Canadian Imperial Bank of Commerce (CM) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CIBC quarterly results conference call. Please be advised the meeting is being recorded.

(Operator Instructions)

I would now like to turn the meeting over to Mr. Geoff Weiss. Please go ahead, Mr. Weiss.

Good morning, and thank you for joining us. This morning, CIBC's senior executives will review CIBC's Q4 and fiscal 2013 results that were released earlier today.

The documents referenced on this call, including CIBC's Q4 news release, investor presentation and financial supplement, as well as CIBC's 2013 financial statements and MD&A, can all be found on our website at www.CIBC.com. In addition, an archive of this audio webcast will be available on our website later today, along with CIBC's full 2013 Annual Report, which was released earlier this morning with our results.

This morning's agenda will include opening remarks from Gerry McCaughey, CIBC's President and Chief Executive Officer; Kevin Glass, our Chief Financial Officer, will follow with the financial review; and Laura Dottori-Attanasio, our Chief Risk Officer, will close the formal remarks with the 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. May I begin by reminding you that my comments may contain forward-looking statements. In 2013, we achieved strong fiscal year earnings, and generated good returns for our shareholders.

This morning, CIBC reported 2013 net income of CAD3.4 billion, and earnings per share of CAD8.23. On an adjusted basis, net income was CAD3.6 billion, up 7% over 2012, and earnings per share was CAD8.78, an increase of 9% over 2012, which is in line with our 5% to 10% medium term target.

CIBC's adjusted return on equity was 22.3%. Throughout our year, we advanced our focus on our clients by providing greater choice and convenience.

Our capital base remains strong, while we continued to invest in strategic growth, and return capital to our shareholders. At the end of fiscal 2013, our Basel III common equity Tier 1 ratio was 9.4%.

During the year, CIBC increased common dividends to shareholders and renewed a normal course issuer bid to repurchase approximately 2% of shares outstanding. In fiscal 2013, CIBC returned approximately 60% of capital generated by earnings to shareholders, while maintaining capital ratios that are among the highest in the industry.

Now turning to our business results. In 2013, retail and business banking reported adjusted net income of CAD2.5 billion, compared to CAD2.3 billion in the prior year. Retail and business banking continued to make strategic investment in areas that are enhancing the relationships we have, and providing greater choice and convenience.

We launched the enhanced CIBC Aventura travel rewards program. CIBC also retained the Aerogold Visa credit card accounts held by clients with broader banking relationships with CIBC, under the terms of the tri-party agreement with Aimia and TD. Earlier today, we announced a multi-year partnership, which establishes CIBC as the GTAA's exclusive financial services provider at Toronto Pearson International Airport.

We also focused our priorities on enhancing our sales and service capabilities, to make it easier for our employees to support our clients, and to acquire and retain clients. We launched the CIBC banking bundle offer to make it easier for our clients to bank with us, and reward them for doing so.

We were the first bank to invest in mobile innovation, and currently have more than 1 million active clients who are now using our award-winning mobile banking app to perform many of their everyday banking transactions. Just last week, we launched our latest innovation, e-deposit which allows our personal and small business clients to deposit their checks by simply taking a photo of their check on their mobile device.

As well as the ongoing conversion of our first line clients into CIBC branded mortgages, continues to exceed targets, and supports our focus on client retention by introducing these clients to the benefits of a broader banking relationship with CIBC. Over the next 12 months we will continue to invest in our front line sales and service capabilities to create deeper, more profitable relationships with our clients, and leverage our multi-channel strategy. David Williamson is here this morning to answer questions about retail and business banking.

Turning to wealth management, 2013 adjusted earnings were CAD392 million, up 29% from the prior year. Results were driven by our strong retail brokerage franchise and record net sales in long-term mutual funds.

During the year, we were successful in attracting and deepening our client relationships with new product offerings. For example, CIBC's Investors Edge was the first major Canadian bank-owned online brokerage to offer no-fee self-directed RESPs.

Looking forward, our goal is to build wealth management's contribution to the Bank from the current 11% to more than 15%. We expect to accomplish this through organic growth initiatives, as well as acquisitions.

Our Q2 2013 acquisition of Atlantic Trust, the US private wealth management firm, is on track to close in early fiscal 2014. This would advance our North American growth strategy by establishing a footprint in the US private wealth management market.

Given the size and attractive characteristics of the US wealth management markets, we will continue to look for acquisition opportunities as this market consolidates in the areas of asset management, private wealth, and private banking. Victor Dodig is here this morning to answer questions about wealth management.

In wholesale banking, 2013 adjusted earnings of CAD834 million were up 23%, compared to the prior year. Throughout the year, we executed on our client focused strategy in key industries including energy, global mining and infrastructure, and North American commercial real estate. We continued to add value to our clients by helping them grow globally through expanded lending and advisory capabilities, as well as an expanded suite of capital markets products, particularly in the areas of foreign exchange, fixed income and commodities in key regions.

During the year we were ranked number one in Canadian equity trading based on volume and value, and number of trades, according to TSX and ATS market share report, and we also ranked number one by volume and by deal count in Canadian dollar-denominated debt for governments in Canada, according to Thompson Reuters [True Economics]. In loan syndication, we were ranked number one by number of deals, and number two by value of deals led in 2013.

Looking forward, we believe that our strategy of providing full service wholesale banking for our clients, wherever they do business, will provide us with quality, consistent returns over the long term. In the Caribbean, where CIBC offers market-leading financial services in 17 countries, with over $11 billion in assets, our goal is to return to historic profitability through leveraging and mirroring CIBC's strength, cross-selling to deepen client relationships, and optimizing our business model and mix. Richard Nesbitt is here this morning to answer questions about wholesale banking and our Caribbean operations.

In summary, our strong performance in 2013 reflects the successful execution of our client-focused strategy. Our outlook for 2014 is one of cautious optimism. The forecast for an improving economic and business environment is encouraging, somewhat offsetting a moderating -- an expected moderation in consumer lending volumes, as well as a cooling of the Canadian housing market.

Before I turn the meeting over to Kevin Glass to review our Q4 2013 results, on behalf of the senior executive team and our Board I would like to take this opportunity to thank our shareholders for their continued support, and to thank all of CIBC's 43,000 employees for their ongoing dedication to serving our 11 million clients. With that, now let me turn the call over to Kevin.

Thanks, Gerry. My presentation will refer to the slides that are posted on our website, starting with slide 7, which is a summary of results for the quarter. So we're very pleased with our strong fourth-quarter results, and the solid contribution from all of our business lines. Adjusted net income for the quarter was CAD905 million which resulted in adjusted earnings per share of CAD2.22.

Our retail and business banking franchise delivered another strong quarter, with good volume growth in core products, and improving margins. Our wealth management business had record revenue and net income this quarter, and in a particularly challenging quarter, we continued to successfully execute on our client-focused strategy in wholesale banking, generating strong earnings.

During quarter we had the following items of note: We booked a restructuring charge of CAD0.09 per share in our CIBC First Caribbean business, where we have taken steps to reorganize the business in the face of continuing challenging economic conditions, in order to operate more efficiently and better serve our customers.

As indicated previously, we had expenses of CAD0.05 per share during the quarter, relating to the proposed credit card transactions with Aimia and TD, including the development and marketing of our enhanced proprietary travel rewards program. In our exited leverage finance portfolio, we booked an impairment of an equity position related to a legacy loan of CAD0.05 per share. This was largely offset by gain from the structured credit run-off business of CAD0.03 per share, and as with other quarters, the amortization of intangible assets amounted to CAD0.01 per share. In aggregate, the impact of these items on our earnings netted to a loss of CAD0.17 per share.

Subsequent to the quarter end, CIBC sold an equity investment that was previously acquired through a loan restructuring in our exited European leveraged finance business. This will result in an after-tax gain of approximately CAD0.13 per share in the first quarter of 2014.

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 the results for retail and business banking on slide 8. Revenue in the quarter was CAD2.1 billion, up CAD68 million or 3% from the same quarter last year. We had solid gains in our core business lines, partially offset by lower revenue in the other segment.

Looking at our individual lines of business, first, revenue in the personal banking segment was CAD1.7 billion, up CAD79 million or 5%, compared to the same quarter last year. This represented the seventh consecutive quarter, where the rate of revenue growth has accelerated. Performance benefited from strong volume growth across CIBC branded products, which were up 9%, as well as wider spreads and higher fees.

Average CIBC mortgage balances grew 15% year-over-year. Our exit from the first line mortgage broker business continues to progress well, with both conversion volumes and spreads well exceeding our targets.

Business banking revenue was CAD384 million, up CAD6 million or 2% from 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 deposits. Business banking volumes continued to grow, with average funds managed up 4% year-over-year.

The other segment had revenue of CAD25 million in the quarter, which is down CAD17 million, compared with the same quarter last year. The two main drivers of this variance were lower Treasury revenue allocations, and lower revenue from our exited first line mortgage business.

The provision for credit losses in the quarter was CAD215 million, down 16% on a year-over-year basis. This reflects the lowest level of loss ratio in almost six years. The decrease was largely due to lower write-offs in the cards and personal loans portfolios.

Each of our consumer lending portfolios in Canada continued to perform well. Laura Dottori will discuss credit quality in her remarks.

Our non-interest expenses for the quarter were CAD1.1 billion, up 3% from the prior year, due to higher marketing spend and slightly higher performance-based compensation. We once again achieved positive operating leverage this quarter, by continuing to invest in strategic growth initiatives. Net income was CAD629 million, up CAD58 million or 10%, compared with the prior year.

Net interest margin, or NIM, was 266 basis points for the quarter. This was up 3 basis points sequentially and up 8 basis points from the prior year. NIM improvement has been achieved as a result of improved business mix.

Turning now to slide 9. Wealth management had a very strong quarter with record revenue and net income. Revenue of CAD472 million, up CAD52 million or 12% from the same quarter last year, was strong performance from all business lines.

Retail brokerage revenue of CAD272 million was up CAD16 million or 6%, compared with the prior year, due to increased assets under administration, and higher trading volumes. Asset management revenue of CAD167 million was up CAD29 million, or 21% from the same quarter last year.

This was due to a combination of market appreciation, higher net sales of long-term mutual funds, and higher contribution from our investment in American Century Investments. Non-interest expenses of CAD334 million were up CAD26 million, or 8% from the prior year, mainly as a result of higher performance-based compensation. Net income in wealth management was CAD106 million, up CAD22 million or 26% from the same quarter last year.

Slide 10 reflects the results of wholesale banking, where we delivered another quarter of strong earnings. Revenue this quarter was CAD540 million, down CAD63 million or 10%, compared with the prior quarter.

Capital markets revenue of CAD279 million was down CAD70 million, or 20% from the prior quarter, primarily due to a weaker overall market environment. The prior quarter also benefited from a reversal of the credit valuation adjustment against exposures to derivative counterparties.

Corporate and investment banking revenue of CAD249 million was up CAD6 million or 2% from the third quarter, largely due to higher revenue in US real estate finance, driven by higher CMBS gains in the quarter, and higher investment gains, largely offset by lower advisory revenue. The provision for credit losses was a recovery of CAD1 million for the quarter, mainly due to recoveries in the US real estate finance portfolio.

Non-interest expenses were CAD270 million in the quarter, down CAD32 million or 11% compared with the prior quarter, primarily due to good expense management and lower performance-based compensation. Net income for wholesale banking was CAD218 million for the quarter, down CAD5 million or 2% from the prior quarter.

CIBC's capital position remains strong, with a common equity Tier 1 ratio of 9.4%, up from 9.3% in the prior quarter. Capital generated by net earnings was partly offset by higher RWAs, and looking forward to next quarter, the phase-in of the credit valuation adjustment capital charge will reduce our CET1 ratio by 15 to 20 basis points.

Our results this quarter capped a year of consistently good earnings. 2013 was a strong year for CIBC, and we made all of our publicly-stated medium-term objectives in the areas of earnings growth, return on common shareholders equity, total shareholder return, and balance sheet strength. CIBC's client-focused strategy generated adjusted earnings growth for the full year of 9%.

Expenses continue to be well managed, and we met our productivity target, with an efficiency ratio at the industry medium. On the subject of expenses, I would like to note that the new accounting standard on pensions, IS-19, which will be implemented retrospectively in fiscal 2014, will increase our annual pension expense. The increase in our 2013 annual pension expense is approximately CAD70 million pre-tax.

So to wrap up, we're very pleased with our performance in 2013, with strong contribution from all of our business lines. In retail and business banking, the shift to a client-centric strategy and investment in strategic initiatives are yielding accelerated revenue, expanding margins, and improved client experience.

Our wealth management franchise delivered strong results in both retail brokerage and asset management. Client assets grew at 8% from last year, driven by record net sales of long-term mutual funds, and wholesale banking delivered solid results in a year characterized by challenging business conditions. Thanks for your attention, and I would now like to turn the meeting over to Laura Dottori.

Thanks, Kevin, and good morning, everyone. So I'll be referring to the risk section, which begins on slide 14, where you'll see that on a reported basis, loan losses were CAD271 million, so that's down CAD49 million. On an adjusted basis, they were up CAD9 million, and that's due to higher losses in CIBC First Caribbean and commercial banking, which was partially offset by lower losses in credit cards and corporate banking.

We continue to see weakness in our Caribbean portfolio. The tourist industry in particular is yet to fully recover, and this has had an impact on our CIBC First Caribbean clients. That said, our wholesale banking and Canadian retail portfolios continued to perform well.

Slide 15 shows that our gross impaired loan level continued to decline in the fourth quarter, with new additions in business, government, and consumer portfolios also trended down. So overall, delinquency trends continued to perform well.

Unemployment forecasts look flat to down over the next year, which should be a positive for our retail portfolio. Our corporate and commercial portfolios are subject to more sector and event risk, but here, impaired loans have been decreasing, which is positive, barring, of course, any downside risks to the global economy.

Slide 16 shows loan losses in our cards portfolio, and they continued to improve. In the fourth quarter, net credit losses decreased to CAD127 million, and our cards delinquency rate remained low.

Turning to slide 17, you see that 71% of our Canadian residential mortgage portfolio is insured, with 94% of the insurance being provided by CMHC. I'd like to highlight here that this quarter, we revised our loan to value calculation.

The loan to value is now calculated using a weighted average instead of a simple average, so the quarter-over-quarter change, which went from 54% to 60% for our uninsured mortgage portfolio, is simply a reflection of the calculation method change. The risk level in our portfolio has not materially changed.

So turning to slide 18, you can see our Canadian residential mortgage portfolio by region. Our total portfolio is CAD146 billion, with about 46% of that in Ontario followed by British Columbia at 20%, and Alberta at 16%. The credit quality of this portfolio remains high, with a net credit loss rate of about 1 basis point per annum.

Slide 19 shows our Canadian residential condo mortgage exposure. Condos account for about 11% of our total mortgage portfolio, and about 73% of that is in Ontario and BC. 74% of our condo sub portfolio is insured, and the uninsured portfolio has an average loan to value of 60%.

This slide also shows our condo developer exposure. You can see at October 31, our drawn loans to construction projects were CAD920 million, or about 2% of our business and government portfolio. This is down by CAD8 million from last quarter, and the exposure is diversified across 79 projects.

So turning to market risk on slide 20, you see the distribution of revenue in our trading portfolios as compared with VAR, or value at risk. We had positive results 97% of the time in the fourth quarter, and that compares to 95% of the time in the third quarter. Our average trading VAR was CAD4.3 million, and that's unchanged from the last quarter.

So in closing, I'd like to say that our risk performance this year has been solid, with our credit portfolios continuing to perform well, and our market risk levels remaining stable. We continuously monitor our portfolio against expected and adverse environments, and we feel that we're well-positioned to support the Bank in our client-focused strategy. So I'll now turn things back to Geoff.

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

(Operator Instructions)

We have a first question from John Aiken from Barclays.

David, I was hoping that you might give us a little bit more details as to what the exclusivity means with your agreement with the GTAA. Does this mean that CIBC is going to be the only banner within Pearson?

What it means, being selected the sole financial institution, is that we'll be the only Canadian bank represented in the GTAA. It means that we will be in there and have the opportunity to sell, so what you'll be seeing is a few things. The GTAA, great partner to date, and a tremendous opportunity as far as volume through the GTAA.

So we'll be putting in facilities that will facilitate foreign exchange sales, any normal banking you'd want to do before you travel, because of the newcomers, that provides us quite a presence. And quite frankly, it gives us a good opportunity on the travel card space too.

So if you're planning to travel over the holiday period, you anticipate seeing a penguin or two in the airport. So it really will give us the chance to put in full banking services and we intend to do so into the GTAA, and benefit from the volumes of folks, newcomers and Canadians that travel through that airport.

Great, David. And along those lines can you give us a sense of what the uptake has been on the rebranded Aventure card, and I'm assuming that the CAD50 million expense target for the implementation still stands?

Yes, so let's do the expenses first, so we're exactly on track with the press release that was issued just back in September, so the CAD50 million still stands. That was CAD30 million in 2013 which happened, and you see that the CAD24 million landed in Q4, the rest was in earlier quarters and that leaves us CAD24 million -- CAD20 million that will be in 2014. Obviously that will be more front end loaded in the year.

Regarding how things are going with the launch, I guess going up a few feet, we said during the middle of last year, we committed to providing a market-leading travel card, and we did a lot of research as to what Canadians would like with the Aventura card, and it has landed well. It seems to be resonating with Canadians.

In addition to that the advertising we've done, Percival the Penguin, and now we're introducing his family, has been well received. The sales have been about four times, actually a bit more than four times the run rate before launch, and frankly, about two times what we had planned on, two times our expectations.

The good news, John is that about fully 50% of the sales of Aventura are going to new card holders to CIBC, which is a positive sign. And then we've got the renewal of Aeroplan, that's coming out shortly, which is exciting as well, so our focus is on choice, and we really feel quite good about that market-leading offer, whether it's Aventura or Aeroplan. Come January, we'll have both in the market.

Great, thanks David. I'll requeue.

Thanks, John.

It's Gerry here. I just wanted to echo what David said, to say that we welcome the opportunity to work in partnership with the GTAA.

We believe that the GTAA's area of responsibility represents key travel destinations for travelers from around the world. We have discussed with them their strategy to enhance all of the services of the GTAA, and we really believe that this partnership is something that will make the GTAA airports a great experience for travelers that are in the vicinity. So it is a partnership that we are looking forward to.

Thank you. The next question is from Gabriel Dechaine from Credit Suisse.

Hi good morning. Just to clarify on that pension cost, CAD50 million after-tax or so, is there any reason to believe that number might increase in 2014, or will it stay approximately the same?

Gabriel, it's Kevin. So we wouldn't give forward guidance, but 2014 expense would really be affected by a couple of things, asset performance and discount rates, and we don't see big changes as far as that's concerned. So I think that the 2013 numbers that we've given you is probably a reasonable proxy to use moving forward.

Okay and just the RWA increase, I don't know if I missed that. Was there anything related to changes to your model assumptions?

And then lastly on the expense, so I get that when this Aeroplan transition was first announced that we were treating the CAD50 million as one-time, but you've got an ongoing process here, is there some sort of additional uptick that we should expect in 2014 that we won't really, should be considered core I guess?

Gabriel, a couple of questions there, so let me have, I'll open on both of them, if there's more detail we can turn to Laura on RWAs and David on the expenses. But as far as RWAs are concerned, we were up about CAD2.8 billion this quarter.

Most of that was actually just business growth, and then we did have some model methodology changes. The most significant was moving to AIRB on our MasterCard, Citibank MasterCard portfolio so that would have driven a bit of an increase in RWAs, so that's the RWA story for this quarter.

That's because the card goes up because your reflecting untapped balances?

Yes, that's right. And then as far as expenses are concerned, when we announced the deal, we indicated there would be -- a couple of things would happen. And there would be elevated marketing expenses on an ongoing basis so you'll see that just in terms of the regular investment in our business.

But there are some unusually high expenses, if you will, for a couple of, certainly for this quarter and in the early part of next year. And when we announced a deal we indicated that we would treat those as an item of note, and that's what we've done this quarter.

Okay, thank you very much.

Thank you. The next question is from Robert Sedran for CIBC.

Just quickly on the securities gains, I guess, for Kevin. We normally assume that some of these gains end up flowing through into the corporate segment, or maybe the wholesale segment. Can you just talk a little bit about where they flowed in terms of the segment-level performance, and whether the retail had it, and if there's any impact on the retail?

Sure, so two elements of that. Part of it will be merchant banking top gains and the other would be bond gains.

So a lot of the merchant banking gains, some of that stays in corporate, but a fair amount of it flows through to the wholesale banks, so there would be some element of that in the wholesale bank. In the current quarter versus the prior quarter our bond gains were down significantly, and that would flow through to retail. So if you look at the retail other segment, there are a few things going on there, but certainly one of the big drivers on a quarter-over-quarter basis was lower bond gains in the current quarter.

And if I think about the 10% year on year growth rate in that segment, was there any impact from the bond gains on a year-over-year basis?

Sorry, are you talking about retail overall?

Yes, well, sorry. The other segment of the 10%, I guess the retail segment was up about 10% year on year, if I remember correctly. And I'm just wondering if there was any impact from that issue on a year-over-year basis.

So let me hand it over to David, because it's a good idea to rather de-comp that particular segment, so let me give that over to David, and he can talk you through those results.

Yes, hi, Rob. David here. So the Treasury did have an impact on the year. If you sort of -- 10% [NYAD] lift with Treasury, and the allocations had an adverse impact, so adjusting them out, we're about 12% up year-over-year.

Okay, and since I have you, David, just in terms of the margin, its been a bit of a challenge lately, because I guess -- largely because of the first-line roll off to understand which way the margin is going. Now that I guess we're pretty far into the first-line impact, leaving aside the Aerogold impact, which I guess is going to start in fiscal Q1, can you talk a little bit about the outlook for the margin, and is it stabilizing from here? Or do you think you can continue to expand, again ex-Aerogold?

Certainly, Rob. So let me break the margin expansion, because as you know, it's five quarters now of year-over-year expansion in margins.

So let me de-comp it and maybe it's time for a bit of a review of first line. So when we kicked off first line, we said that about 50% of the book would make it to end of term, and that of that 50% we hope to retain 50%, which gave us a target of a 25% retention. We also set minimum margins that we would pursue,.

So how its played out is that more people have decided to stay to the full term, it's about 55%, rather than 50%, but the big difference has been, of the 55% that have stayed to term, we have retained about 90%, frankly that's a titch more than 90%. So that's allowed us to keep about 50% of the book.

In addition to that, we're getting branch-level margins as opposed to broker margins, so the lift that we're getting from first line, and we've been guiding to NIMs being flat, and we've been outperforming that. One factor has been that on first line, we're getting better margins by quite a bit and the retention level is at 50% as opposed to 25%. And we've got a couple more years of first line, and the way things are playing out, I think we can anticipate we'll maintain the run rate that we've got now, so that will continue to be a help.

The other issue is -- or help, is on pricing. We've introduced some advanced analytics over the last year or more, it's a bit more than that, however bringing in better awareness on risk and price sensitivity attributes for our client base, and we've pushed out into the front line new grids, new pricing grids and that's actually quite well.

So what we're also seeing is a lift in spreads on our personal lending book as well. Now that's something that's isolated to what we're doing, and there's also competitive pressures that will counter balance that. But we'll keep our guidance if you will, to flat NIMs, but we do have a couple of CIBC-centric events that are helping us from that in that regard, so those are the two large ones.

Helpful, thank you.

Thank you. The next question is from John Reucassel for BMO Capital Markets.

Just a question for Kevin, just to clarify on the pension expense. That CAD0.13 last year, would that be evenly spread throughout the year? Do you amortize it in every quarter, is that what you do?

Yes, that's right, John. It would be an expense that would be administrated throughout the year.

Okay and then just for Laura, on the LTVs, going to the weighted from the simple, so there's a big increase on the LTVs there. What happens, when you look at your internal debt service ratios, do you look at it on a simple average basis or a weighted average basis, and what is the difference between the two?

Do you mean the difference between the average and the weighted average?

I'm trying to wonder, when you think about debt service ratios, when you're looking at your mortgage loan portfolio, do you look at that on a simple average basis, or do you also use the weighted average, or is there a difference?

Yes, sorry, well now it's weighted. We were looking at it simple, so everything is now on a weighted basis.

I get that, but--

Does that answer your question?

I'm just trying to understand because the LTVs are up, and I assume that suggests that the people with bigger houses have bigger mortgages, or is that how I should look at it? And does it impact your debt service coverage ratios that you would monitor internally, with the different -- moving from simple to an average, or no?

Oh, okay, I'm sorry. Now I understand, so no, that doesn't impact the debt service coverage ratio.

Okay, so -- and you have seen no increases in delinquencies in this portfolio?

No.

Okay, thank you.

Thank you. The next question is from Darko Mihelic from RBC Capital Markets.

Just a few questions. The first question, maybe just a very simple straightforward one. What exactly are you doing with First Caribbean in this restructuring?

And what is the hope, you've always talked about trying to bring it back to historical levels of profitability. Can you give us any idea of what exactly you're hoping to accomplish with First Caribbean?

Well that's a lot of questions. First Caribbean is our bank in the Caribbean and we've been in Caribbean for over 90 years. It's very much a part of what we do at CIBC.

So, when we say we're returning it to its historic level of profitability, if you go back prior to the recession, particularly prior to it hitting the Caribbean, you were seeing regularly CAD175 million to CAD200 million of net earnings from First Caribbean. So now what are we doing in the restructuring? The restructuring is designed to reduce costs and to put a brake on the growth in costs.

So the intention is to reduce the headcount across all of the islands, in the 17 islands we operate, by about 10%, and to reduce some other costs alongside that. So we should have a lower rate of growth in our costs going forward, and we do expect -- some of the islands are starting to improve, for example, Cayman, it still remains tough in a number of islands like Barbados and Bahamas, but we do expect revenues to start to increase over the next 12 to 18 months.

And just to be clear does that also mean branch reductions?

On a minimal scale. What we're doing is moving out of certain islands, we're reducing our exposure and our activity level in certain islands, where there's limited business opportunities, such as the smaller islands. And generally, we will increase our activity in the larger, more populous islands.

Okay, great. Thanks for the color, and maybe one last question for Laura.

When I look at slide 19, the condo developers exposure, you mentioned that you had 72 borrowers. Did you mean that the CAD900 million that's drawn is divided up among 72, or do you mean the entire portfolio has 72? And really what I guess I'm getting at is, it's expected that condo construction is really going to ramp up here in the next couple of years.

We've seen very minimal growth in this portfolio to CAD3 billion from I think CAD2.8 billion at the beginning of the year. Is there any expectation that the drawn portion will increase and/or the entire portfolio on a go-forward basis?

Or are the number of names, in other words, 72 different borrowers, is that name, those number of borrowers, is that down from previous quarters? And do you expect that to go up? I know there's a lot of questions in there but I'm just looking for a lot more color on the condo developer exposure.

Yes, so the number is actually 79, and it's been pretty much the same, so there hasn't been a whole lot of movement there, and so that amount that we gave was across those projects, so we're comfortable with it. I don't know that I'd expect us to have a whole lot of increase in that particular segment.

Again, I can give you some comfort, we really focus on top tier condo builders in that space, and we look at a very high level of pre sales as well, we insist that we have acceptable deposit levels and whatnot. We don't take on a whole lot of market risk in these as well, as I said, because we require pre-sales, very rare if we do that, and if we do, it's with the top tier sponsors. So I wouldn't expect to see that number move a whole lot.

You don't expect the total exposure or the drawn exposure to really change in the next, say, two years? Is that a fair statement?

Well, there will be some movement, but again, when we look at our portfolio today, we wouldn't expect material movement in it, in this segment.

Okay, thank you very much. That's helpful.

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

Thank you, operator. Well that concludes our call. Please contact Investor Relations with any follow-up questions. On behalf of the team at CIBC, I'd like to wish everyone a happy and safe holiday season, and happy new year. Thanks for joining us this morning.