarter-over-quarter? And could you remind if that's still the case on the CRE, what of the CAD35.7 billion balance, how much is CRE loans?

So this quarter, for business lending, a bit softer than the run rate that we've been seeing for a while. So that's a factor. And part of that is commercial mortgages. For multi-year period now we've been running well in business lending, around about 10%. And although this quarter was a bit softer, we're still thinking high single digits going forward. So we haven't really parsed out the commercial mortgages and don't really intend to go down that path. But it is a factor with the current spreads in commercial mortgages that we've just backed off in growth in that area. So no doubt, if you adjust for that, it does elevate our quarter-over-quarter growth, but just to be transparent, this quarter a bit softer than our recent run rate but we still feel good about how this business is moving forward over an extended period now.

Got it. Thanks for your time.

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

Thank you, Operator. That concludes our call. If there are any additional or follow-up questions, please contact Investor Relations. Have a good day.