Canadian Imperial Bank of Commerce (CM) 2014 Q3 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 the to turn the meeting over to Mr. Geoff Weiss, Senior Vice President Investor Relations. Please go ahead. Mr. Weiss.

Good morning and thank you for joining us. This morning CIBC senior executives will review CIBC's Q3 2014 results that were released earlier today. The documents referenced on this call including CIBC's Q3 news release, investor presentation, and financial supplement, as well as CIBC's Q3 report to shareholders can all be found on our website at www.CIBC.com. In addition, an archive of this audio webcast will be available on our website later today.

This morning's agenda will include opening remarks from Gerry McCaughey, CIBC's President and Chief Executive Officer; Kevin Glass, our Chief Financial Officer, will follow with the financial review; and 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 AM. Also with us for the question and answer period are CIBC's business leaders including Victor Dodig, Richard Nesbitt, and David Williamson, as well as other senior officers.

Before we begin, let me remind you that any individual speaking on behalf of CIBC on today's call may make forward-looking statements that are subject to a variety of risks and uncertainties. These statements may include material factors or assumptions that could cause CIBC's actual results in future periods to differ materially. For more information, please refer to the note about forward-looking statements in today's press release. With that, let me now turn the meeting over to Gerry.

Thank you Geoff and good morning everyone. Before I begin let me also remind you that my comments may contain forward-looking statements.

We announced our third-quarter results this morning with reported net income of CAD921 million, up 5% from the same period last year. Adjusting for items of note, net income was CAD908 million, compared to CAD931 million in Q3. On a per share basis, adjusted earnings of CAD2.23 compared to CAD2.26 in the same period last year. For the period ending July 31, 2014, our Basel III common equity tier 1 capital ratio remained strong at 10.1%, and our adjusted return on equity was 20.7%.

On September 5 last year we entered into a normal course issuer bid to purchase for cancellation approximately 2%, or a maximum of CAD8 million of outstanding common shares over a 12 month period. With the buyback program due to expire on September 8, 2014, we intend to renew the program under the same terms for another 12 months subject to approval from the Toronto Stock Exchange.

Turning to the results from our business units. Retail and Business Banking reported adjusted net income of CAD597 million, compared to CAD628 million in Q3 2013. A 5% decline reflects primarily impact from the sale of 50% of the Aerogold portfolio which closed in Q1 2014. Excluding the sale, adjusted net income was up 4% compared to the same period last year.

We continue to invest in strategic initiatives to strengthen our franchise. This quarter we commenced national rollout of our multiproduct sales origination platform, which was being worked on over the past two years. Early results have been positive, resulting in deeper relationships and a better client experience.

We also continued to invest in mobile innovation which is resonating well with our clients. CIBC's focus on innovation has put us at the leading edge of mobile banking, being the first Canadian bank to introduce mobile cash management, mobile payment, and e-deposit apps for smartphones. Since its launch in 2014 more than 1 million checks have been deposited using our e-deposit app, proving that clients embrace the convenience of making check deposits by taking a picture with their mobile devices.

The development and launch of new products also demonstrates our commitment to innovation. During the quarter, we launched CIBC Double Double Visa card with Tim Hortons. This first of its kind two-button technology combines a CIBC credit card with a Tim Hortons reward card.

The distribution of this card is structured to leverage the broad distribution network of Tim's 3,500 plus locations across Canada while embedding cross-sell opportunities in the client experience to ensure new clients are connected to CIBC. Early results indicate that this card will be very popular with our clients. David Williamson is here this morning to answer questions about Retail and Business Banking.

Turning to Wealth Management. Q3 2014 adjusted earnings were a record CAD124 million, up 20% from the same period in 2013. As we continue to execute on our strategic priority to build our Wealth Management platform, our client focused strategy is gaining traction. At CIBC asset management, a significant milestone was achieved with CAD100 billion in assets under management and its 22nd consecutive quarter of positive net sales of long-term mutual funds.

Atlantic Trust, our recent US acquisition, continues to perform well and was recently ranked the second highest luxury brand in the 2014 Luxury Institute Survey of US Wealth Management firms. Victor Dodig is here this morning to answer questions about Wealth Management.

In Wholesale Banking, Q3 2014 adjusted earnings of CAD254 million were up 11%, compared to CAD228 million in the prior quarter. Improved equity issuance market and higher revenue from corporate banking and US real estate finance contributed to a stronger third quarter. For the period ended July 31, 2014, CIBC was joint book runner on three transactions totaling approximately CAD6.2 billion, and was the financial advisor on asset sales totaling CAD1.3 billion. Richard Nesbitt is here this morning to answer questions about Wholesale Banking.

CIBC has achieved solid financial results in the first nine months of FY14. We are delivering on our objectives of generating consistent and sustainable earnings for our shareholders. By staying focused on deepening client relationships and investing in the franchise, we intend to build on our progress of becoming the leading Canadian bank for our clients.

As previously announced, CIBC's Board of Directors has appointed Victor Dodig as the next President and CEO of CIBC. I will officially step down as CEO when Victor Dodig transitions to his new role on September 15. Since the announcement, Victor and I have worked closely together to ensure a smooth and full transition. I would like to take this opportunity to congratulate Victor on his appointment and wish him all the best as he leads CIBC in its next chapter of growth and development. With that, let me turn it over to Victor.

Thank you, Gerry. Under your leadership, CIBC has built a very strong foundation for long-term success, with a strong capital base, leading retail and wholesale banking franchises, and a strong North American wealth management platform. I look forward to working with our Senior Executive team to continue to build on the momentum and successes that we've achieved. I'm encouraged by the opportunities for growth as we accelerate our client-focused strategy, and look forward to delivering enhanced value to all of our stakeholders. I would now like to turn the meeting over to Kevin Glass to review our financial results in more detail. Kevin?

Thanks, Victor. 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 CAD908 million, which resulted in adjusted earnings per share of CAD2.23 driven by strong results in all of our businesses.

In our Retail and Business Banking segment, we continue to see solid core operating results. And Wealth Management and Wholesale Banking made strong contributions to our earnings.

During the quarter we had the following items of note. We recorded a gain within an equity account investment in our merchant banking portfolio of CAD0.08 per share. We incurred expenses relating to the development of our enhanced travel rewards program and in respect to the Aeroplan transactions with Aimia and TD of CAD0.02 per share. Amortization of intangible assets amounted to CAD0.02 per share and the structured credit runoff business generated loss of CAD0.01 per share. In aggregate, the impact of these items on our earnings netted to a gain of CAD0.03 per share.

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 6. Revenue for the quarter was CAD2 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 4%.

Now looking at our individual lines of business. Revenue in Personal Banking was CAD1.6 billion, up 5% compared with the same quarter last year. Performance benefited from strong volume growth across CIBC brand products and higher fee based revenue on increased mutual fund sales.

CIBC brand mortgage balances grew 15%, or 12% excluding the benefit from FirstLine conversions. The conversion of the FirstLine mortgages into CIBC brand continues to go very well. We continue to convert approximately 50% on renewal at improved margins.

CIBC brand deposits were up 6% and mutual funds were up 22% year over year on strong net sales of CAD5 billion. Business Banking revenue was CAD389 million, up 1% from the same quarter last year. Volume growth was largely offset by the impact of lower spreads.

Business deposits and GIC balances were up 12% year over year, which represented the strongest growth in five years. Business lending also continued to grow with average balance growth of 5%. The Other segment had revenue of CAD29 million in the quarter, which was down CAD118 million compared with the same quarter last year which is due to the impact of the Aero transaction.

The provision for credit losses in the quarter was CAD177 million, down 20% on a year-over-year basis. The decrease was due to lower write-offs and bankruptcies in the card portfolio, the impact of an initiative to enhance account management practices, as well as the sold Aero balances. Both our consumer and business lending portfolios in Canada performed extremely well this quarter. Laura Dottori will discuss credit quality in her remarks.

Non-interest expenses for the quarter were CAD1.1 billion, up 5% from the prior year, primarily driven by a continued investment in growth initiatives, including expanding our sales force as well as new product launches and innovations in mobile banking.

Net income for the quarter was down 5% from the prior-year quarter. Excluding the impact of the Aero transaction, net income was up 4% year over year. Net interest margin, or NIMs, were largely stable, down slightly by 1 basis point sequentially.

Turning now to slide 7. Wealth Management had a record quarter with double-digit revenue growth across all businesses. Planned assets grew 31% from last year or 16% excluding the recently acquired Atlantic Trust. Revenue was CAD569 million, up CAD111 million or 24% from the same quarter last year.

Retail brokerage revenue of CAD307 million was up CAD40 million or 15% compared with the prior year due to higher fee-based and commission revenue. Asset management revenue of CAD187 million was up CAD28 million or 18% from the same quarter last year. This was largely due to higher client assets under management, driven by market appreciation and strong net sales of long-term mutual funds. This quarter represented the 22nd consecutive quarter of positive net sales of long-term mutual funds.

Private Wealth Management revenue of CAD75 million was up CAD43 million, mainly from the acquisition of Atlantic Trust. Non-interest expenses of CAD405 million were up CAD80 million or 25% from the prior year, mainly as a result of the inclusion of Atlantic Trust mentioned earlier as well as higher performance-based compensation. Net income in Wealth Management was CAD124 million, up CAD21 million or 20% from same quarter last year.

Slide 8 reflects the results of Wholesale Banking where we delivered another quarter of strong earnings. Revenue this quarter was CAD619 million, up CAD10 million or 2% compared with the prior quarter. Capital markets revenue of CAD336 million was up CAD5 million or 2% from the prior quarter, as higher equity and debt issuance revenue was partially offset by lower revenue from equity derivatives in Canadian fixed income trading.

Corporate and investment banking revenue of CAD278 million was relatively in line with the prior quarter. Higher equity issuance and advisory revenue was largely offset by lower investment gains. The provision for credit losses was CAD6 million, compared to a recovery of CAD1 million for the prior quarter, which was due to losses in the US corporate lending portfolio.

Non-interest expenses were CAD278 million in the quarter, down CAD39 million or 12% compared to the prior quarter, primarily due to lower performance-based compensation. Net income for Wholesale Banking was CAD254 million for the quarter, up CAD26 million or 11% from the prior quarter.

CIBC's capital position remains strong with a common equity Tier 1 ratio of 10.1%, up from 10% in the prior quarter. Strong internal capital generation was largely offset by growth in risk weighted assets, which increased by approximately CAD4 billion this quarter, due to parameter updates and business growth including the RWA impact of the increase in the carrying value of the investment that was highlighted as an item of note.

To wrap up, we are very pleased with our core operating results. In Retail and Business Banking, good volume growth in core products drove solid results. Our Wealth Management franchise delivered record results this quarter. Client assets grew 31% from last year, and CIBC asset management achieved CAD100 billion in assets under management. Both of our recent wealth acquisitions, Atlantic Trust and American Century, are performing very well.

In Wholesale Banking our client focused strategy delivered strong results across all business lines. And we continue to effectively manage our capital resources and remain well positioned for the evolving regulatory and capital environment. Thank you for your attention. I'd now like to turn the meeting over to Laura Dottori.

Thanks, Kevin. Good morning everyone. I'll be referring to the risk section which begins on slide 12. You'll see that our third-quarter loan losses came in at CAD195 million. This is up slightly from CAD185 million in the prior quarter and that's on an adjusted basis.

On slide 13, you'll see new formations along with growth in net impaired loans by geography, where new formations were up this quarter across both the consumer and business and government portfolios. Excluding last quarter, this is still the lowest we've seen since the third quarter of 2008. As it relates to gross impaired loans, they were down, mainly due to decreases in the US business and government portfolio.

If you turn to cards on slide 14, our net credit losses remained relatively flat at CAD102 million this quarter. And our cards portfolio continues to perform well.

Slide 15 shows our Canadian residential mortgage exposures. The insured portion of our portfolio is 70%, and 90% of the insurance is provided by CMHC. The weighted average loan to value of our uninsured portfolio is 59%. And condos would account for 11% of the total Canadian mortgage portfolio.

Slide 16 you can see our condo developer exposure, and as at July the 31, our authorized loans to construction projects were CAD2.8 billion, and drawn loans were at CAD1 billion, up from CAD791 million at the end of the second quarter. Our condo developer exposure remains diversified across about 80 projects.

Lastly, on slide 17, you can see the distribution of revenue in our trading portfolios as compared with VAR. We had positive results every day this quarter, the same as last quarter, and our average trading VAR was CAD3.1 million. That's down from CAD3.4 million last quarter. I'll now turn things back to Geoff.

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

(Operator Instructions)

First question is from John Aiken from Barclays. Please go ahead.

Good morning. Question for David: We actually saw some solid performance in cards, with average lending volumes up and the fees up. David, can you give us some sense as to what you're seeing in terms of the trends, the adoption of the new card, and what your outlook is for the remainder of the year?

Certainly, John. We are seeing -- a few comments. We're seeing strong sales in our enhanced Aventura travel card. We continue to offer choice in travel, with both the Aeroplan and the Aventura card. The net result is that, in the travel card space, we're now seeing high-single-digit growth in balances year over year. So, the travel business is definitely performing well.

Attention now is swinging over to the non-travel cards, to enhance that part of the Business, and the Tim Hortons Double Double card that Gerry mentioned is part of that. We have other things that are planned. The metrics I guess worth saying, when you see that much growth, the metrics for the new card sales are performing in line with expectations as far as utilization, survival rates, that type of thing.

I guess a couple of other comments -- I think you mentioned it, John. You look at the fee income on cards this quarter -- up a fair piece. Now that the launches have been successful, in the third quarter we've gone to normal points incentives. So, that's reduced the cost that we saw in the preceding quarters on points issues.

I think, looking forward, as I mentioned, we're going to be focusing on our non-travel cards book, and reinvigorate it. We've got our exclusive presence at the Toronto Airport that should prove helpful. And we will continue to focus on choice in travel, and enhance non-travel portfolio, and use some of our profile we've got through our recent innovations in the Toronto Airport to continue our growth.

David, in terms of the legacy Aeroplan portfolio that you retained, can you give us some sense as to whether there was any material attrition or if you've been able to retain most of that or transition them onto other cards?

There's been actually a little of all that, John; some transitioning amongst our cards, some are going to other cards. There's been some new card sales, some attrition. So, it's somewhat early days. The new plastics are just kind of being launched now type of thing, so we're still in an evolutionary state. But overall, the book's proving to be fairly stable.

Great. Thanks, David. I'll requeue.

Thanks, John.

The following question is from Gabriel Dechaine from Canaccord Genuity. Please go ahead.

Good morning. First question is on the mortgage business -- just want to tie in two items. The branch mortgage growth looked phenomenal -- 3% quarter over quarter. I want to know also about the FirstLine outlook. Is there an expectation that that runoff accelerates in 2015? And how that might affect your pricing strategies to replace those assets or defend your revenue line?

Hi, Gabriel. Let me just go through those in order. So, the branch sales are quite strong. When we first highlighted we were going to exit FirstLine, we talked about what we'd put in place or plan to put in place to make sure our branch sales were strong, and there's a couple of factors that are driving that.

One is the mobile advisors: We're enhancing and building that distribution channel in a couple of ways. One is just size of; and secondarily, the breadth of what they can offer. So, we're trying to give better tools to our mobile advisors to transition them from mortgage advisors to mobile advisors, and they can offer more products. That's going well.

And in addition, we've been working on our processes to make sure that our speed to decisions and speed to complete transactions is enhanced. So, that's helped ensure that we've got a strong branch platform.

And I think I've highlighted before -- so, we're achieving what we're achieving, not competing on price. So, to your point about what we do on price, we will continue to not be aggressive on the price front, and to a certain extent, be a price taker in the market, and try to win on distribution and service offering.

Regarding FirstLine, I think Kevin mentioned we're still retaining about 50% of the book, and obviously, the spreads on our own brand of mortgages are substantively better than the FirstLine spread. So, that continues to help us. So, branch sales are good, and signs are they'll continue that way, and FirstLine retention is good. And as far as pricing, Gabriel, no intended change.

I was thinking more along the lines of the duration of the FirstLine book. Is it a year where, when you see refinancings or something like that, does the runoff accelerate? And if you still maintain the 50% retention, could that actually enhance the NIM benefit you're getting next year?

I don't see the runoff substantively changing. I think just continue at the pace it is now.

Okay. My next question: Victor, you're going to be CEO in less than a month. I'd like to get your view on CIBC's capital management strategy -- how you intend to balance acquisitions and share buybacks? Buyback program is going to be renewed? Are you going to be active in it, because you haven't been recently. Maybe not fair to ask you this early, but I still will.

Well, fair enough, Gabriel. Thank you very much. Couple of points there on our capital management strategy. First of all, fixing a long-term capital requirement, given the continuing evolution of the regulatory environment, would be inappropriate at this time. I will say that in the current environment, we're comfortable operating in the 10% range when it comes to our Basel III CET1 ratio.

Our current capital position and the levels of incremental capital that we generate on a quarterly basis provide us with sufficient flexibility on a number of fronts. That's to invest in our core business for long-term growth, which we are doing; to pursue acquisition opportunities that are aligned with our strategy, which would most likely be in wealth management, as we stated before; and to return capital to our shareholders in the form of dividends and through share repurchases. And on a year-to-date basis, 55% of our adjusted earnings have been returned to shareholders through dividends and share repurchase.

So, will you be active in the buyback?

Well, we've announced a buyback today, and I think we've been quite clear. We're going to return capital to our shareholders. We're going to maintain a CET1 ratio in the 10% range. We're going to have the flexibility to invest in our businesses, both on an organic basis and through acquisitions.

Thank you, Victor, and everybody else.

Thank you. The following question is from Robert Sedran from CIBC. Please go ahead.

Hi. Good morning. David, if I think of the margin in your business, excluding Aerogold, on a year-over-year basis, would it look more similar to the sequential performance, sort of flat to down 1 basis point?

Yes, it would, Rob. The year over year is Aeroplan. So, other than that, it would be flat to down 1 basis point.

This quarter is seasonally one where cards portfolio generally is lower as people pay off their cards from Christmas time. That down 1 basis point is kind of cards related. Net-net, short answer is, yes, it would be.

Okay. And then just similarly from an operating leverage perspective, the slide shows revenue up 4%, excluding Aerogold, and maybe you can -- in answering that question in terms of operating leverage, maybe you can give a little bit of color on the expense growth we've seen in the segment, and if this is kind of run rate expense growth or if it's some kind of project related or something unusual in the quarter?

Certainly. Rob, important question I think, so, let me spend a moment on it. So, this quarter, expenses were higher than what we've seen reported in prior quarters. And as you said, expenses are driven by strategic investment. So, let me just give you a sense of what some of those are.

One is in the project space. As Gerry mentioned, we've been investing increased investment in projects. And one that he mentioned is an important one: multi-product sales origination. We have been working on that for a couple of years, and now we're particularly active, because as of Monday of this week, we just rolled it out to the last of our 1,138 branches. So, it's now out in all the branches.

That offering is -- it's a brand new, client-facing front end that has the objective of generating more sales and better advice for clients, and most importantly, deeper relationships. It's an intelligent system, so, when you put in client data, it recommends the products and services that, based on the data, would be most appropriate for the client. And then as the client selects products during the conversation, they're put into a shopping cart, and at the end of the discussion between the client and our advisor, they can check out and all the documents are printed.

It's been a great success with our staff. It's been a great success with clients. And from a return perspective, the cross-sell levels that we're achieving are substantively better than the business case. That's an example of a substantive investment.

We've also been investing in additional client-facing staff. We've been investing in mobile, and we've been launching an innovative new product, such as this Tim Hortons Double Double credit card.

The important part is the investments are having an impact. So, they're helping us to accelerate our revenue growth, with the relaunch of Aventura, as I mentioned earlier, we're now getting high-single-digit growth in travel cards. We're now going to focus on building momentum in other segments for our cards portfolio.

And importantly, we are being recognized for our leadership in online and mobile banking. This quarter alone, we received awards from Global Finance for Best Consumer Internet bank, Forester Research for Best in Mobile Banking, and Apple; Apple had us as the only Canadian financial institution in their Best in Canada apps.

So, from a client perspective, we're getting clearer feedback. They appreciate our efforts to spend money to build an ability to assist them to bank when, where and how they want. For example, as Gerry mentioned, the eDeposits, now we've had over 1 million deposits since we've launched that service. So, a lot of investment, but a lot of positive results from that investment.

So, (multiple speakers) going forward, just to answer your second part, given all that, what for the future? As far as 2014 operating leverage, I expect to be pretty close to even when you adjust for the Aeroplan transaction. Going forward, we expect the level of expense growth we've seen this quarter to continue for the next few quarters, as we'll continue to make these kind of investments in technology and people to achieve our two objectives, which is to accelerate profitable revenue growth and enhance client experience.

So, the message is, as some of these projects roll off, the money's going to get recycled into other initiatives, in other words.

That's correct. Because what we've experienced so far over the last few years is that the investments we've been making we've been able to land them successfully, and hats off to our technology and other groups within the bank working with us to land these projects.

So, they're working and getting them delivered, and they're working as far as our client impact and impact on revenue. So, I think it would be foolish to do anything other than steady on and continue the growth we're building.

Great. Thank you.

Thanks, Rob.

Thank you. The following question is from Sumit Malhotra from Scotia Capital. Please go ahead.

Thanks. Good morning. I wanted to stay with expenses for a moment, please. When I look at a couple of segments here, first off, the corporate segment, not one where we have to think about too much, but on the core basis that you show a much bigger loss this quarter, and it seemed to have been driven by a much larger level of expenses in corporate. So, it's probably for Kevin, if you could help me understand what's happening there?

And then, to tie in the expenses, for Victor -- pretty surprised just given the revenue environment and the trend you've shown on your business that operating leverage turned negative there as well. Not in a large way, but more a reflection of the revenue environment and why leverage would have been negative in that segment, if you could help me, I'd appreciate it.

Sumit, it's Kevin. In terms of -- a couple of things driving the corporate results. First of all, revenues are down. You'll have seen that our security gains are a lot lower this quarter than they have been in the past. So, I think I talked to quality of our earnings overall. But just generally speaking, that would have had a negative impact on revenue.

And then, you're right, our expenses were up this quarter. In the corporate segment, there is an element of volatility, and we certainly saw some of that this quarter, although some of the expenses will stick.

But we did have some higher employee benefits expenses as a result of changing interest rates. We adjusted some of our liabilities, and that impacted our expenses. Check expenses also a bit higher, as were some of our compensation expenses, and we did have some timing on occupancy.

So, all of those things seemed to kind of come through in the current quarter. So, if you take those -- the revenue impact, as well as those cost items that I've outlined, that would have resulted in the lower earnings in the corporate segment this quarter.

Just so if I hear you correctly, and I want to stay just on the expense line in corporate, so I think if you clean this up the way you guys show it, it's something like a CAD50 million-plus sequential increase. And I know it was a good capital markets quarter, but I wouldn't think comp related to that segment would be being booked here. Is that correct? When you talk about employee benefits or compensation expenses, why would that have a major impact in this segment, as opposed to the ones that are actually booking the market-sensitive revenue?

It's got nothing to do with the market-sensitive revenue. We have some long-term benefits, [replenishment] time and benefits, which is based on long-term interest rates. We happen to put through an adjustment this quarter that went through corporate and other. That was the benefits item that I was referencing.

We also had some check expenses that stay in the center. So, those were a bit higher. And it didn't have -- the comp stuff had nothing to do with the interest-sensitive items, Sumit.

All right. And then, for Victor, on his segment?

Sure, Sumit. Much like David's articulation on retail and business banking, we are investing in the wealth management business. We are investing in Atlantic Trust in terms of carving out some of the continued technology that we're working toward this year. American Century's made some good investments in terms of new products. And I would see that all as investment rather than expense, and I would see that we would continue to focus on revenue growth across all those businesses through those investments.

Thanks, guys.

Thank you. The following question is from Peter Routledge from National Bank Financial. Please go ahead.

Hi. I'll ask a question of Victor. But I'll start off by congratulating Gerry on a good run. Certainly, the Bank's in more solid footing than what you inherited.

Victor, question for you: Can you just address continuity of your leadership team? I'll leave it open ended to allow you to answer as you see fit.

We have a deep pool of talent at CIBC. We have businesses that are run by very talented executives. And as we go forward, the strength and stability in terms of financial performance, and in terms of organizational strength and strategic consistency, is going to be the order of the day as we go forward.

So, you don't anticipate any issues with leadership continuity?

I anticipate stability and strength.

Okay. David, you referenced your work at the airport. I was there; I noticed it as well -- a lot of branding there. One thing I noticed, and CIBC isn't alone, is a focus on new Canadians, and I certainly understand why you'd be focused on that area. But some of the ads, either from CIBC or from some of your competitors, were along the lines of no credit history, no problem. And I understand sort of why. I mean, you have a new Canadian, you don't have credit history.

I wonder: Is the industry moving down the credit curve? Is the marginal consumer borrower in Canada inferior in credit quality than he or she five years ago?

That's an interesting question, Peter, with respect from a five-year spread. Let me speak to a bit what we're trying to do at the GTAA. Maybe I'll come back to that, and focus first on your question regarding new Canadians.

No, the intent isn't to go down the credit curve. New Canadians coming in, there's, A, they are new to the country. In a country such as Canada, the growth in the population is largely from those that are joining us in the country. And a lot of the folks coming in are of a solid credit standard, and they're coming in to work here or to invest here. So, we're looking to more than just participate in that space.

So, the offer of no credit history, that's obviously a pretty finite balance. But rather than a credit card with a couple hundred dollars secured balance, the intent is to just start someone off with a small, unsecured balance, so that they can start to build a credit history. If it doesn't go well, the size of the loss is quite limited, in addition to the normal filters as to how we'd move forward. But obviously, the experience is that it's a winning proposition. So, that's why you'll see us and others doing it.

So, it's a very small balance, but allows a new Canadian to start to build a credit history. So, not looking to grow by going down the credit curve by any stretch, but certainly looking to grow by capturing the growth in our population that's coming in from new Canadians.

And obviously -- now I'll turn to the airport. That's obviously an important funnel or channel to meet and engage with the new Canadians. So, we're trying, in that space, and we found people quite receptive to starting to engage right when they first get to the country. So, the intent there, and that's why you see a fairly prevalent kind of way is -- welcome to the country, you'll need a bank, and we stand ready to be that bank. And in so doing, we try to offer a multi-product package that's suited to the needs of a new Canadian.

Beyond that, in the airport, we see opportunities in foreign exchange. We see opportunities in, frankly, banking the tens of thousands of people that work at the airport and the businesses that operate at the airport, along with the branding that you mentioned is quite prevalent now at the airport. So, hopefully, Peter, that answers your question.

Yes, it does. I guess one way to gain the -- get a small secured line of credit is you get it, you take a balance out, and you pay it off, and then get a larger line of credit. And then maybe you're not quite as vigilant about paying back on time. Do you have ways of detecting that behavior and getting in front of it?

As you know, the champion challenge or the detailed rigor around our loss monitoring and measuring -- pretty robust. As we now look to -- because this is new for us to say, for a small, unsecured line, let's try that and ensure that the losses stay contained, and it continues to be a profitable effort. We will be tracking it, and I re-emphasize: We're looking to grow, but not by going down the credit curve.

Maybe at this point I'll hand over to Laura. She's probably best suited to speak to it.

I guess I'd just like to add that, as it relates to new Canadians that, when we do extend credit to them in the mortgage space, we do it at a lower loan to value. And we do monitor all of our portfolios, including that one. We actually see better performance, from a credit perspective, with our new Canadian portfolio. And so, we do monitor line of credit usage and whatnot, and we do have the required thresholds and red flags, if you will, in place as it relates to when payments are not being made on time, et cetera, not just for new Canadians but for our entire portfolio.

Thanks for that.

Thank you. The following question is from Sohrab Movahedi from BMO Capital Markets.

I had three questions. First, with David, you talked about not competing on price on the asset side of the balance sheet. There's lots of competition it looks like with money being offered to transfer accounts or iPad Minis and the like. What's happening on the deposit side?

My comment, although it is universal across our products, was specifically on mortgages. When you see mortgage pricing drop, you won't see us initiating that move. So, that's what I meant by we're not trying to and nor are we achieving the growth that we're seeing over the last several quarters through price.

So, you also spoke specifically to balance transfers and so forth. That's something that, just like competition in the mortgage space and the card space, getting new clients and growing your book, balance transfer's been a multi-year strategy. So, we haven't really upped our game in that, more so than what we've done in the past.

Having said all that, it is a competitive marketplace. We do see pricing pressure in business banking. We see it in our asset segment. But we're trying to grow [in our focus] on that.

You asked specifically about deposits. I jumped off on mortgages because that's where I made my comment about not competing on price. Deposits -- again, a competitive space. This quarter we're seeing -- frankly, for a little while we've seen good growth in our deposit book this quarter, particularly so on the business banking side.

I would say there's not any particular news or developments on the pricing competition on that front this quarter relative to any quarter. And again, we're trying to compete by things like MPSO, where we're offering a package of products, including deposits. We're trying to compete by innovation with eDeposit and a good mobile banking offer, which we're being recognized for. So, we're trying to compete using innovation, relationships, and other tools other than price.

Richard, I think that opening remarks noted a good quarter in parts -- in your segment in part because of US real estate finance. Can you quantify how much of the contribution that was to the quarter, and what you think the outlook for that is in the next 6 to 12 months?

So, in terms of -- this is Kevin. In terms of the actual amount, we wouldn't give that level of detail. But it's an important part of the Business, just in terms of what we're doing. So, it was part of the contribution, but not massively material in terms of moving the dial. But an important part of our operation moving forward.

Let me hand over to Richard.

It's a business that we had shut down from 2008 to 2010. We restarted it in 2011. And we have a very good team that we maintained through that whole period.

The business is really composed of two pieces. One is our CMBS activity, and that's actually the growing piece of our business today, where we assemble portfolios of conforming commercial real estate, and then every quarter, sell those into the CMBS marketplace. That market is continuing to be active and growing over time here. So, we'll continue to see that part of our business growing.

We would have done approximately -- a little over CAD1 billion this year; that's our plan anyways. And we'll do more next year.

Then we have -- of course, we have a balance sheet business as well, where we're looking for good first mortgages on high-quality properties in good urban settings. The spreads that you can earn on first mortgages and commercial real estate in the United States is superior to almost any other corporate lending we do in the wholesale bank. And so, we've actually grown that business over the last three years.

Thank you. And then lastly, for Laura, I mean, credit generally stays good. Any commentary on the outlook, as it relates to CIBC in particular?

Sohrab, as you know, we don't give forward-looking guidance. But I guess, as you know, loan losses really depend on -- I guess on a few things. So, how well the economic environment is, the credit quality of our loan portfolio, and our overall risk management effectiveness across the Organization.

I mean, we continue to benefit from I think sound risk management practices in the front office and in our second lines of defense. And we've got strong credit quality in our portfolios. And as you know, the economy seems to be stable. I think I would leave it at that.

Okay. Thank you.

Thank you. The following question is from Meny Grauman from Cormark Securities. Please go ahead.

Hi, good morning. There's been a lot of talk across the group about interchange fees. I'm wondering what your perspective is on the issue? Do you think something is coming down the pipeline? But more specifically, do you think that altering rewards levels is a lever that you'd consider to offset any potential declines in interchange fees?

Hi, Meny. It's David Williamson. I'll take that. So, yes, interchange was noted in the federal budget, and I gather there has been some discussions on prior bank conference calls. So, just similar to those comments, discussions have been happening, and continue to happen amongst interested parties. But all that does is it confirms it's premature to speculate on outcome, whether it's with respect to loyalty programs, or what will or won't happen to interchange rates.

I guess I'd just say, from a personal perspective, I think the goal should be an outcome that supports the Canadian economy, that supports building a leading-edge payment capability and services for Canadians. So, I hope that what, if anything, occurs are aligned with those types of objectives.

Maybe I'll just try it a different way and end there. Is the issue of altering rewards levels on the table, in your view?

I think it would be. I think Canadians love their loyalty programs, for good reason. We like them as well because it does result in a more sustained relationship. But that's a cost of cards programs.

So, it's that whole relationship around cards, based on fee income, interchange income, interest income, and the cost associated with those programs. So, that's why I say, Meny, obviously, we'd just be speculating on potential outcomes because we don't know what the inputs are at this point. But that would be part of any process or decision after the facts are known.

Appreciate it. Thank you.

Thanks, Meny.

Thank you. The following question is from Darko Mihelic from RBC Capital Markets. Please go ahead.

Hi. Thank you. Good morning. You've done an incredibly good job outlining many of your initiatives that you're spending on, for which I'm grateful actually. I'm going to have a lot of follow-up questions for you after the call.

The only thing that I would like to ask is: You don't touch upon commercial lending. Are those initiatives something that you intend to look at maybe later next year, or is there something in the background that you just haven't touched on?

Hi, Darko. It's actually something in the background I haven't touched on. When I talked about increasing our client-facing staff, we are hiring relationship managers and client-facing staff in our commercial lending group. So, we are investing there. And on the innovation front, the success of eDeposits for personal clients, we've now moved into business banking.

So, we are offering to clients the ability to not have to go to the bank, and just run their checks through a machine that we give them. And they can then avoid sending someone down to the bank each day just to have real-time value for their deposits whilst in their office.

We have got another innovation that we're in the process of launching for cash balances, too, that will allow our business customers to avoid a trip to the bank. So, appreciate you raising it because we are investing in innovation and front-line staff in commercial lending as well.

And if I may, is pricing something -- I mean, your remarks on pricing with respect to retail -- is it similar in commercial? My impression is that commercial's getting quite competitive, and the growth prospects look good. Is the pricing dynamic slightly different in the commercial side?

I'd say you're right on, actually, Darko. They are slightly different; more pricing pressure on the commercial side, I would say. That's showing in our spreads. So, it is a competitive space, similar to personal. We're trying to compete with things like innovation and other offers, rather than through price. But there is competition and spread pressure in the commercial lending side.

But as you also said, volumes are good. So, deposits for us this quarter up 12%, lending up 5%, even with the decision to pull back on commercial mortgages. So, we're seeing good volume, which I think bodes well for future revenue. But between a little bit of pricing pressure and the continued impact of the trackers with the low interest rate environment on a book and business banking that's deposit heavy, the two of those factors are compressing margins.

Great. Thanks very much.

Thanks, Darko.

Thank you. The following question is from Mario Mendonca from TD Securities. Please go ahead.

Good morning. David, two quick follow-up questions for you. You did a good job of explaining the growth in cards, and you can see in page 9 of your statistical supplement that the growth quarter over quarter was about 2.4% in cards. And I appreciate all the things you said that caused that growth. But was there anything specific to transfers from TD that would have augmented that growth in the quarter?

Anything specific with respect to TD? No, not really. So, there's -- we have a mechanism that's been talked about before, for payments of balances that are going to and from TD. But that depends on card utilization, and it needs more time before that will even be able to be calculated.

Right. That 2.4% then, that sequential growth, 2.4% is pretty much -- it's all natural growth then?

That's exactly right, yes.

Okay. And again, you'd attributed it to Aventura and the travel rewards generally?

Yes, the travel rewards, after a period where it hasn't been strong, is now strong. And on the non-travel part, that's coming up next kind of thing, with Tim Hortons is strong out of the gate. So, that looks like it's going to be a winner. And we've got other things in the pipeline on the non-travel cards, too.

I just want to make sure that there wasn't anything special with the TD arrangement that would have caused that growth to look better than it really was, but it doesn't sound like it.

No, there's not.

Let me drive into another topic. You gave a pretty good summary of the expenses and the initiatives in domestic retail. You helped us think through 2014 with one quarter left, in terms of operating leverage. Can you think about 2015 with this higher expense level, do you expect the Bank to deliver positive operating leverage in 2015 in domestic retail, or is it just too early to say?

It's still early. But there's -- the investment, as I mentioned, expense level we're seeing now I think will continue. We've been seeing about that in personal banking revenue growth. Business banking revenue growth has lagged that, right, but the volumes haven't; they've been better. But the spreads due to interest rates and pricing competition is affecting the business banking revenue growth.

So, if you look forward, expense growth 5%, personal banking growth 5%, speaks to flat kind of operating leverage. Business banking revenues -- we'll see how they play out next year. If they start to tie closer to volumes, then that bodes well for operating leverage. There's no doubt that we're signaling here we're investing for growth, and that will put some pressure on operating leverage for the coming few quarters.

So, if you delevered flat, like zero operating leverage in 2015, you'd consider that a reasonably good result given all the investment spending?

Yes.

Thank you.

Thank you. The following question is from Derek De Vries from UBS. Please go ahead.

Great. Thanks. Just a couple small follow-up questions -- starting with costs, I guess. You guys added 1,250 people or so in the quarter, so there was a big jump-up in employees, and I guess some of that's graduate intake, but it seems like more than just that. Can you just maybe tell us where those people are going to work, or if there's anything special in that? Is there any initiatives or is it just kind of across the board?

Hey, Derek. It's Kevin. I think David spent a lot of time talking about investments. There's a fair amount there. We also are spending money on some of our regulatory groups. There's a slight increase over there. And graduate programs obviously would also be an increase. So, I think those would be the major areas where you'd see some growth.

There's nothing transitory in there. That's real people that will be there next quarter and the quarter after.

And then, just on the wholesale business, there's a big bump-up in deposits there. Was there anything sort of notable in there? Was there a change in pricing scheme or one big in-flow, or why did that jump up so much?

It's Richard. Going out and getting deposits from our corporate clients is just as important as going out and making loans to them. And so, we do have a program in all the regions that we lend, to try to self fund as much as we can. I'd say that probably what you're seeing is some of the work that Gary and his team have been doing gaining some more momentum, and we're becoming more effective with some of our corporate clients. But, yes, it was very encouraging to see that -- the bump-up to about CAD13 billion.

Okay. Is that the result of new initiatives and whatnot, not only will this quarter be sticky, but you could see growth in future quarters as well, or is there anything sort of exceptional?

We're going to continue to try to grow that number in all the regions we operate, particularly here in Canada, of course. As we have grown our position in the corporate credit market, we also want to see corresponding growth in our deposit -- corporate deposit market. So, you will see the two things march forward together.

Perfect. Those are the questions from me. Appreciate it.

Thank you. This is all the time we had for questions. I would now like to turn the meeting over to Mr. Gerry McCaughey. Please go ahead, Mr. McCaughey.

Thank you. Before we end the call, I'd like to take this opportunity to thank the entire CIBC team for the commitment that each of you have demonstrated to the Organization, and to our clients and shareholders for the support you have shown. We've accomplished much over the last few years, and Victor's appointment as CEO is a testament to the Board's recognition and confidence in our strategy. I know that, with Victor's leadership and the support of the CIBC team, the Bank's future is in good hands. Thank you.

Thank you, Gerry. That concludes our call. If anyone has any follow-up questions, please contact our Investor Relations department. Thanks again for joining us this morning, and we'll see you next quarter.

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