Canadian Imperial Bank of Commerce (CM) 2014 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.

(Operator Instructions)

I would now like to turn the meeting over to Geoff Weiss, Senior Vice President, Investor Relations. 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 2014 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 a financial review, and Laura Dottori-Attanasio, our Chief Risk Officer will close the formal remarks with a Risk Management update.

After the presentations there will be a question and answer period that will conclude by 9.00 a.m. Also with us for the question and answer period are CIBC's business leaders including Victor Dodig, Richard Nesbitt and David Williamson, as well as other senior officers.

Before we begin, let me remind you that any individual speaking on behalf of CIBC on today's call may make forward-looking statements that are subject to a variety of risks and uncertainties. These statements may include material factors or assumptions that could cause CIBC's actual results in future periods 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 remind you that my comments may contain forward-looking statements.

This morning, CIBC released second-quarter results with adjusted net income of CAD887 million, up 3% from last year. Adjusted earnings per share this quarter were CAD2.17 compared with CAD2.09 in Q2 of 2013. Our reported net income was CAD306 million this quarter.

As you are aware, our reported results in Q2 were impacted by goodwill impairment charge related to our Caribbean operation that we announced on May 15. The goodwill impairment charge is a non-cash item and does not affect our cash net income, our ongoing business or our capital ratios.

For the period ended April 30, 2014, our Basel III Common Equity Tier 1 ratio was strong at 10%. This morning we also announced a CAD0.02 increase to our quarterly common dividend to CAD1 per share. This increase leaves us within our target payout ratio between 40% and 50%.

During the quarter we also continued to exercise on our previously announced normal course issuer bid and purchased recancellation approximately 1 million common shares. Our adjusted return on equity was 20.6% for the quarter.

Turning to the results from our business units, Retail and Business Banking reported adjusted net income of CAD563 million, compared to CAD573 million in Q2 of 2013. The decline reflects a full-quarter impact from the sale of 50% of our Aerogold credit card portfolio. Excluding the impact of the Aerogold sale, net income was up 8%.

On a year-over-year basis we saw strong balance growth in our CIBC branded mortgages, as well as continued progress in deepening our client relationships. Credit quality remains strong with provisions for loan losses down 26% compared to the same period last year.

Within our retail business our focus on deepening client relationships with an emphasis on improving sales and service capabilities, cross-selling and acquiring and retaining clients is gaining traction. We continue to invest in technology to enhance the client experience including the implementation of a new interactive sales origination platform as well as expanding access to our mobile banking applications.

Since introducing Canada's first mobile banking app in 2010, CIBC has continued to innovate to meet client needs through their mobile devices. Our efforts have recently been recognized by Forrester Research, who ranks CIBC number one overall for mobile banking in Canada among the big five banks.

Canadians have embraced mobile banking and it now forms an important part of a clients overall experience with their bank. Adoption rates for CIBC's mobile banking have exceeded those for online banking in the 90's and we now have over 1 million mobile app users. David Williamson is here this morning to answer questions about Retail and Business Banking.

Turning to Wealth Management, Q2 2014 adjusted earnings were a record CAD121 million, up 32% from the same period in 2013. All areas of Wealth Management contributed to the record results including higher fee-based earnings and strong volume growth in retail brokerage, solid asset growth driven by market appreciation, higher long-term net sales of mutual funds and contribution from Atlantic Trust acquisition which closed in Q2 of 2014. As well as a higher contribution from our investment in American Century. Victor Dodig is here this morning to answer questions about Wealth Management.

In Wholesale Banking, Q2 2014 adjusted earnings of CAD228 million were up 6% compared to the prior quarter. Trading revenue and securities gains were strong in Q2. During the quarter, CIBC was joint book owner on three transactions totaling approximately CAD5 billion. As well, we participated in all of the top 10 equity capital market deals priced in Q2 2014. Richard Nesbitt is here this morning to answer questions about Wholesale Banking.

In summary, we are pleased with our core operating results this quarter despite continuing challenging economic conditions at our Caribbean operations. Each of our business units demonstrate a consistent sustainable growth this quarter. We are delivering on our strategy to grow our business, to deepening our client relationships, to be the leading bank for our clients.

I would now like to turn the meeting over to Kevin Glass to review our financial results in more detail. 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.

Adjusted net income for the quarter was CAD887 million, which resulted in adjusted earnings per share of CAD2.17, reflecting another quarter of successful execution of our client focused strategy. In our Retail and Business Banking segment, we continued to see good momentum with strong balanced growth in CIBC brand products and an increase in the depth of relationships. Wealth Management had double-digit revenue growth across all businesses and Wholesale Banking continued to generate strong earnings.

During the quarter we had the following items of note. As announced on May 15th, we recorded a charge of CAD1.34 per share relating to CIBC First Caribbean comprising incremental loan losses and a non-cash goodwill impairment charge reflecting revised expectations on the extent and timing of the anticipated economic recovery in the Caribbean region. We do expect conditions in the region to improve just not at the pace that we had previously forecast.

We incurred expenses relating to the development of our enhanced travel rewards program and in respect of the Aeroplan transactions with Aimia and TD, of CAD0.04 per share. We booked loan losses in our exited US leveraged finance portfolio of CAD0.03 per share and the amortization of intangible assets amounted to CAD0.02 per share. And finally we incurred a loss from the structured credit runoff business of CAD0.01 per share. In aggregate, the impact of these items our earnings netted to a loss of CAD1.44 per share.

The balance of my presentation will be focused on adjusted results which exclude these items of note. We've included slides with reported results in the appendix to this presentation.

So moving to the details for each of our strategic business units, I will start with results for Retail and Business Banking on slide 6. Revenue for the quarter was CAD1.9 billion, down 2% from the same quarter last year due to the impact of the Aero transaction in Q1. Excluding this impact, revenue was up 3%.

Let's turn now to our individual lines of business. Revenue in Personal Banking was CAD1.5 billion up 5% compared with the same quarter last year. This is a nice consecutive quarter of accelerating growth in this segment. Performance benefited from strong volume growth across CIBC brand products.

CIBC brand mortgage balances grew 15% or 12% excluding the benefit from first-line conversions. Mutual funds were up 19% year-over-year on strong net sales of CAD4 billion and deposits were up 8%. Business Banking revenue was CAD368 million in line with the same quarter last year. Volume growth was offset by the impact of lower spreads.

Business deposits and GIC balances were up 8% year-over-year which represented the strongest growth in almost three years. Business Lending also continued to grow with average balance growth of over 4%. The other segment had revenue of CAD35 million in the quarter which was down CAD113 million compared with the same quarter last year due to the impact of the Aero transaction.

The provision for credit losses in the quarter was CAD173 million, down 26% on a year-over-year basis. The decrease was due to lower write-offs and bankruptcies in the cost portfolio including the impact of the sold Aero balances and lower losses in business lending.

Each of our consumer and business lending portfolios in Canada performed extremely well this quarter. Laura Dottori-Attanasio will discuss credit quality in her remarks. Non-interest expenses for the quarter were CAD1 billion, up 3% from the prior year. Primarily due to our continued investments in branches, mobile and online banking and payments capabilities.

The investments we are making are starting to pay off. We're seeing improvements in cross-sell with higher customer product use counts, improving customer satisfaction scores and above industry average organic revenue growth rates in personal banking.

Net income for the quarter was down 2% from the prior-year quarter and net interest margins or NIMs were down five basis points from the prior quarter. Excluding the impact of the Aero transaction, net income for the quarter was up 8% year-over-year and NIMs were up one basis points sequentially.

Turning now to slide 7, Wealth Management had a very strong quarter. Revenue was CAD550 million, up CAD107 million or 24% from the same quarter last year with solid performance from all business lines including a full quarter of results from our recently acquired Atlantic Trust business.

Retail Brokerage revenue of CAD292 million was up CAD30 million or 11% compared with the prior year due to higher fee-based and commission revenue. Asset Management revenue of CAD183 million was up CAD30 million or 20% from the same quarter last year. This was due to a combination of higher client assets under management driven by a market appreciation and net sales of long-term mutual funds and also higher contribution from our investment in American Century Investments.

Private Loss Management revenue of CAD75 million was up CAD47 million mainly from the acquisition of Atlantic Trust. Non-interest expenses of CAD392 million were up CAD69 million or 21% from the prior-year mainly as a result of the inclusion of Atlantic Trust mentioned earlier and higher performance based compensation. Net income in Wealth Management was CAD121 million up CAD29 million or 32% from the same quarter last year.

Slide 8 reflects the results of Wholesale Banking, where we delivered another quarter of strong earnings. Revenue this quarter was CAD609 million, up CAD15 million or 3% compared with the prior quarter. Capital Markets revenue of CAD331 million was relatively flat to the prior quarter as higher equity and debt issuance revenue and higher revenue from equity derivatives trading were offset by lower foreign exchange trading revenue.

Corporate and Investment Banking revenue of CAD275 million was up CAD25 million or 10% from the prior quarter largely due to higher corporate banking revenue, higher revenue in our US Real Estate business and higher investment portfolio gains. The recovery of credit losses was CAD1 million compared to provision of CAD2 million for the prior quarter.

Non-interest expenses of CAD317 million in the quarter, up CAD7 million or 2% compared with the prior quarter primarily due to higher performance-based compensation. Net income for Wholesale Banking was CAD228 million for the quarter, up CAD13 million or 6% from the prior quarter. CIBC's capital position remains strong with a Common Equity Tier 1 ratio of 10%, up from 9.5% in the prior quarter.

Risk Weighted Asset decreased by approximately CAD5 billion this quarter largely due to refinements to the treatment of our over-the-counter derivatives, reductions in our AFS portfolios and a positive impact from foreign exchange.

To wrap up, while clearly we continue to face challenges in our Caribbean business, we are very pleased with our core operating results. In Retail and Business Banking, good volume growth in core products and strong credit performance drove solid results. Our Wealth Management franchise delivered record results this quarter. Client Assets grew 27% from last year or 13% excluding the Atlantic Trust acquisition. And in Wholesale Banking, our client focused strategy delivered strong results across business lines.

Finally, we continue to effectively manage our capital resources. We increased our Basel III CET1 ratio by 50 basis points to 10% this quarter and we increased our quarterly dividend by CAD0.02 to CAD1 per share.

Thank you for your attention. And I would now like to turn the meeting over to Laura Dottori-Attanasio.

Great. Thanks, Kevin.

I'll be referring to the Risk section which begins on slide 12. You can see that on a reported basis, loan losses came in at CAD330 million. So that's up from CAD218 million in the prior quarter.

There were two items of note in the quarter to highlight. The first, is a CAD123 million charge relating to CIBC First Caribbean. This was to reflect revised expectations on the extent and timing of the anticipated economic recovery in the region. The second, is a CAD22 million loan loss in our exited US leverage finance portfolio.

On an adjusted basis, loan losses were CAD185 million. That's down 15% or CAD33 million quarter-over-quarter. The decrease was primarily due to the sale of half of our Aeroplan cards and a release in the collective allowance as a result of improving credit quality of the card's portfolio.

On slide 13, you'll see new formations along with growth in net-impaired loans by geography. Here, you can see that overall new formations along with growth impaired loans are down, with decreases that are primarily attributable to residential mortgages and commercial and corporate loans. Whereas in the Caribbean, our gross impaired loans remain elevated as the markets where we have our largest operations continue to be challenged.

If you turn to Cards on slide 14, you can see that our net credit losses decreased 12% to CAD99 million this quarter and that's mainly due to the sale of half of the Aeroplan portfolio in the first quarter. Bottom line, our cards portfolio continues to perform well.

Slide 15 shows our Canadian residential mortgage exposures. And the insured portion of our portfolio is 70%, and 93% of that insurance is provided by CMHC. The weighted average loan-to-value of our uninsured portfolio is 60%, and I'd just point out that condos account for 11% of our total mortgages.

On slide 16, you can see our condo developer exposure. And at April 30, our authorized loans to construction projects were CAD2.6 billion, whereas our drawn loans were CAD791 million. So that's largely flat compared with the last quarter.

On the last slide, 17, you can see the distribution of revenue in our trading portfolios as compared with VaR. So we had positive results every day this quarter and that compares to 98% of the time last quarter. Our average trading VaR was CAD3.4 million.

And with that I'll turn things back to Geoff.

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

Thank you.

(Operator Instructions)

Steve Theriault, Bank of America Merrill Lynch.

Question for Gerry. Gerry, raising the dividend two quarters in a row, I think that's pretty close to unprecedented. So I was hoping, you did mention in your opening remarks, but I was hoping you could give us a little bit more color surrounding the discussion with the board, the decision process here. I guess, what's changed Q2 versus Q1 that did make you move consecutively?

Well, first of all, as I've answered in the past, we have a payout ratio that is 40% to 50% as a target. And at our old dividend rate, we would have run for this quarter at approximately 45.2%. And in the new quarter, with the new dividend rate, we run at 46.1%.

So the first thing that I would indicate is that the materiality is not significant in terms of the change in our payout ratio. And that cuts to the second part, which is we are and I have talked about this in the past, although in a fairly roundabout way, our comfort level with living in the mid-to higher end of the range at this stage in the cycle has grown. And so, the fact that we're at 46% versus 45% and that, if you had some quarterly movement you'd still be within our payout ratio, there is a growing comfort level with living in the higher end of the payout ratio.

Okay. So -- I think that helps.

And then for David if I could, a couple quick things. Kevin mentioned increased cross-sell, increased customer satisfaction scores in Retail Banking. I was hoping you might be able to provide a little color maybe some numbers around that.

And I did want to follow-up, the 12% growth in mortgages excluding FirstLine renewals does that include any third-party originated mortgages?

Let's take them one at a time. So on the deepening of client relationships, so we haven't provided the numbers behind that. For a couple reasons. One, is interpreting the numbers can be difficult and I'll explain why. And then there's not any comparisons in the Canadian marketplace.

But let's talk about how we measure debt and what's happening on that front. So when I say interpreting can be tricky, some would interpret it based on the individuals, some would go based on household when they look at depth of relationship. We do it based on individual.

Also, we've decided to include items that are important to indicating the desired client behavior and important to client satisfaction but aren't products in the normal sense. Such as setting up bill pay or depositing your payroll with CIBC.

The key thing -- so that's why if you put a number out there interpreting it could be tricky. We're using it more to drive the behaviors inside the bank and provide clients with what they need. So we're trying to drive the right behaviors in and outside the shop.

The key point, I guess, is that using that definition for getting greater depth both with new clients and with existing clients. And that's starting to accelerate quarter over quarter and some of our other actions I think will further accelerate that progress. It's a key strategic initiative for us.

So what products are you getting greater depth with, maybe?

Well, by definition you're seeking across the board. So we are getting greater depth across the board.

So I could talk a bit about our new onboarding of clients for example. That's the NPS so multi-product sales origination platform that we've just are in the process of rolling out. We've been investing in that for some time now. It's now in a number of branches.

So that's a way that system is setup set up, is that based on client data puts forward what's the most likely array of products that client with that profile would want. And whether it's savings deposits, overdrafts, credit card, which credit card, insurance protection, the upshot is that in using that software, we're seeing a substantive, much better than what we had hoped for, lift in depth.

So not so much a particular product, just putting forward the array and people say overdraft would be protection would be good. Well, take me through the choice in credit cards. And yes, that software also allows its client base adjudication so it allows for the movement of a client's limit across other products. Allocating it to overdraft or allocating it across different credit card products.

So I'd say, Steve, we're not driving a product. Let's increase credit cards or let's increase checking accounts. What we're really trying to do is broaden out the relationship with clients depending on their needs and we're using our data warehouse to better surface, what are the needs of those clients based on their profile?

Okay. Thanks for that. Just on the third-party question?

Yes. So let's talk a bit about what's going on in mortgages. Because we are growing quite a bit faster than the market. So let's touch on a couple points.

First, the one you asked about, Steve, we are not aggregating mortgages. We're not buying mortgages off third parties. So everything you're seeing in our growth, the 16% growth year over year or the 12% excluding FirstLine, is just from our organic in-house activities.

FirstLine, we'll talk about that as well, retention's still at 50%, actually slightly over. Spreads are very strong right now at the branch level. So FirstLine continues to perform or that whole exercise is going quite well.

So then if you say let's put FirstLine to the side, and I've already said mortgage aggregators aren't part of what we're doing, then why the growth? So it's not just in credit and it's not through pricing. What it is, is adding mobile advisors. We've talked about the breakaway program where we've done across Canada sales training.

Third, and most important one is process improvements. Faster adjudication, faster turnaround times.

And then finally another point would be home power plant where we've introduced that integrated mortgage and HELOC product a year or two ago. So it's those kind of factors that are allowing us to show the growth we are exhibiting.

Great. Thanks very much for that.

Gabriel Dechaine, Canaccord Genuity.

I've got a strategic one and a number one for you. First on the strategic, the wealth business, good growth once again. Now, it's 14% of your adjusted earnings. You'd targeted 15%. That was before the Aeroplan thing.

Just wondering if you can give an updated target, or if you can tell me that organic growth will get you to where you want to be more so than acquisitions? Because you up your acquisition target a while back, so either Gerry or Victor, please?

A couple things. We actually outlined to the market a couple quarters back that our goal was 15% plus. So we are making headway to that.

Not long ago we were at 9%. We're at 13% of adjusted earnings today on a year-to-date basis. We've stated quite clearly that we want to grow twofold in terms of getting to that target.

One third of that growth is going to come from organic growth in Canada and we've got very good momentum there working in very close partnership with the retail and business bank. As David's been trying to have his team deepen our client relationships, we see very good flows in the long-term mutual funds side and we see very good flows on the online brokerage side as we cross sell into our client base with high market-leading performance as well as might add.

So we see continued growth organically at home across all of our businesses that'll contribute to one third of that delta. Two thirds of the growth we see over the medium-term coming from the deployment of capital.

And we see that particularly in the United States. And especially in the Asset Management sector, in the private wealth sector which includes private banking.

Both our investments in American Century and Atlantic Trust are performing well. Those are foundational investments and those would be the two segments that we would focus on going forward.

Okay. Then on the numbers, just hoping you can quantify this. So card fees were down CAD40 million year over year. Can you tell me how much of that was from Aeroplan and then how much was due to the contra-revenue from sign-up bonuses?

And then also, the low fee accounts or the no fee accounts were low income earners. Is that going to have an impact on the industry or CIBC in particular? Noticeable one?

In terms of card fees, it's mainly due to -- 15 of it is Aero and the balance is due to seasonality. And a few less days in the quarter. Those are the main drivers of the card fees.

Okay.

If I can add in, you talked about the no fee and also about the welcome points.

The welcome points, sales of at Ventura were obviously quite a bit beyond our planned levels. And successful outing in the quarter as a result of that, the welcome points were about CAD20 million higher than planned, a bit more than that than the prior year. That's contra-revenue item that should be factored into personal banking revenue performance.

The other point you raised, the no-cost or low-cost industry wide phenomenon. I think what we're looking to do at CIBC over the next while is have a look at our fleet, if you will, of deposit and checking accounts.

And we'll be looking to reposition those over the next while to make sure that we're meeting client needs. The best way possible especially as we move into more emerging channels is the way people are doing business.

So I guess that's a long way of saying I don't see any significant adverse impact to us in that way. And in fact, we might be looking for an opportunity to enhance growth on the deposit side by being thoughtful about our profile.

Thank you.

Robert Sedran, CIBC.

Kevin, just first off a question on the RWA's being down. Just to confirm, there's nothing to do with Aerogold, right? That was in the Q1 numbers where risk weighted assets actually went up. This is the other issues that you noted?

That's correct, Rob. Our RWA's were down. Some of it was just refinements in our OTC derivatives.

We also had some reductions in our AFS portfolios and affects actually helped us this quarter so it had nothing to do with the cards this quarter. And there was offset to a certain extent by business growth but those are the main drivers that brought it down.

Okay. And maybe it's a question for Gerry. I know when we look at the Caribbean, there's probably not a long list of buyers if the bank were to decide it didn't want to be in there longer term. But can you talk about the commitment to the Caribbean and perhaps, as you think longer term, I know the bank is saying that the recovery profile is there just delayed. But can you talk about whether the ceiling might be lower than you might have thought of previously and what kind of implications that has to return on capital and return on equity in the Caribbean?

Rob, I'm going to turn it over to Richard Nesbitt to answer your question. And if you have any follow-ups that you want me to take after he's answered, I'd be happy to do that. Richard?

We've been in the region a long time. The business has historically been a good investment for us. And at CIB itself is a solid stand alone business. So in line with CIBC's strategy we're going to keep focused on building our client relationships there and generating consistent sustainable earnings in the future.

On your second question, about whether or not we think the achievable getting back to historical levels of earnings, what you're seeing here is we continue to believe we can get there. Unfortunately, it's going to take us longer because the economic environment has not started to improve like we felt it would. And so that process is going to take longer.

Do you think you might have to invest more to get to that level of earnings, Richard? Or are you comfortable with the size and the size of the operation and the investments you have there now?

Well, it's a good operation. It's a good investment. We don't have to -- we would not have to invest anymore in order to achieve those historical levels of earnings.

Once we work our way through the impact of the credit crisis on our nonperforming loans. So we have to work our way through that. Once we do that, we will return to the more normal levels of earnings.

Okay. Thank you.

Peter Routledge, National Bank Financial.

Just a question on your effective tax rate, just bottom line on page 2 of the sub pack. It's been dropping for a couple years now and was very low this quarter.

So two questions. Why was it so low this quarter? And generally, why is it trending down?

Peter, it's Kevin. I think there were a couple factors this quarter that drove the tax rate lower. I think first of all, business mix and we had a couple specific transactions. Net reduced the rate by about 1.5%, 2%.

And then on a non-tier basis tax rate was further helped by higher dividend income in our equity derivatives business. So that's a business that we've been growing. Our position, we've been the top equity trader on the TSX.

We've got strong client demand in this business. And over time that has been growing. So that also would over time result in a slightly lower tax rate.

But I'd say for the last while, our tax rate has been in the mid-to high 16's. I think what we'd see is our rate going up to on a non-tier basis, 17% to 19% which is where we would see it standing up.

Okay. And is there any reason to think that the tax deficiency, the equity derivative business might wither?

No, I don't think so. I think that it's an important part of our business. It's something that is an industry wide business and so there's nothing that would indicate in the short-term that it would wither, no.

Okay. And then just to follow-up on the Caribbean, it sounds like most of the loan loss issues are in First Caribbean. You also have an exposure to Butterfield Bank. I'm not sure where you are with that right now so maybe you could just update us on that exposure and then whether or not you have any credit quality concerns there?

Peter, it's Victor Dodig here. I'm on the board of Butterfield Bank. In terms of the Butterfield business, it's delivering consistent and sustainable earnings at a very attractive financial profile. The management team has taken it from where it was after the financial crisis to deliver a very steady and consistent earnings stream so we're very pleased with that investment.

And do you have material exposure other than the equity investment?

I'm sorry?

Do you have a material exposure to Butterfield other than the equity investment?

No we don't.

Okay. Thanks very much.

Meny Grauman, Cormark Securities.

My question's on capital. A number of competitors have talked about appropriate target ranges for the CET1 and some variation among them. I'm wondering what your view is on this? Thanks.

We still believe that over the next few years that the regulatory picture will become clearer. And that's my way of saying that I think that there's more to come. And so therefore, fixing a target at this point I think is premature.

However, in general, it is my belief that when you think of targets in order to meet future regulatory requirements, you should be thinking higher not lower.

Thank you.

Sumit Malhotra, Scotia Capital.

First question is for David Williamson. And it has to do with expenses in the retail segment. I think obviously we understood there was going to be a topline impact with the Aeroplan divestiture.

But it doesn't look like there was much of an offset when we look at expenses. And that's even taking into account the adjusted numbers that you provide which I think were only down CAD5 million sequentially. I was hoping you could give me a little bit of color on the outlook on the expense line here and where you think the efficiency ratio normalizes?

Certainly, Sumit. Good morning.

So the Aeroplan impact, the sale of the assets, we need to get into the mix of it. The impact is at the bottom line level as anticipated. But the mix is that most of the impact is on lower revenue and lower loan losses, not much on expenses as you pointed out.

So when you're looking at say a mixed ratio, you don't get credit for the lower loan losses. So Aeroplan affects the mix ratio more than it affects the bottom line. So I think aggregate impact, what was expected, people need to recognize it's a more loan loss revenue thing than an expense factor.

The other point when you look at revenue relative to expenses, is again this quarter, very successful launch of Aventura and the bad news associated with that is a lot of contra-revenue on the welcome points front. But going up a level, big picture, we've indicated that we're investing in the business to deliver on our two objectives of accelerating profitable revenue growth and enhancing the client experience. And the key thing is we're seeing real traction in our revenue numbers as a result.

This is the ninth consecutive quarter of accelerating revenue growth in personal banking. Net interest margins for continuing operations continue to expand. Market share growth even if you put aside the benefit of FirstLine, we've got number one growth in market share on mortgages.

Mutual funds, as Victor pointed out, a number one growth in mutual funds. And personal lending, an area where we've historically lagged, we've now our growth in market share is now number three.

So things that we've been investing in for a period of time, some of the larger investments, are just now starting to come into play. This multi-product sales origination platform I mentioned in my earlier comments is now in pilot in a number of branches and we'll rollout across the rest of the network by the end of the year.

That's an investment that's in our numbers, we've been making it for a period of time. And it's just now coming out. Early results are really positive.

We're seeing significant lift and deeper relationships that result from this new way of welcoming clients into CIBC. So hopefully that gives you a sense of the overall context.

I certainly hear you on the revenue and PCL impacts. I think the question becomes, obviously you're giving the one-time item treatment or items of no treatment to some of the expenses related to the Aventura build-out. But is it an appropriate way to look at it that perhaps the infrastructure related with credit cards has remained in place despite the Aeroplan sale so that as the Aventura product continues to gain traction we're not necessarily going to see additional expenses associated with that? I don't know if I'm explaining it that well but I hope you have an idea of what I'm saying.

I do have an idea I believe what you're saying. You're saying that there's not much action on the expense line and most revenues (multiple speakers) revenue on loan losses. And loan losses in almost a different bucket when you're looking at mix and operating leverage, that type of thing.

So as you success in Aventura, we're also looking at our Tim Horton's relationship and as that builds up, we'll also have a positive impact going forward. But I think big picture you're looking at it the right way. That it's with the changes to our credit card profile, the actions more so on revenue and loan losses.

Okay. Last question is for Gerry and I wanted to go back to Wealth Management. You've been helpful in putting a few statements in the public domain about the potential acquisition appetite of the bank and wealth. I think about six months ago you mentioned the bank would be willing to spend north of CAD1 billion and you've also let us know that it's not particularly inexpensive in that space right now.

I was wondering if there was any update to these comments? Is there a high-end to that range that you'd be willing to spend from an acquisition perspective? Where does geography come into play? And is there a level of the capital ratio that you'd be willing to come down to for a period of time if you found an acquisition you liked?

Well, first of all I'll answer the last part first. In general, you should expect that if we acquire we would probably issue shares. As I said and that's consistent with my prior remarks. I wouldn't be inclined -- on the margin how many shares you actually issue would always be a question and that would be governed by where you're ratio would be post-transaction and how long it would take to close and all that sort of thing.

But in general, when one thinks about the target size that we're talking about, which I said was in the CAD1 billion plus area, even from today's capital levels, we would be inclined to still issue shares. So that's the first thing. I think you should think that way, rather than thinking in terms of what capital ratio we would be willing to come down to. So that's part one.

Part two is size does matter. But I think I'd like to talk about what matters the most to us and that is strategic fit. And strategic fit is our number one governor of our current screening that we do in the marketplace. As we've looked through our pipeline of opportunities, in general, what Victor and the team have found was that the limiting factor was strategic fit.

These properties as I've said in the past are historically expensive and have gotten more expensive. That is not -- although you've got to watch that, that's not the number one screen. The number one screen is strategic fit. So if you were to reverse that a little bit, if we found something with the right strategic fit for CIBC, our price appetite would go up, number one.

Number two, to a certain degree, we would then be inclined to allow for larger size, because we wouldn't want to miss something that was let's take an extreme example that 100% of the business was an extremely good CIBC strategic fit. In that particular case, we might be willing to go bigger than we would otherwise. So strategic fit is a determinant of what we'll pay in price and also the size that we'll go to.

All that having been said, we would also be concerned about in the event of a transaction that the tail starts to wag the dog, meaning we want to build gradually and over a number of years. A very large transaction at a very diluted price is something that would just take so long to absorb and be a distraction for so long that would be again, a screen as to how big we're willing to go. Because we have other businesses at CIBC, that are equally as important.

We want all of our business to grow robustly. This happens to be business that's very attractive. And when Victor started building it, was at the lower end of the three businesses at 9%. It's up to 14%. We want to go to 15% plus. The number one criteria is strategic fit. That is more important than price. And it is something that will help govern in size.

But the issue then becomes price plus size if it starts to take on an overwhelming influence in terms of the bank. That would also preclude that type of transaction because we want this to be in a manageable area where it's discussed primarily from the wealth viewpoint as opposed to everybody at CIBC having to talk about our recent dilutive transaction.

Does that make it clear? As clear as I can?

Very thorough, Gerry. Thanks for your time.

Darko Mihelic, RBC Capital Markets.

Maybe just to start with a very simple numbers question for Kevin. I'm looking at page 6 of your supplemental. And I just wanted to understand the revenue impact of Atlantic Trust.

Is that going through the investment management and custodial fees or is it some of it's going to mutual fund fees and some of it presumably someone go through net interest income as well? But if you can give me an idea of where they're landing that would be helpful.

Darko, I think cut out a bit let me take it off-line and get back to the details on that.

Okay. Thanks.

And maybe just a couple of other questions then. With respect to the loan loss, I'm looking at slide 12 your presentation. Laura, during your discussions you mentioned the release. Am I looking at that correctly? Is this that CAD12 million?

The release for the credit card the collective allowance is? Is that the CAD12 million?

Yes.

So a more appropriate run-rate would be like perhaps CAD12 million higher from here on in? Would that be a simple statement that you think you can agree with?

Well, I don't know that I'd be providing any forward-looking guidance.

Okay.

And lastly, turning to page 6 of the presentation, I just want to understand a couple of comments that you'd made during the presentation. You mentioned that the other category, in revenues there I'm looking at the CAD35 million, dropping because of Aeroplan. Did I hear that correctly? Was the Aeroplan revenues in that line item?

Yes. That's correct. What we did just so that we could have comparability moving forward, Darko, was to put the Aeroplan relating to the sold portfolio. So it just relates to the sold portfolio. That went through the other line. So essentially what's left in the other line now is materially just the FirstLine mortgage business that remains.

Okay. That's helpful.

And then just lastly again, so that I understand this better, the business banking the CAD368 million, that declined despite the fact that you have asset growth and deposit growth was pretty much all spread based. Is that the reason for the decline mostly?

Darko, I'll take that. Primarily spread based. So a couple factors.

In the area of deposits, we've adjusted the value of some of our business banking deposits and that's going through funds transfer pricing, so that's affecting spreads. Affecting us at least.

In industry factor is you've been hearing about additional competition. We're feeling a bit of that too in our spreads.

And a couple of CIBC centric factors that affect in growth in business banking. One is we have been pulling back in commercial mortgages. We've talked about that. A fair amount of that because of spreads we still are.

And I think I mentioned in the past, we transferred some of the bigger clients out of our book and into corporate lending. Has a bit of an impact on our year over year growth. Obviously much less so in corporate given the size of that book.

So volume growth, decent in business banking. We're adding some relationship manager right now. We're investing in small business but there's the spread impact is for the reasons I just outlined.

So just to be clear though, David, when I think of that, what you're mentioning in this slide is that excluding the sold Aerogold portfolio, that your net interest margin would actually be up one basis point? So that must mean that there's significant spread compression happening in commercial? Am I reading that right?

You're right about being up one basis point but you need to think about the relative size of the businesses too. So there's -- the relative size of the businesses have an impact. In personal banking we continue to expand margins. You're obviously right about that, Darko.

In business banking we're seeing compression there. It's just a smaller business unit. And therefore in aggregate, it gets us to and all in up one basis point net interest margin.

Okay. Fair enough. Thanks very much.

Mario Mendonca, TD Securities.

Question either for Kevin or for Peter Levitt. The AFS, the available-for-sale securities were down fairly materially this quarter. And I was trying to back into where on the funding side I would have seen the offset and it does seem like wholesale funding like mortgage securitizations is where the offset is.

What would be helpful to understand is -- and I appreciate that these questions are difficult when you're looking at a balance sheet that large but what is the bank trying to achieve by shrinking the securities book the way it did and then shrinking the wholesale funding? Or is this just a temporary fluctuation that we'll see quarter-to-quarter?

Let me open with that and then if there are any more detailed questions, they may want to take off-line or we can follow-up with Peter. I do think there are fluctuations. Some of our term funding has come off some of the IMPP funding did mature and so you will see some fluctuations on a quarter over quarter basis. But right now I'd say it's more in line with the national treasury activities and our immediate needs.

Taking down the available-for-sale securities as much as the bank did, is that something we should see going forward? Is there an expectation that the available-for-sale securities portfolio will just be materially lower at some point?

I think again, that balance fluctuates. It depends on our treasury needs at the time and what our business needs are and the way things worked out this quarter, we happened to have a fairly significant reduction.

Okay. And at the risk of going back to this acquisition discussion again if I could just -- Gerry made a good point about strategic fit and how important that was. Does the bank have any firm financial criteria, or is the strategic fit criteria just so overwhelming that the near-term financial criteria really just aren't that important?

Well, I have to say that near-term financial criteria would always be relevant. Whether or not that would be the dominant factor -- the dominant factor is strategic fit.

Now, to rephrase your question, is there a knockout level of dilution that would preclude a transaction? That's where size comes in. And my remark earlier on of even -- I'd be inclined to go bigger if we got something of a strategic fit but if bigger starts to overwhelm the bank results for the next 32 quarters in a row, all we're going to be talking about is a particular transaction, that is just not good for the institution even if it is a good strategic fit.

And so all of this does matter in terms of size. And remember, we're very inclined and we're encouraging you to think of this in terms of that we would issue equity, which is another -- that's a pretty binding constraint, because you can't do any of this versus cash earnings on capital you used. The full dilutive impact would be apparent.

And so I think, I'm disinclined to go too far in limiting the upside of what we would do, but and to give you a quantum, but the reality is that there's a lot of qualitative issues that would restrict you from breaking out by an order of magnitude from our guidance that we've given you.

And if I could go one step further then. So you've made it very clear now that equities in the cards if a deal were like CAD1 billion plus.

Playing with numbers, just real simple, if you were to do a deal for CAD1 billion and the goodwill were CAD1 billion because say the book value was negligible, which is often the case in the Wealth Management deals. The bank's Common Equity Tier 1 ratio would drop by about 70 basis points but it would still you put in putting you in a pretty good position. Why is the common equity so important for a deal of CAD1 billion? Like a 9.2% Basel III Common Equity Tier 1 ratio is certainly not, there's precedent for that across the industry. Why the equity?

Well, first of all as I said earlier on, I think that the requirements over the next few years are going to increase and they could come at you from a variety of different directions. Leverage ratios are also a factor and while there's some capacity to fill leverage ratio requirements through non-common, the reality of it is common is an important part of the equation when you're dealing with leverage ratios. And again, my expectation is leverage ratios are the requirements are going to be higher rather than lower.

And so I think that one is better to not presume, anything's possible, but one is better not to presume that we would haircut our capital in order to do a transaction. In the end, might we drop our capital ratio a little bit yes, but I would presume that at a CAD1 billion level we would be issuing equity. And there's a good part of that, which is that it just makes the scrutiny and dilutive impact of any transaction far more apparent upfront.

And personally, I like that discipline. Because it's a binding constraint. There's a certain amount that everyone can live with. And if it's fairly diluted and expensive transaction at CAD1 billion, the impact on the overall CIBC earnings and organization is different than if it is for instance, CAD3 billion.

And when you get to those larger numbers, the reality is also that one has to start to say that the actual advisability of that size of equity issuance is declining dramatically. So I think that you've got a fairly good feel for the qualitative elements that we're talking about.

For CIBC to do a transaction that was highly dilutive, at CAD1 billion level, is quite different than CIBC doing a diluted transaction at a CAD2 billion level or a CAD3 billion level. And I think that the constraints are, the nature of the dilution, the enablers are, the nature of the strategic fit but also the practicalities of issuance and are we comfortable with a certain size of issuance?

And historically, the numbers I've thrown out would be at the very higher end of what we've ever issued in terms of common. So I think you've got a lot to go on there in terms of the inputs that we have when we're making a decision. And as I said I don't want to give you an absolute number but I've given you quite a bit of insight into our thinking. Is that adequate?

Yes, it is. Thank you.

Sohrab Movahedi, BMO Capital Markets.

Gerry, just to follow-up on that, does the 10% the worry or the maybe even depressions of preparing for a tougher regulatory environment, does that have any bearings on your buyback activity as well relative to that 10% Common Equity Tier 1 ratio?

There are a number of things that would affect our buyback activity including ongoing business opportunity and ongoing business growth. And one of the things that we've said in the past is that our order of thoughts around using our capital have generally been that first and foremost, the investment in the business is our ongoing business is where we'd like to use our capital. So that's part one.

You don't want to maintain strong capital ratios and then have a buyback in place that is restricting business activity. So that's part one of that.

Part two is that we do want to have a fair bit of flexibility to accommodate whatever future regulatory requirements there are. And part three is that we are also in a relatively quiet benign period at the moment or so it appears in terms of the economy and ongoing stresses on the banking system. As we've seen in the past, those things can reverse.

And I think that when you take on a transaction and it's something that is a focus of the organization, I don't think you also want to have the focus of the organization on having to build back up capital particularly if you get into a little bit of rough sledding in the overall economy and markets. This is just a question of controlling as many of the variables as we can when we engage in activities that would raise in a small way uncertainty and acquisitions do that. Uncertainty goes up.

And so I'm trying to put some again without binding ourselves with an absolute quantum I'm trying to put some -- you should see my remarks as being highly restrictive as to the actual size of transaction that I'd be willing to recommend. Did that answer your question?

I think it's very helpful in giving a lot of color around the size of the acquisition, but I don't know if I'm totally clear as to what it means as far as buyback activities.

Buyback activity, again as I've said, it'll depend on ongoing business levels. Our decisions about how we want to return capital to shareholders.

And on the margin, it might also -- if you thought you had transactions that were imminent or a higher probability, you might be keeping some capital. It wouldn't make sense to have a buyback running full tilt and then engage in a transaction the next day where you had to issue shares so you've got to think about that a little bit.

That's not a dominant influence. The dominant influence is that strong capital levels are highly advisable now because of the regulatory environment, the economic environment, i.e., it's good now but our history over the last 20 years has been we're now getting into longer end of recoveries.

Let's keep in mind that everybody keeps waiting for a more robust expansion. And while we're our economists are somewhat optimistic about that, we are now in the sixth year after the last crisis.

History would tell us that at some point, there is a possibility that on a more or less global basis that things might start to rollover. And I'm not predicting that but I'm saying that history says that you should be prepared for that.

So ongoing regulatory requirements, probability just if you take the time weighted probability historically of that the current scenarios of benign economies that do not continue, the fact that I don't think it's incumbent upon us to spend -- to utilize every bit of capital the minute comes in, particularly when there are contingencies that we may want to deal with such as an acquisition or business growth. And in fact, that the gap of our capital today is -- while we're ahead of all of our peers, when you look at the Canadian bank, the Canadian banks are all maintaining very high capital ratios. There's a 9.8% out there, there's a 9.7% out there. I may be mixing quarters up in terms of our competitors and we're at 10%.

So I don't think that we're at an extraordinary level of capital relative to our peers either. And therefore, I think that there's a possibility that to a certain degree although they may not share our views, their views are somewhat aligned with ours. Also remind you that we have been running our buyback at I think a higher level than the vast majority of our competitors.

Okay. Thank you very much.

That is all the time we have for questions today. I would like to return the meeting to Mr. Weiss.

Thank you, Operator. That concludes our call this morning. If there are any follow-up questions please contact our Investor Relations department. Thanks again for joining us this morning, and have a great day.

Thank you. That concludes today's conference call. Please disconnect your lines at this time. And we thank you for your participation.