Canadian Imperial Bank of Commerce (CM) 2013 Q2 法說會逐字稿

Good morning ladies and gentlemen, welcome to the CIBC quarterly results conference call. Please be advised that this call is being recorded. 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's Senior Executives will review CIBC's Q2 2013 results that were released earlier today. The documents referenced on this call, including CIBC's Q2 news release, investor presentation and financial supplement, as well as CIBC's Q2 report to shareholders, can all be found on our website at www.cibc.com. In addition, an archive of this audio webcast will be available on our website later today.

This morning's agenda will include opening remarks from Gerry McCaughey, CIBC's President and Chief Executive Officer; Kevin Glass, our Chief Financial Officer, will follow with the 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 before 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 announced adjusted net income for the second quarter of CAD876 million, up 4% from a year ago. And adjusted diluted earnings per share of CAD2.12, up 6% from a year ago. Return on Equity for the quarter was 22.3%. We finished the second quarter with a Basel III common equity ratio of 9.7%. Today we declared a CAD0.02 increase in our quarterly common dividend. This increase leaves us within our payout range of 40% to 50%. During the quarter, we purchased and canceled approximately 2.5 million common shares. With this we have completed the normal course issuer bid announced in August of 2012 for repurchase of up to 2% of CIBC's common shares. Also during the quarter, we announced our intention to acquire Atlantic Trust, a leading US private wealth management firm from its parent company Invesco. This transaction further enhances our strategy to build our North American private wealth management offering to high net worth clients.

I will now review the financial results and strategic developments for each of our businesses. Retail and Business Banking delivered net income of CAD604 million for the second quarter of 2013, up 9% from the same quarter last year. Credit quality in our retail portfolios is strong. In Q2, provision for credit losses decreased from the prior year largely due to lower losses in our credit card portfolio. Loss rates in this portfolio are at the lowest level since the fourth quarter of 2008. During the second quarter of 2013, Retail and Business Banking continued to make progress against our objects of accelerating profitable revenue growth and enhancing the client experience. We continue to invest in our distribution platform opening 10 branches in the first half of fiscal '13. In April we launched the CIBC everyday banking bundle and CIBC premium banking bundle and post-quarter end we announced the availability of CIBC mobile payments to Android smartphones from Rogers starting with the Samsung Galaxy S3. Our focus in Retail and Business Banking 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.

As disclosed again this quarter, we have been engaged in periodic discussions with Aimia regarding the expiry of the Aeroplan credit card agreement on December 31 of 2013. Our primary objective is to ensure that one way or another we offer our clients a market-leading travel credit card. This could include the renewal of the Aeroplan agreement. In the event we choose not to renew with Aimia, we have taken steps to build a new market-leading travel card offer. This alternative will ensure that we will be well positioned to serve our clients in the best way possible to meet the widest range of their travel needs. We are investing more than CAD50 million over the next four quarters, including approximately CAD30 million for the remainder of fiscal 2013, to build this alternative. Under the scenario where this alternative card is launched, we would expect to retain a sizable portion of the existing portfolio. The balance we do not retain would be split among the other key players in the industry, all of whom will aggressively market to take advantage of this opportunity.

As the incumbent, our end of contract rights, as well as our proprietary information and data analytic capabilities, uniquely enable us to tailor alternative credit card programs to meet our customer needs and allow us to target retention efforts on the most profitable portion of the portfolio. We will also commit over and above this significant material and marketing dollars in order to ensure the retention of the portfolio in 2014. While the launch of the alternative card would result in short-term costs for CIBC, we believe it would generate benefit over the longer term for our clients and shareholders. David Williamson is here this morning to answer questions about Retail and Business Banking.

Wealth Management earnings for the quarter were CAD92 million, up 16% from the same quarter last year primarily driven by growth in our asset management business. We continue to experience strong sales and performance in our mutual fund business. Year to date, long-term net sales of CAD3.9 billion are up CAD1.4 billion, or 59% compared to the prior year. Our retail fund business has had 17 consecutive quarters of positive long-term net sales. We are very pleased with our pending acquisition of Atlantic Trust which provides CIBC with an attractive entry into the US private wealth market where high net worth personal financial assets are growing 50% faster than those of the average US household. Victor Dodig is here this morning to answer questions about Wealth Management.

Wholesale Banking continued to perform well this quarter, generating low risk, client driven, consistent and sustainable results. Reported net income was CAD198 million this quarter. Adjusting for items of note, net income was CAD193 million, down CAD7 million from the previous quarter. In support of its objective to be the premier client focused wholesale bank in Canada, Wholesale Banking acted as a financial advisor to Inmet Mining on its sale to First Quantum Minerals for CAD4.6 billion, joint book runner and administrative agent in the refinancing of Hydro-Quebec's CAD2 billion revolving credit facility and joint book runner of TELUS Corporation's CAD1.7 billion dual tranche bond offering. Richard Nesbitt is here this morning to answer questions about Wholesale Banking.

In summary, we are very pleased with this quarter. We experienced balanced revenue growth, our industry leading return on equity increased to 22.3% and our capital levels are strong. Our progress supports the strategic path we are on and positions us well for the future. Let me now turn the meeting over to 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. And we're actually very pleased with our second-quarter results. We posted adjusted net income of CAD876 million, which resulted in adjusted earnings per share of CAD2.12. And overall we produced strong results this quarter. Our Retail and Business Banking franchise generated another quarter of strong earnings with solid year-over-year volume growth particularly in our CIBC branded products. Retail and Business Banking is successfully executing on its strategy, focused on accelerating profitable revenue growth and enhancing the client experience. Our Wealth Management business experienced record net sales of long-term mutual funds and we continue to execute our client focused strategy in Wholesale banking. Our capital markets and corporate and investment banking businesses both performed well. We had improving credit quality, particularly in our retail portfolios, and we also increased our quarterly dividend by CAD0.02 to CAD0.96 per share this quarter.

During the quarter, we had three items of note. Income from the structured credit runoff business of CAD0.05 per share, a loss in our exited European leverage finance portfolio of CAD0.04 per share and the amortization of intangible assets, with was the loss of CAD0.01 per share. In aggregate, the impact of these items on our earnings netted to CAD0.00. 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 results for Retail and Business Banking on slide 6. Revenue in the quarter was CAD2 billion, up CAD32 million or 2% from the same quarter last year, with gains in our core business lines partially offset by lower revenue in the exited broker mortgage business and lower treasury revenue allocations in the other segment. Moving to our lines of business. Revenue in the personal banking segment was CAD1.6 billion, up CAD61 million or 4% compared with the same quarter last year. Performance benefited from volume growth across most products, wider spreads and higher fee income partially offset by one less day in the current quarter. Our exit from the FirstLine Mortgage Broker business continued to progress well with both conversion volumes and spreads well exceeding our stated targets.

The CIBC brand mortgage portfolio grew 12% year over year, which represented the 14th consecutive quarter of out performance versus the industry. Business banking revenue was CAD372 million, up CAD4 million or 1% compared with the same quarter last year due to a combination of higher volumes and fee income partially offset by the impact of lower interest rates on deposit balances. Business banking volumes continued to grow with deposits and lending balances each up 7% year-over-year. The Other segment had revenue of CAD68 million in the quarter, which was down CAD33 million compared with the same quarter last year. The main driver of this variance was treasury revenue which tends to be somewhat volatile and will likely be lower in the coming quarters. As expected, revenue is also lower in our exited broker mortgage business FirstLine.

The provision for credit losses in the quarter was CAD233 million, down 14% on a year-over-year basis. This reflects the lowest level of losses in over four years largely due to lower write-offs and bankruptcies in the credit card portfolio. Each of our consumer lending portfolios in Canada 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 1% from the prior year. While we continue to invest in strategic growth initiatives and hire more front line sales people, we generated positive operating leverage in the quarter and we are targeting positive operating leverage over the fiscal year.

Our adjusted net income was CAD605 million, up CAD47 million or 8% compared with the prior year. Our core net interest margin, or NIM, was 264 basis points for the quarter. This was up 2 basis points from the prior quarter and 8 basis points from the prior year. This represents the fifth consecutive quarter of higher NIMs which has been helped by an 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 rates that has been felt throughout the industry.

Turning now to slide 7 and the results for Wealth Management. Revenue in the quarter was CAD443 million, up CAD25 million or 6% from the same quarter last year. Looking at the results of the specific business lines on the slide, retail brokerage revenue of CAD262 million was essentially flat compared with the prior year. Higher fee based revenue was offset by lower new issue activity. Asset management revenue of CAD153 million was up CAD23 million or 18% from the same quarter last year. This was due to a combination of an increase in assets under management which was driven by market growth, record net sales of long-term mutual funds and strong fund performance as well as higher fee income. Non interest expenses of CAD322 million were up CAD10 million, or 3% from the prior year mainly as a result of higher for performance based compensation. Adjusted net income in Wealth Management was CAD93 million, up CAD13 million or 16% from the same quarter last year.

Slide 8 reflects the results of Wholesale Banking, where we continue to deliver strong performance. Revenue this quarter was CAD551 million, down CAD6 million or 1% compared with the prior quarter. Capital markets revenue of CAD312 million was down CAD16 million, or 5% from the prior quarter primarily due to lower fixed income revenue. Corporate and Investment baking revenue of CAD226 million was up CAD13 million or 6% from the first quarter largely due to higher real estate finance activity in the US and higher advisory revenue. The adjusted provision for credit losses was nil for the quarter which is down CAD10 million from the prior quarter. Non interest expenses were CAD297 million in the quarter, up CAD6 million or 2% compared with the prior quarter primarily due to an increase in performance based compensation. On an adjusted basis, net income for Wholesale Banking was CAD193 million for the quarter, down CAD7 million or 4% from the prior quarter on the same basis.

In conclusion, each of our businesses produced solid results in the second quarter. We remain well positioned as a lower risk Bank and our strategy continues to deliver consistent and sustainable earnings. Retail and Business Banking generated strong revenue growth in the quarter, which included volume growth in core products and improving margins. In Wealth Management, solid investment performance, above market asset growth and growing fee-based revenue streams provided strong results. And Wholesale Banking delivered diversified and consistent performance across all business lines. We had strong credit performance as a result of improving credit quality and we increased our quarterly dividend by CAD0.02 to CAD0.96 per share. Thank you for your attention, and I would now like to turn the meeting over to Tom Woods.

Thanks, Kevin, good morning, everybody. Slide 21, loan losses in Q2 were CAD265 million, or CAD244 million on an adjusted basis compared with CAD265 million in Q1. Reported loan losses included a CAD21 million provision in our exited European leverage finance portfolio. On an adjusted basis, we had very good performance in both retail and wholesale lending mainly due to lower losses in cards and the US real estate finance portfolio. Slide 22, our cards portfolio continues to perform very well. The net credit loss rate in Q2 is 3.9%, down from 4.1% in Q1 and the lowest since Q4 of 2008. Our cards delinquency rate continued to improve in Q2.

With respect to Canadian residential mortgages on slide 23, 74% of this portfolio is insured, with over 90% of this insurance being provided by CMHC. The average loan to value of our uninsured mortgage portfolio based on March house price estimates is 54%. Slide 24 shows our Canadian residential mortgage portfolio by region. The size of this portfolio is CAD143 billion with approximately 46% in Ontario followed by B.C. at 20% and Alberta at 16%. The credit quality of this portfolio continues to be high with a net credit loss rate of approximately 1 basis point per annum.

Slide 25 shows our Canadian residential condo mortgage exposure. Condos account for approximately 12% of our total mortgage portfolio with about 72% in Ontario and B.C. 75% of the condo sub portfolio is insured. And the uninsured portfolio has an average loan to value of 54%. This slide also shows our condo developer exposure. At April 30, our drawn loans to construction projects were CAD888 million, or approximately 2% of our business and government portfolio. The exposure is diversified across 75 projects.

Slide 26 shows our exposure to the 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 CAD6 million net exposure after deducting the collateral we hold. We have CAD293 million indirect exposure to corporates in the peripheral countries in our structured credit runoff book, up slightly quarter over quarter, where our interests benefit from significant subordination to our position. But here too none of this exposure is to peripheral sovereigns.

Our US real estate finance business on slide 27 had CAD4.6 billion of drawn exposure and CAD460 million of undrawns. 84% of this has been originated since 2009 which benefits from higher credit quality standards due to better loan to value metrics and tighter adjudication criteria. In Q2, we had loan losses of CAD4 million, down from CAD9 million last quarter, all on loans that were originated pre 2009. We had CAD109 million of net impaired loans. Slide 28, our exited European leverage finance book had CAD381 million in drawn exposures and CAD61 million in undrawn. In Q2 we had provisions as I said of CAD21 million in this portfolio all related to one account. Our exited US leverage finance book had CAD47 million in drawn exposures and CAD17 million in undrawn.

Slide 29, turning to market risk. You can see the distribution of revenue in our trading portfolios. We had positive results every day but one in Q2 compared to 100% of the time in Q1. Our average trading VaR was CAD4.9 million compared with CAD5 million in Q1. The low VaR levels reflect our continued conservative market positioning. On slide 30, our Basel III Common Equity Tier 1 ratio was 9.7% at the end of Q2, up from 9.6% at the end of Q1. The quarter-over-quarter increase was primarily due to earnings net of dividends partially offset by repurchase of common shares and a pension program contribution. I'll now turn things back to Geoff Weiss.

Thank you, that concludes our prepared remarks, we'll now move to questions. Due to the hard stop at 8.30, I ask that you please keep it to one question and then re-queue. Operator, we're ready for the first question on the phone.

Absolutely.

(Operator Instructions)

John Aiken, Barclays.

Question for Victor. Victor, does the news of the unfortunate passing of Mark Powell have any impact whatsoever on the potential acquisition of Atlantic Trust?

John, not appropriate for us to comment on what is clearly a personal matter reflecting the private actions of an individual now deceased. But what I can tell you from a business standpoint is our transition planning is well under way, we're working towards a Q4 calendar closing. Client feedback has been very positive and to date all indicators are that we have some strong client retention and importantly employees have expressed satisfaction with the announcement and CIBC as an owner of Atlantic Trust.

Great thanks, Victor.

Gabriel Dechaine, Credit Suisse.

One on Aeroplan, could you tell me who quote-unquote, owns the customer, owns the data and the information. And then on the buyback, I'm surprised that Gerry, you didn't give any more color on your future plans for buyback. You've exhausted the current NCIB and you're not upsizing it, so no buybacks until the next one comes up for renewal or the [current]?

Yes, I'll go first and then David can take the Aimia question. We originally announced this buyback last September and it had a one-year window for us to complete it. Circumstances have permitted us to proceed more rapidly than that schedule, so we're finished now. In the interim, we've also bought Atlantic Trust and we've decided that what we would like to do is as we get closer to year end and the closing of the Atlantic Trust transaction, we'll review with our Board the possibility of a further buyback. But we're proceeding strategically at roughly the pace that we outlined a little -- around a year ago.

Okay, thanks.

Hello, Gabriel this is David Williamson. Regarding your question regarding the customer. So the nature of the relationship as we buy points from Aimia for the Aeroplan program so the customer information and relationships with us. Hence the desire to ensure that that card is a market-leading card because the customers look to us for the nature of that -- the offerings on that card. But of course there's scope to active partners on that product with the information that's available to us. But that's the information regarding the customer and the relationship really resides with us in that program.

Thanks.

Robert Sedran, CIBC.

Wanted to follow up on a travel card issue. I'm curious the expenses that were disclosed earlier, was there any impact on the Q2 results? Is the CAD50 million committed spending now regardless of what happens with Aimia? And a related question, are these new expenses or just being reallocated from savings that you found elsewhere?

Hi, it's Gerry I'll start off and then I'll turn it over to David for further color on this. First of all although there is some slicing and dicing that one can do about more so other value that you might derive from the expenditures rather than a reallocation, I do think that you should think of this as new spending and you should think of it as spending over and above what we would otherwise have spent. You should also not think of it is spending where there will necessarily be a reallocation from other areas. That's always possible, we've been -- we've done very well with that in the past. But that's not our message here, our message here is this is incremental expenditure and that it's an investment in the possibility that we will be working with a CIBC travel card.

Having said that, there have been some expenditures so far but they'd be reasonably minor and they'd be pretty much soft cost. And I would also say that the CAD50 million we outlined as I mentioned in my remarks is not the costs of marketing and retention that would mainly come in 2014. I'll turn it over to David for a little more color on that and we'll see if that satisfies what you're asking. David?

Thanks, Gerry, so that was a pretty comprehensive answer. Let me build upon that. What we indicated in Gerry's comments today is a CAD50 million spend. There's been a small amount of spend in Q2 but it's really not that significant in amount, so it's really starting to build up from here. We expect to spend CAD30 million in the remainder of 2013, with roughly two thirds of that amount in Q4 and expect the expenditures of approximately the remaining CAD20 million in the first half of the next year. And as Gerry also mentioned in his remarks, if we choose not to renew with Aimia and proceed to launch a new offering, it'll be a significant materially higher marketing and retention incentive cost that would be expended in that circumstance. And frankly, we expect several market players will also spend significantly.

I guess the point I would make, the advantage we have along with our end of contract rights, we've got unique insight into the Aeroplan customer so we can target to retain the most let's say important customer relationships. That's some inside onto the economics. Regarding -- and Gerry is right, these would be incremental costs. To date what we've been doing is managing our expenses by a lot of what we referred to in an earlier conference call is back to front. We've eliminated several hundred positions in sales service roles and not taken those savings but we've used that as a source to invest in our front line staff and several hundred people added to the front line sales effort. That program is going to continue as the way we're managing getting incremental sales with not incremental expenses, so that'll continue. But this build for an alternative travel card offering would be on top of that.

And to clarify, this is an entirely new offering, it's not like you're retrofitting the Aventura program or something like that.

I think we'll build upon the platforms and rails that we have, but the intent here is to build something that is truly a market-leading travel card. It would be a new offering, but obviously sensibly build upon the existing rails to the extent that are available to us. But it'll be a new and enhanced travel card offering.

Thank you.

John Reucassel, BMO Capital Markets.

Thank you, David and back to Aeroplan again, or Gerry. You did mention sizable retention of existing Aeroplan customers are you able to size that for us? Under 50%, over 50%? And what -- you mentioned a short-term cost which you've talked about here the costs, there's cost of retention and new technology but there is the cost of lost earnings or what not. Is there any color you can give us around that?

Yes I'll start off again here. The -- we're not in a position to define the percentage of retention and I also want to make sure that the distinction that David has made about what qualifies as our targeted retention is something that's well understood. When we talk about percentages of retention, there are a number of unknowns. Gross retention is an unknown because of the competitive forces that will come to bear at the time. Our defense on this card will not just be geared to the new contract holder. As a matter fact, we do not believe that the new contract holder would necessarily be the unique area of competition because we think that if this has opened up, that there are several industry players in the travel card business that would market very hard into the opportunity. And so that's quite a crowd that one could have competitively.

And our intent and response to that in order to fulfill our strategy and to arrive at the best economic outcome will be to be very, very targeted because we do have the advantage of having all of the data and all of the client specifics. And so the one thing I will tell you is while we're not in a position to tell you the percentage of retention, we will tell you the shape of retention. We will be targeting a subset of the portfolio because the retention dollars that we spend can be best leveraged in that fashion and can have the highest success rate. There are other parts of the portfolio that this would present an opportunity for us to align with our strategy and that may in some cases mean that competitors would be taking that away from us. I'll turn it over to David for further color, but I will tell you that the retention dollars that we will spend once we get the targeting going will be significant.

Thanks, Gerry. John I'll offer a couple of additional comments, see if this continues to add to your understanding. First off, I'd say our primary objective, and consistent with our client centric focus that we've been talking about for a while, is to ensure that one or another we offer our clients a market-leading travel card. It could be Aeroplan if the offering is revitalized, the extent required for our client and is available on appropriate economic terms. It may be the case that we choose not to renew the Aimia agreement and therefore we've been taking steps to build a new market-leading travel card offer. This is effectively taking the flying and the airline Aventura and building upon it.

In the event that the Aeroplan contracts we choose not to renew it, then we're going to ensure that we're ready to very effectively meet our client needs. And as Gerry said, if the contract is not renewed we would expect pretty intense competition from premium card product offers. And we expect there'll be attrition from our existing cardholder base. The interesting point being the attrition would likely be split in the market place by at least five market participants who will seek to take advantage of this market disruption. We do however expect to retain a sizable portion of our existing client base. In addition to our end of contract rights, we are uniquely positioned as the incumbent to tailor an offer to target the retention of the most desirable segments of the portfolio. And as Gerry said, we will spend the funds required to support those retention efforts.

I guess one thing I'd turn to is we've had a bit of practice in this area recently with FirstLine. As we said with FirstLine, we want to retain 25% of that book. Retention to date as we've mentioned has been stronger than that. In fact in the second quarter, we retained over 40% of the book that came off and in fact each month in the second quarter we were over 40%. That was achieved through having a detailed retention plan, having a dedicated retention team, and frankly a fairly solid and effective execution of that retention plan. That learning and that kind of focus would be what we need to apply to this particular effort. Hopefully that helps, John.

A follow up Gerry, presumably you wouldn't raise the divi if you're worried that there was a significant earnings hit coming. Would that be a fair conclusion?

Do you mean, are you talking about future increases or this increase?

This increase.

Well you've got to remember that the -- you've got the short term and longer term, and over the longer term one of the elements that will happen here if this contract is no longer with us and then we go through the retargeting and retaining a smaller portion of the portfolio, but one that totally fits our strategy, what will happen is that we would have less mono line oriented business, and we would also have less credit susceptibility in terms of the economic cycle. So while you're going to have a total earnings picture that would be different in the short term, if we migrate away from this card, in the longer term remember our strategy is lower risk, consistent sustainable earnings and reduction of volatility. Because we would actually, under certain scenarios, be reducing the volatility of our earnings base in the event that we had a smaller travel card component, that would mean that it would be supportive of dividend increases. So that's what I think you should take out of this is that strategically as long as we stay aligned, we believe that you should continue to think of our future interest rate increases in the same way you have in the past.

Thank you.

Peter Routledge, National Bank Financial.

A quick follow up on the Aimia. Net card fees I think in 2012 were CAD619 million. If -- what's that number going to be if you shift off -- shift away from Aeroplan? How much of a decline would there be?

Hi, Peter this is David speaking. I think it's a bit early to speculate on the impact. I think some of the comments we've had here as far as giving a sense of the dynamics would be about the right level to be at this point in time.

Okay. And then for Kevin, I noticed in Corporate and Other you've got a clear trend of declining net interest income in just that segment. Is there something we should draw from that? Why do we see that persistent downward trend in net interest income in Corporate and Other?

I think a couple of factors. Some of that's driven by treasury activities which can be somewhat volatile. And also that would be the area where we have our TEB offset and that part of our business has actually been pretty successful on an ongoing basis. That's what would drive that delta.

So it's not higher funding cost?

No, it wouldn't be a higher funding cost issue.

Okay, all right, thanks very much.

Michael Goldberg, Desjardins Securities.

Thanks, I'll change it from credit card. Can you please talk about the increase in your Canadian net interest margin broken into one, the impact of product margins on a matched basis? Two, mix. And three, treasury. And in particular, what would the NIM trend be in the absence of the treasury contribution? And if you could give us a NIM trend in percentage terms excluding treasury that would be great.

Hi, Michael, David Williamson, I'll have a crack at -- from a business perspective because you're really sounds like looking at it ex-treasury which is the way I look at it. So why don't I speak to it and if there's any follow-up questions we can come from there. You talked about products, you talked about mix. From a product perspective, part of how we've had an 8 basis point uplift in NIMs year-over-year and five quarters of marginal increases in NIMs is really those two points you've raised, products and mix.

On the product space, business banking we're holding our margins as a competitive marketplace, but we are holding our margins in commercial mortgages which has become quite a thin margin business. You've heard us say we've downplayed that sector. Again could have had the revenue growth if we pursued it, but we're looking to pursue business that's suitably profitable for use of the balance sheet. So we've deemphasized that business. And the other parts of our commercial lending are meeting the needs of our clients but doing so on appropriate prices. And the other -- and mortgages we're growing at rates above our peer group, but again we're doing that and the way we conduct ourselves in the market isn't by competing on price. We're trying to do it on a quality and suitable volume level. If you see us acting in each of the products, you see us acting with profitability and margin in mind.

And then when it comes to mix, that's also very much a factor for us. We've got with the runoff of the FirstLine book and have moved to our branded products happening in mortgages and happening in other parts of our book, in our broker deposits, those kind of places, the mix is moving more to profitable areas. And that's where we get this tailwind we've got which is the impact of moving out of FirstLine and having a desire to get 25% of that into the higher margin branded products. As I mentioned we are running quite a bit higher retention than the 25% and that's having quite a positive impact. That's our -- one of the things that's helping our NIMs and frankly offsetting the headwind which everyone has which is this low interest rate environment. As a result of those dynamics, we've been saying we anticipate a relatively stable NIM again excluding treasury, a stable NIM and it's that over the last little while we've been outperforming that marginally because of that focus on product profitability and the benefit of moving to a mix with higher margin. Hopefully that covers it, and I look at the world excluding treasury, if you want to get into treasury that's probably worthy of a follow up offline discussion I would think.

Okay, one other thing on the product side, the impact of low rates on deposits.

Yes, it is significant, right? In say business banking for example, where we have quite a collection of deposits especially in our small business sector which are really trying to focus on and enhance our team in business banking revitalized the higher end of our lending in the larger client, but has revenue at the higher end, that's really worked well and now we're trying to revitalize our small business banking part. A lot of deposits in there and it really grinds us, the impact of lower interest rates as the tractors roll over overtime and impacts deposits. That's being offset by the growth in the book. What you're seeing is the results in business banking are that those two dynamics, the impact of lower interest rates on a very substantial deposit base which will play well in the future being offset by us focusing on margins and achieving quite good volume growth.

Without getting too much into the detail of the treasury, could -- are there numbers that you could give us as to what that NIM would be excluding the treasury?

Michael, it's Gerry here. Unfortunately we requested at the beginning that follow on -- that we limit the follow-on questions and we still have a queue and we're into very good follow-on questions by you. We're going to have to ask you to re-queue to come back at this stage so we can get everybody else to answer their questions, is that okay?

Do I have a choice? (laughter)

Darko Mihelic, Cormark.

I can appreciate there's a lot of sensitivity around the Aimia especially now at this stage, so a couple things real quickly on Aimia. One, if you're not prepared to talk about the earnings impact today in terms of ultimate risk, when do you think you would be prepared to talk about the ultimate risk of perhaps losing the Aeroplan? And then secondly, with respect to your verbiage around this whole discussion it's quite clear should you choose not to renew. I think that's very clear that we understand that it's your choice at the end of this period whether or not to renew. What I'm very unclear on is what you mean by your rights at the end of it all. Could you perhaps provide more color? Obviously what I'm looking for is the size of the risk. And then secondly I want to understand how you're going to mitigate it and what are the mitigating factors and this rights, I'm not exactly sure I understand what that means. Thanks.

Hi, Darko. The reason why -- it's early days, right, we're right in the middle of negotiation and hence providing some of the information you're talking about would be A, early and B, inappropriate when you are in the middle of a negotiation. What we're trying to do here is be clear about some of the dynamics, and I've been clear but the dynamics from our perspective, I can also be clear of the dynamics from the prospective of a potential bidder, but it'd all be with respect of trying to provide you the appropriate information at this point in time.

The second point you raise which is trying to understand what our end of contract rights are, and there's a reason why you're in the dark. We're not legally capable of outlining what our end of contract rights are in our agreement with Aimia. That lack of clarity is intentional and it has to be there. Hopefully that gives you a sense of what we're trying to do. We're tying to be helpful here to the appropriate extent at this juncture.

Okay, fair enough, thank you.

Andre-Philippe Hardy, RBC Capital Markets.

Thank you very much, surprise another question on Aimia. Obviously you're not going to make a decision December 30 on whether you renew or not, so what's a realistic date as to when you might make a decision to renew or not? And let's say the decision is to renew, does that CAD50 million spend stop at that point?

Hi, Andre, let's talk about the status of negotiations. As we mentioned before, long-standing partnership with Aeroplan that goes back 20 years, it does expire at the end of this calendar year. And we've been engaged in periodic extension discussions with Aimia and we do anticipate being involved in future conversations with them. Regarding timing, a key thing is our key objective here is to revitalize the Aimia program and make sure it can be a market-leading offer going forward, but do it on appropriate economic terms. It may be the case that we choose not to renew the agreement with Aimia and therefore are building this alternative market-leading travel card which speaks to the actions -- it speaks to our clients' interests, if you want a market-leading travel card and we'll get there one way or the other. And timing will be dictated by the flow of the discussions around those points of topic.

Regarding -- I'll cover the other question you had which is cost. So of the CAD50 million, and a part of it is building a -- this enhanced fly any airline or a travel card offering and making sure that we've got offers that are appropriate for this client base we're going to be targeting. So we will spend a large part of that money irrespective because it enhances our client offering and -- so that'll be spent. But part of the CAD50 million is in relation to an actual launch, for example cutting plastic is in the CAD50 million. That number would migrate quite a bit depending on how much plastic you were cutting. Some of it will be spent irrespective because it's good money to be spending, and part of it is money that would be spent attached to a launch.

Okay and to wrap up, a lot of questions on how much you expect to lose in revenues or customers, I appreciate you simply can't answer that question but can you at least help us understand the starting point which is how much net income does CIBC generate from the Aeroplan relationship?

The -- I think -- I'll make a couple of comments. First obviously that none of the -- consistent with our peer group, we don't disclose the profitability of the cards business or -- that's consistent across the market. And then within that, you've gone inside cards and want information regarding a sub segment. Again not planning to disclose at this point, as things evolve there might be a point in time to do that, but I'm sure you would understand Andre, in the middle of negotiations at this point in time not the right way to go forward.

Regarding retention, I think we've given a lot of information and tried to allow for a studied view on it. One thing I'd comment on, to a certain extent the retention level we achieve will be related to the amount of money we commit to retention. We've got some work under way to determine the optimal level to spend. And optimal isn't just a magnitude, it's also targeting and thinking about the nature of the offer for the various customer characteristics that we are in a position to observe. It's early days yet, we're moving on a couple of fronts, and our primary objective is to make sure our clients are taken care of.

Andre, it's Gerry here, I'd also like to mention that strategically the characteristic of the income is very important to us here in terms of what we choose to retain and not retain. There is a -- while there's certain fee revenue that comes into this, there's also payments that go out and what you're left with in the end is that a substantial portion of the economics of any cards portfolio is around the revolved. And I would link back to my earlier remarks, revolve means you have outstandings, outstandings mean you have exposure and when we do our stress tests through the cycle, because of that exposure you have to allocate capital to the portfolio.

All of this you know, but I did want to say that from a viewpoint of strategy, it's important to understand that we do not just look at net income as a raw piece of information. We look at net income including all of the elements that are associated with earning that income and we're trying to come out of this with the best alignment with our strategy around low risk and consistent sustainable earnings. The key elements that we target on this portfolio when we think about that are the cyclical elements. And so I want to emphasize that strategy is closely linked to this decision. And there are elements of this portfolio in terms of risk as well as client characteristics in that it's a large mono line portfolio for us that are influencing our attitude around the overall economics that are associated with this.

Thank you.

Mario Mendonca, Canaccord Genuity.

Going to page 41 of your supplement, and I'll move away from Aimia for a moment, there you make -- you indicated and this is probably best for Tom, exposure at default for your residential secured personal lending or your real estate secured lending of about CAD183 billion and a risk weighting of about 4%. Now I'm not sure how much you study your peers, but it would be helpful to understand why that number, that risk weighted and the 4% would be so much lower for CIBC than most of the other banks in Canada. Is there a mix issue here, is there something that you can point me to?

Yes, hi Mario, it's Tom. Two things, one mainly it is mix, the fact that we have a higher percentage of insured versus the other banks. And secondly, and I think Brian O'Donnell will correct me if I'm wrong here, it's largely -- well it's virtually entirely a Canadian portfolio.

Sorry, one quick thing, the exposure at default I thought took into account just the uninsured.

Exposure at default, do have a comment, Brian, on that?

Actually I think I'll have to follow up Tom and get some clarity in terms of the exposure. I'm pretty sure the exposure here is on page 41 you're referring to includes the insured portfolio.

I see.

And probably the best way to look at that then is the exceptionally low components the first line on page 41 where there's exposure of CAD155 billion and that would include the insured component and the loss history on that portfolio therefore is obviously very low, so you can see that bring down our weighted average pretty significantly.

Okay, then that's a disclosure difference than because that's not how it appears for some of the others that the disclosure is different, I think that might be the explanation. But I may want to --

I'll check into that and clarify for you as well.

Okay one final thing then on Aimia, if I could, the expenses, the CAD50 million or so you're referring to. Could any of that be capitalized? And secondarily, how do you expect to treat this as a core number or would you adjust for it?

Hi, Mario, David speaking. No, there might be some element of it being with scope to be capitalized, but the nature of the spend is primarily expense in nature, at least you should look at it that -- at that way. And I think we'll look at the size of the spend and in the periods but we'd have a orientation towards adjust to be able to pull that out so you could see what the underlying business is doing.

So an orientation to adjust for it to show it as an item of note?

Exactly, yes.

Steve Theriault, Bank of America.

I wanted to come back to the buyback for a moment for Gerry, and I apologize Gerry if I missed this earlier. I did see the headline that you're going to review the buyback in Q4. But what's the rational for not upsizing the buyback sooner with a Tier 1 common over 9% likely heading to 10%? I know you do have Atlantic Trust coming down the pipe, that's a pretty nominal 20 basis points relative to your normal internal capital generation. So if you could give us some color around there in particular, is there any sense from the regulator that they would like you to hold off on the buyback at this point?

We don't comment on any discussions that we have with the regulator, that would be the first thing that I would say. The second thing is, is that we'll review it in the fourth quarter in line with our overall capital planning for the next year. We laid originally out that this would take place over the course of the year. We proceeded more rapidly than we originally laid out and we don't see any drawbacks of having a high capital ratio. We're ahead of our peers but there are some that are in our vicinity and therefore, we don't particularly think that we're an outlier and so we are going to address this in the fullness of time.

Okay. If I could ask a follow up on Aimia, at this time is there any restriction to sending out marketing to Aerogold customers in their monthly statements pitching Aventura or another card before the deal were to expire?

Yes, we're not going to comment any further on things that have to do with whether -- with the guts of the contract and our existing relationship. And so I think that the cross marketing that we might do to Aventura, you should look at it that whatever we might have done up until today we will continue to do. But there are certain elements of balance that have been discussed and are contained within the contract, and I think we should for the moment presume that its business as usual.

Okay, thank you.

Cheryl Pate, Morgan Stanley.

I have a question on the net interest margin in the Retail and Business Banking segment. I'm wondering if you can help me understand the difference between -- trying to figure if something changed in the way you're doing the treasury allocations this quarter. When I run the basic calc, it looks like NIM would actually be down ex the treasury allocation. So I'm wondering if you can help reconcile the two and help me understand the difference there?

Cheryl, let me speak first to that and then maybe if anyone has comments on the treasury side, I'll hand over to them. So no, pulling aside treasury, the Retail and Business Banking NIMs, or the comments I made before to Michael Goldberg, let me put it that way, apply. We without putting treasury to the side, we've got enhanced NIMs and the dynamic is pressure from low interest rates being offset by maintaining margin in products and enhancing where we can by choosing what products we move on like commercial mortgages and so forth. And then mix, and we've got a real tailwind from products moving from FirstLine to our branded mortgages. So maybe that's the thing Cheryl that's -- because if not for FirstLine, we would be seeing flat NIMs and that's what is pushing us into the positive zone. That's from a business perspective, let me hand over to Kevin.

Cheryl nothing has changed in terms of our methodology. The NIMs that David discloses as he said excludes treasury but we've done that on a consistent basis. So happy to take this offline because we should make sure we know what we're reconciling to, so we'll follow up with you after the call I think.

Great, thank you.

At this time, I would like to turn the meeting back over to you Mr. Weiss.

Thank you, Operator, that concludes our call. Please contact investor relations with any follow-up questions. Have a good day.

Thank you. The conference call has now ended. Please disconnect your lines at this time. We thank you for your participation.