Canadian Imperial Bank of Commerce (CM) 2014 Q4 法說會逐字稿

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

(Operator Instructions)

I would now like to turn the meeting over to Mr. Geoff Weiss, Senior Vice President, Investor Relations. Please go ahead.

Good morning, and thank you for joining us. This morning, CIBC's senior executives will review CIBC's Q4 2014 results that were released earlier today. The documents referenced on this call, including CIBC's Q4 news release, investor presentation and financial supplement, as well as CIBC's annual report, can all be found on a 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 Victor Dodig, 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 AM. Also with us for the question-and-answer period are CIBC's business leaders, including Geoff Belsher, Harry Culham, Steve Geist, 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 Victor.

Thank you, Geoff, and good morning everyone. This morning, CIBC reported a strong finish to 2014, with all of our businesses delivering solid results. Adjusted net income was CAD3.7 billion, up 2% over 2013, and earnings per share were CAD8.94, an increase of 3% over last year. We delivered a return on equity of over 20%, and maintained a strong Basel III Common Equity Tier 1 ratio of 10.3%.

In FY14, CIBC returned approximately 60% of capital generated by earnings to our shareholders, while maintaining capital ratios that are amongst the highest in the industry. We achieved these results by staying on our stated strategy of deepening client relationships and investing in our core businesses.

Looking forward, our priority is to build further strengthen our businesses focusing on our culture, our clients, and our shareholders. We are committed to continuing on our path of delivering consistent, sustainable earnings, and to growing our bank both organically and through targeted strategic acquisitions.

During 2014, we have delivered several notable accomplishments. In retail and business banking, we continue to be a leader in innovation, being the first Canadian bank to offer check deposits using smartphones. To date, over 2 million checks have been deposited by our clients using CIBC's eDeposit app.

We introduced a new credit card with unique two-button technology that combines credit and rewards functionality, with our double-double card in partnership with Tim Hortons and Visa. In addition to this innovative card, our Aventura travel rewards card has been a big hit with our clients.

We have also made a substantial investment in technology in our retail branch channel to improve productivity and customer service, to deepen client relationships and to promote cross-selling. In 2014, we completed a national rollout of the first phase of a new branch-based technology platform that enables our advisors to strengthen and deepen relationships with new and existing clients. We've named the new platform COMPASS, because it directs clients to what's most appropriate for them to meet their financial needs.

It's early days, but feedback on this new platform has been very encouraging. Our advisors find it easy to use, and the average time taken to sell five CIBC products and services has been cut in half, from one hour to half an hour. In 2015, we will continue to invest in our infrastructure, and to evolve our culture to be a more client-focused organization.

As well, we will improve our processes to make it easier to bank with us, and leverage our data to offer a differentiated and personalized experience to our clients. My colleague David Williamson is here this morning to answer questions about retail and business banking.

Our wholesale bank has also done very well over the last number of years, delivering consistent earnings to our shareholders. It's a high quality franchise, with a very confident team that deploys capital in a prudent manner, something we will continue to do.

We have leading expertise in the energy, mining, infrastructure and real estate finance sectors. We are also key market participants in transacting foreign exchange, fixed income and commodities. Our strategy is to leverage our industry expertise and client relationships in Canada, and to deepen our global presence by supporting our clients when they make investments outside of Canada.

We continue to be highly ranked by third parties in our capital markets in corporate investment banking activities, where we have received the following awards. Number one IPO underwriter in Canada. The leader in Canadian equity by volume, value and number of trades. The number one bank in Canadian syndicated loan market by value and number of deals led, and being named the Canadian derivatives source of the year at the 2014 Global Capital Americas Derivatives Awards. My colleagues Harry Culham and Jeff Belsher, our Co-heads of Wholesale Banking, are here this morning to answer questions.

CIBC also has a strong wealth management franchise in Canada. CIBC asset management crossed a milestone in 2014, when our assets under management exceeded CAD100 billion for the first time. As well, we reported the 23rd consecutive quarter of positive net flows of long-term mutual funds in our fourth quarter.

We will continue to enhance the client experience and attract new clients in Canada. But with our Canadian businesses scale, we will also seek to grow outside of our home market. We will look at investments that are a natural progression for CIBC. They will be in businesses that we understand at home, and businesses with an industry structure and a market that we like, and where we believe we can create shareholder value.

We understand private banking and wealth management, including asset management very well, and we have identified the US to be a particularly attractive market for us to pursue. Not only are the US private banking and wealth management markets substantially larger than in Canada, but they are also highly fragmented.

To date, as you know, we've made two foundational investments in the US wealth management, and both have performed very well. Our recent acquisition of Atlantic Trust, an award-winning private wealth management firm, closed in early 2014. We retained 99.6% of our client assets, and 100% of our team. Assets have grown from $20 billion at the time of our investment, to over $26 billion today.

Our plan for Atlantic Trust is to expand our reach across the US beyond the 12 offices we currently have. We are looking at other states where we don't have a presence, and we are actively recruiting highly qualified, experienced professionals to support our client growth.

As you know, in 2011, we acquired a 40% interest in American Century, a US-based asset manager. It has been a very good investment for us. Assets have grown from $111 billion at the time of our investment, to over $145 billion today. And American Century now manages over 5 billion of CIBC's investment products in Canada.

We have a very strong relationship with the management team there, and we believe it's a platform that can continue to grow, both organically and through strategic acquisitions. My colleague Steve Geist, our Head of Wealth Management, is here to answer questions this morning, as well.

Looking to 2015 and beyond, our goal at CIBC is clear, and will build directly and everything we've accomplished over the past several years. The goal is to be a strong, relationship-based and high-performing bank that will continue to deliver consistent and sustainable earnings and create significant shareholder value over time.

CIBC is moving from a low risk bank focused on operational stability to a bank focused on sustainable growth, with sound risk management and long-lasting client relationships. We have a strategic plan focused on growth in Canada and select international markets. We're growing from a strong base, and will continue to make investments in our people and in our technology, to allow us to better meet the needs of our clients.

Before I turn the meeting over to Kevin Glass to review our financial results, on behalf of CIBC's executive committee and our Board, I'd like to take this opportunity to thank our shareholders for their continued support, and all of CIBC's 44,000 employees for their ongoing dedication to serving our 11 million clients. With that, let me turn the call over to Kevin.

Thanks, Victor. My presentation will refer to the slides that are posted on our website, starting with slide 6, which is a summary of results for the quarter. We're very pleased with our strong fourth-quarter results, and the solid contribution from all of our business lines. Adjusted net income for the quarter was CAD911 million, which resulted in adjusted earnings per share of CAD2.24.

In our retail and business banking segment, strong volume growth and core products drove solid results. Strong revenue in wealth management return by asset growth due to favorable market conditions, as well as record net sales of long-term mutual funds.

We were also very pleased with the performance of our US-based businesses, Atlantic Trust and American Century Investments. And notwithstanding a challenging environment, wholesale banking produced another quarter of solid results, executing on our client-focused strategy. Credit performance also continued to be favorable, and we increased our quarterly dividend by CAD0.03 per share this quarter.

We had a few items of note during the quarter, the more material ones being a charge relating to the incorporation of funding valuation adjustments, or FVA, into the valuation of un-collateralized derivatives of CAD0.21 per share, and expenses relating to the development of our enhanced travel rewards program. And in respect of the Aeroplan transactions of CAD0.03 per share. So this is the last quarter that we will be highlighting these expenses as an item of note.

In aggregate, the impact of the items of note on our earnings netted to a negative CAD0.26 per share. The balance of my presentation will be focused on adjusted results, which execute these items of note. We've included a slide 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 7, where revenue for the quarter was CAD2.1 billion, down 1% from last year, which is due to the impact of the Aero credit card transaction in Q1. Excluding this impact, revenue was actually up 4%.

Looking at our individual lines of business, revenue in personal banking was CAD1.6 billion, up 5% compared with last year. Performance benefited from volume growth across CIBC brand products, including a higher fee revenue on strong mutual fund sales.

CIBC brand mortgage balances grew 14%, or 12% excluding the benefit from first-line conversions. The conversion of first-line mortgages into CIBC brand continues to go very well. Since we started originating broker mortgages in the first line channel in July of 2012, CAD31 billion, or 65%, of the portfolio has run off. Of that amount, we have retained approximately 50% into our own brand mortgage portfolio. We're optimistic that we will continue to maintain current retention levels as the balance of the portfolio runs off. Personal deposits were up 6%, and mutual funds were up 17% year over year, on strong net sales of CAD5 billion.

Business banking revenue was CAD393 million, the highest revenue on record, and up 2% from last year, due to volume growth. This was partially offset by the impact of lower spreads. Business lending balances were up 7%, and business deposits and GIC balances were up 9% year over year.

The other segment had revenue of CAD27 million, which was down CAD119 million compared to last year, due mainly to the impact of the Aero transaction.

The provision for credit losses was CAD171 million, down 20% year on a year-over-year basis. The decrease was due to lower write-offs and bankruptcies in the cost portfolio, the impact of an initiative to enhance account management practices, as well as the sold Aero balances. We also had losses -- we also had lower losses in the business lending portfolio, which again performed well this quarter.

Non-interest expenses were CAD1.1 billion, up 3% from the prior year, primarily driven by our continued investment in growth initiatives, including expanding our sales force, as well as new product launches and innovations in mobile banking.

Net income was down 3% from the prior-year quarter. Excluding the impact of the Aero transaction, net income was actually up 7% year over year. Net interest margin, or NIMs, were largely stable, down 1 basis point sequentially.

Turning now to slide 8, wealth management had a strong quarter, with double-digit revenue growth across all businesses. Client assets grew 27% from last year, or 12% excluding the recently acquired Atlantic Trust business. Revenue was CAD587 million, up CAD115 million or 24% from the prior year, with solid performances from all business lines.

Retail brokerage revenue of CAD302 million was up CAD30 million, or 11% compared with prior year, due to higher fee-based revenue. Asset management revenue of CAD206 million was up CAD39 million, or 23% from last year. This was largely due to a combination of higher client assets under management, driven by market appreciation and strong net sales of long-term mutual funds, as well as a higher contribution from our investment in American Century Investments. This represents the 23rd consecutive quarter of positive net sales of long-term mutual funds, with CIBC asset management achieving a record CAD5.4 billion in long-term net sales in FY14.

Private wealth management revenue of CAD79 million was up CAD46 million, mainly from the acquisition of Atlantic Trust. Non-interest expense of CAD424 million were up CAD89 million or 27% from the prior year, mainly as a result of the inclusion of Atlantic Trust, as well as higher performance-based compensation. Net income in wealth management was CAD124 million, up CAD19 million, or 18%, from the same quarter last year.

Slide 9 reflects the results of wholesale banking, where we delivered another quarter of strong earnings. Revenue was CAD577 million, up CAD39 million or 7% compared with the prior year period.

Capital markets revenue of CAD308 million was up CAD29 million due to higher equity issuance and foreign exchange trading revenue, partially offset by lower debt issuance revenue. Corporate and investment banking revenue of CAD265 million was up CAD19 million or 8%, largely due to higher equity issuance and advisory revenue, and higher revenue from corporate banking, partially offset by lower investment gains. The provision for credit losses was CAD14 million compared with the recovery of CAD1 million due to lower recoveries in the US legacy portfolio.

Non-interest expenses were CAD292 million in the quarter, up CAD23 million or 9%, primarily due to higher employee-related expenses, including performance-based compensation. Net income for wholesale banking was CAD216 million for the quarter, in line with the prior year.

Slide 10 reflects the results of the corporate and other segments Revenue of CAD115 million was up from CAD103 million in the prior year, as the result of increased securities gains. The provision for credit losses was CAD9 million, compared with CAD56 million for the prior year. The current quarter included lower losses in CIBC First Caribbean, and a decrease in the collective allowance.

Non-interest expenses of CAD288 million were higher compared to the prior year, largely a result of increased employee benefits expense and higher performance-based compensation. Net loss for the quarter was CAD45 million, compared with a net loss of CAD60 million in the prior year. Looking to 2015, we anticipate losses in the segment to increase somewhat, more or less in line with the CAD70 million we had in Q3, mainly due to lower treasury revenue and increased regulatory spending.

CIBC's capital position remains strong. The strength of our earnings is reflected in our Basel III Common Equity Tier 1 ratio of 10.3%, which increased from 10.1% in the prior quarter. The increase in the CE Tier 1 ration due to earnings net of dividends was partly offset by share repurchases and higher risk-weighted assets. RWA has increased by CAD1.3 billion, driven by business growth and model parameter updates.

To wrap up, 2014 was a good year for CIBC, with strong financial results across all businesses. We performed well against our medium-term financial objectives, with a strong return on equity and increasing capital strength.

Our headline adjusted EPS growth of 3% was below our medium-term objective of 5% to 10% annual growth. But excluding the impact of the sale of 50% of the Aero plan portfolio, EPS increased by 8% compared to last year.

CIBC generated the best one-year total shareholder return amongst the big five Canadian banks at 21%. And heading into 2015, we are confident our client-focused strategy positions CIBC well to continue delivering sustainable earnings growth. With that, I'd like to turn the meeting over to Laura Dottori.

Thanks, Kevin, and good morning, everyone. I will be referring to the risk section, which begins on slide 14. You'll see that our loan losses in the fourth quarter came in at CAD194 million, which is in line with the third quarter. We had lower losses in credit cards and CIBC First Caribbean. And these were offset by higher losses in the US legacy real estate portfolio, and a lower release in the collective allowance for non-impaired loans.

Turning to slide 15, we highlight new formations, along with growth and net impaired loans by geography. Here, you can see that new formations were down this quarter, across both the consumer and business and government portfolios. And gross impaired loans were down from last quarter, with declines seen across the Canadian portfolio, and the Caribbean business and government portfolio.

Turning to cards on slide 16, our net credit losses were CAD96 million this quarter, and that's down CAD6 million from the third quarter. Slide 17 shows our Canadian residential mortgage exposures. The insured portion of our portfolio is 67%, with 90% of the insurance being provided by the CMHC. The weighted average loan to value of our uninsured portfolio is 60%, and condos account for 11% of the total Canadian mortgage portfolio.

Turning to slide 18, you can see our condo developer exposure. And you'll see that as of October 31, our authorized loans to construction projects were CAD3 billion, and our drawn loans were CAD1 billion, which is unchanged from the last quarter.

Lastly, on slide 19, you see the distribution of revenue in our trading portfolios as compared with VAR. And we had positive results in all but two days this quarter. Our average trading VAR was CAD3 million, and that's relatively unchanged from the last quarter. I will now turn things back to Geoff.

Thank you. That concludes our prepared remarks. We'll now move to questions. Before we do, as usual, I would ask that you please limit yourself to one question and then re-queue, so everyone has an opportunity to participate.

Operator, can we please have the first question on the phone?

(Operator Instructions)

John Aiken from Barclays Capital.

David, in terms of the new initiatives that you have put in place to gather new customers, and I'm thinking of the [remedy] with the GTAA, as well as the Tim Hortons cards. Can you let us know how those have been progressing? And as well, what -- and I know this is early days -- but how successful you've been, in terms of leveraging additional products onto these new customers that have come on board?

Good morning, John. Sure. I'd be happy to do that. Yes, we are making a number of investments, as Victor commented in his remarks, and we are quite happy with all the returns we're getting off of them. I will speak to a couple of them, and I will for sure touch on the Tim Hortons and the airport.

It started, beginning of the year was Aventura, where we put a lot of effort into redesigning that product and the marketing thereof. And we're now getting high single-digit growth in our travel card space.

Mortgages, another one early on where we said we were going to make sure our CIBC branded mortgages were strong as we came out of the broker space. Investing in mobile advisors, investing in productivity measures, investing on some of our front line sales capabilities. And now we are seeing mortgage growth of 12% relative to the Street at 5%, if you exclude the benefit of first line.

COMPASS that Victor spoke of, a big investment. We've cut the time to get deep relationships in half, and the level of depth that we're getting from those new sales is multiples of what we had in the business case. So that's returning.

And then you have mentioned a couple of other ones that were important, too. The double-double card with Tim Hortons is an important relationship. That card has been received amazingly well by Canadians.

And to your point about getting to depth, which is what we are looking to do, as opposed to another single product relationship, for new clients that are coming to CIBC through that card, of which there are many, and more than what we had anticipated in our business case, we're achieving over 50% with additional products. Actually, over 50% with a checking account alone. And a checking account, obviously, is fundamental to building that relationship beyond just a credit card. We've not seen anything close to that in prior product launches, and in part because it's a different focus on getting to deeper, as opposed to launching a product.

And then the airport, the airport has been a great success. Three targeted audiences, there. One is newcomers, 100,000 newcomers coming through that airport each year, and we have an offer targeted to newcomers.

The second category as travelers. 37 million travelers coming through that airport per year. A lot of individual needs of that group, but one of them as foreign exchange. And we now offer over 30 currencies through the over-the-counter and through ATMs. We have ATM, some of which offer four currencies through that box.

And then there is 40,000 employees out at the airport. And when I've been out there, there's invariably someone there working on their day-to-day banking needs that works at the airport. So the investments we've made, and we spoke about last quarter -- are real, real in amount, but the traction is at levels beyond what we had planned for, to date. So it's -- we're getting solid traction out of the investments we've put forth. And particularly in the two you mentioned, the double-double and the airport.

Thanks, David. And on the Aventura card, can you give us a sense as to what this is being -- if that has been able to bring in new clients? Or if this is just conversion of existing CIBC clients onto the new card platform?

That's a good question. I know it's -- we've had a bit of conversion, but actually not a tremendous amount. And yes, it has been a source of new clients. In part because we've been out there with a strong offer and a strong market. Percy the Penguin resonated with Canadians. And because we have marketed, and we have marketed with a promo offer, it has been a draw for new clients.

Great. Thanks, David. I will re-queue.

Gabriel Dechaine from Canaccord Genuity.

Just a question for Victor. Connecting some dots, here. Your buyback activity has gone down, and it's well below your available capacity under your current program. And then you spent quite a bit of time in your opening remarks commenting about how well the Atlantic Trust and American Century investments have worked out for you. Just wondering if you are telegraphing anything there, as far as M&A activity in 2015? And then I've got a quick follow-up.

I'm just telegraphing success in terms of the investments that we've made, Gabriel. So you asked about the buyback. I think about capital management, as we all do here at CIBC, across the spectrum. And the first and foremost focus is to make sure that we are well within the dividend payout range, though delivering consistency and sustainability of our earnings. And we are right now at the midpoint of the range, and we increased our dividend that quarter.

The other two areas that we look at, in terms of driving growth, would be organic growth. And as you just head David outline, all of the initiatives that we have in retail, important initiatives to deepen the client relationship. We have similar investments going on in wealth management and wholesale to strengthen client relationships. That is a component of our capital deployment plan.

And the remainder is used toward buybacks and acquisitions. So that's the way we think about it. I think it's a smart, sensible way. Very straight forward way. So on to your next question.

The -- let's consider M&A, though. What's the -- could you draw the parameters around what size of a transaction would then be fully funded with excess capital, versus what side of the transaction would be partially equity funded? And then as far as what assets you are potentially targeting, are you looking at 100% control? Or would you prefer to go through American Century, and partner with them, and maintain your ownership level in any new acquisitions there?

When it comes to pursuing inorganic growth opportunity, we are interested in the asset management sector. And we are interested in the private wealth management sector, which includes private banking. And we're particularly interested in the US market, because it is the largest and most fragmented, in terms of opportunity.

We have made two foundational investments there. When it comes to asset management, there opportunities that American Century seeks out. Other asset management opportunities that we identify, we always work with them first, to see if that's a fit for their organization.

And if it's not, it would be something that complements it. But again, we work in tandem with American Century to strengthen our asset management presence in the US.

When it comes to private wealth management, we've got Atlantic Trust, which is the leading provider. It has CAD26 billion, which would put it in the top 30 when it comes to the high net worth market in the US. But we know that we need scale there. We believe we need to add some banking capability there. So those are the two areas that we are most interested in investing in.

When you look at the economic parameters, there is three things to consider, Gabriel. One is size. And the size that we are looking at right now is in the CAD1 billion to CAD2 billion range. And the reason -- and there may be some tuck-ins that Atlantic Trust or American Century may do within their businesses that are below that.

But we are looking to get scale in our businesses, and therefore, size is important. But the high end of size is probably in the CAD2 billion range.

When it comes to valuations, we recognize that they are fairly robust in the marketplace today. But I think we have, in the past, and we will in the future, exert discipline, in terms of deploying our capital. And we will always look at it over the medium term under CIBC ownership. We look to be accretive on most of these investments within a three-year timeframe.

And finally, when it comes to consideration, something that I think you asked as well, at the lower end of the CAD1 billion, we believe we can do that in cash. At the higher end, we may need to do some equity. But we would -- that would all be a factor of when we do things.

So, what's most important to note at CIBC is, there's lots of opportunity to grow at home, in terms of deepening our client relationships, and inorganic growth is just another avenue to continue to grow our Company.

Thanks for the fulsome response. If I could just sneak one more in there for David, just on the card balance growth was flat quarter over quarter. That's not always a good indication of revenue, because of interchange. But I saw a couple of your big peers there, the main card player is growing at the double digits on an annualized basis this quarter. Is that really balance transfer stuff? Or what's going on in the marketplace right now?

I'd break the card business into two categories. In the travel side, we're growing now at high single digits. And that's been a full [clarity], as you know, for us over the last couple of years. So that -- we're through some change, and happy with our broad offering of the Aeroplan on the Aventura product. It is working.

Now, we are turning our attention to the non-travel cards segment, and we have work to do there that's counterbalancing our success on the travel side right now. And one of the products in that respect was the Tim Hortons double-double card, which has come out of the gate quite strong. And we've got more in the pipeline. So travel is in great shape, and we're now looking at the non-travel. And I think we are on the path to revitalizing that business substantially, as well.

So balance transfer initiatives, or --

It's part of the business, but it's not really -- one of the things in Q4 relative to Q3 is, we had strong growth Q3 to Q2. Q4 to Q3, there's been a seasonality there. So there is not any kind of -- other kind of factors of note in looking at that business. Momentum is building in the cards after several quarters of declines. And the outstandings this quarter, year over year, we've got growth in the outstanding balances, and that's a sign of the momentum building in our cards business.

Okay, thanks for all the answers.

Robert Sedran from CIBC.

It seems like the losses in the Caribbean -- or the loan loss in the Caribbean, excuse me, have settled down since the charge taken a couple of quarters ago, whereas some of the -- some of your competitors in the region are reporting heightened level of noise. So can you talk a little bit about how things are going in the Caribbean in the last couple of quarters?

And perhaps what the near-term outlook for that region is? I know it's still struggling from a GDP perspective. But do you think your loan losses have reached a level where they are at a roughly sustainable level?

Rob, it's Laura. I will take that one, and then if David wants to add on. As you did mention, in the second quarter, we did take a significant provision in the portfolio, which did provide us with better coverage ratio. So this quarter, the number that you are seeing does have some recoveries in it.

I guess what I would say is that the portfolio continues to face challenges, given economic conditions. But we do feel that our provisions appropriately reflect the current economic situation there. I don't know if, David, you wanted to add anything?

No, I think that's a good answer, Laura.

Maybe I am going to bug you anyway, David. (laughter) The top line outlook, I guess, is still a challenging one. Should we -- is a sideways revenue outlook the right way to look at the Caribbean right now?

Rob, it's a tough market there, right now. The travel, a lot of the economies there are dependent on travel. Travel really hasn't bounced back from 2008, 2009. Some of the nations in the Caribbean are feeling the pressure as a result.

So, it's a tough economic climate in the Caribbean, still, and it really hasn't significantly bounced back. There is actions that we will be taking to optimize our business. And similar to what we've done in retail and business banking in Canada, we're going to be taking a strong client focus to the Caribbean. But there's no doubt, the context we're operating in isn't markedly different from the last couple of years.

Thank you.

Sohrab Movahedi from BMO Capital Markets.

Victor, a quick question. Another dividend increase. What message are you trying to give us?

Just simply doing the right thing, as we look at our earnings and our earnings profile, and we look at our shareholders base, and we know that the return of capital is an important component of how we operate our bank. Sohrab, the second component is obviously having capital there to continue to grow our bank.

So we know that income is important to our shareholder base. But what we want to do over the medium term is also continue to invest in CIBC to aid the growth profile. And that's something that the management team, the leadership team here, is very excited about, and we think we can do with great confidence.

Okay. You said about a 60% in 2014, about a 60% capital return. Would you be happy if you had another 60% capital return in 2015, between buybacks and dividends?

(laughter) Look, we have -- the dividend payout range that we have is 40% to 50%. We are right now right at the midpoint. I think being at the midpoint, or at the upper end of that midpoint, is fine.

And then the other component of capital return comes through buybacks. And that's how we get to our 60%. So I think that we want to do what's right for our shareholders, and what's right for our Company.

And there is always the three areas. We look at the return of capital, we look at organic growth, and we look at inorganic growth. If an inorganic growth opportunity were to arise over the medium-term, we'd say, well, maybe they re-balance that slightly. But the return of capital, the dividend payout range ratio is very important to us and to our shareholders. We recognize that.

Perfect. Thank you. And if I can just quickly ask, David, nice set of results out of the segment that you run. Do you think this is reflective of the core operating power of that segment? Or do you think this was a bit higher than you would expect it to be?

Thank you for the compliment. The team will appreciate that. Everyone is working hard to enhance our results. There's no doubt that the results coming out of retail and business banking are strengthening. Our revenue growth rates relative to our peer group are -- have moved quite a bit over the last few years.

And I do think that there's more that we can do, by taking our strong products and now putting a different perspective on it, which is starting from a client first and looking to get to deeper relationships. And all the good things that come for clients and for the bank in taking that approach.

I guess one thing I'd highlight, similar to Q3 last quarter, is we're investing to make all this happen. So we're getting traction on our two core -- or our two objectives, we only have two. One, accelerate profitable revenue growth. And the other is to enhance client experience.

This quarter, we've made great progress on both. But that's being done through the inorganic investments that Victor has talked about. So yes, the quarter, on operating leverage, came in maybe on the good side of what I thought we might do. You're right, they were good results. So I'd reemphasize, I guess, what I said last quarter, which is that we continue to invest. And that going into next year, operating leverage will be negative in the first half, say.

And then as our investments even out and revenue continues to grow, we'll get to -- we anticipate getting to positive in the second half. This year, we said we'd be better than flat on operating leverage for the year, and we were, if you adjust for the impact of the Aeroplan sale. And we have highlighted we're still investing.

So good quarter, but just sticking with what I said last quarter. We'll have some operating leverage pressure in the first half of next year.

I'm just going to sneak one in for Laura. Laura, you continue to sleep well at night, notwithstanding what's happening around the world?

Yes, Sohrab, only my children keep me up at night. (laughter)

Thank you very much.

Peter Routledge from National Bank Financial.

Question for Victor. As well as retail business banking is performing, and I don't dispute that it's doing -- it's performing quite well. It provides 67%, or roughly two-thirds, of the bank's earnings. And if the credit cycle, which is probably as good as it gets right now, turns, that is certainly going to be a challenge for CIBC.

Is now not the time to be more aggressive on inorganic growth opportunities? You have very strong capital. Why not stop the buybacks, and do something more transformational in businesses that have good performance, as well, wealth and capital markets?

Peter, we're investing in all of our businesses. So retail and business banking does deliver the majority of our earnings. We are investing in that platform because we believe that there is an opportunity to deepen client relationships. There truly is. If you look at the penetration of our investment portfolios with our core client base, it is low, relative to what it can be.

And the reason we are investing in the technology today is because we want to make it a better experience for our advisors and clients to deepen those relationships, and be relevant to our clients. Having said that, the organic opportunities within wealth management and with wholesale, as well. And we've got to continue to make sure that those franchises are robust.

While we are operating at good scale in both wealth management and in wholesale in Canada, we think that there is still opportunity to grow. And therefore, we are investing in those new businesses, but they will be organic investments.

When it comes to deploying capital for acquisitions, we try and take the word transformational out of our lexicon, because it's not what we're trying to do. We are trying to build a very strong bank for the long term. We are trying to look at companies that could fit our culture, and will contribute not only to the strength of our culture, but also will contribute over the medium term to our bottom line.

That stuff takes time. And when the right time comes, we'll make those investments. But there's so much opportunity at home today, that we need to continue to focus on that element of our franchise, as well.

Five years from today, what would you like the earnings mix at CIBC to look like? Particularly, do you still want -- or would you still be satisfied with 60% plus coming from retail business banking?

I think having a strong retail and business bank is core to what CIBC does. In that, if we do this well, we can continue to have retail and business banking contribute the majority of earnings, but the overall earnings pie will increase.

I think where you will see the largest shifts, in terms of international earnings, will be primarily in wealth management. So that will continue to pivot outside of Canada, and be mostly focused on this continent. And you will see the portion of wholesale earnings that follow our clients from Canada into the US and into the markets that we operate also contribute to that, as well. So there will be more international earnings, but we will have a very strong retail and business bank.

And then just a quick question for Jeff Belsher. The corporate investment banking revenue line was actually -- looked to me, anyway, to be pretty strong. What's driving that? And how much of that strength is coming from your US real estate platform?

Again, we had very strong results in both the corporate bank on the corporate lending side, and also we had a very good quarter in the underwriting and advisory. So again, it was very solid mix.

Again, our US real estate portfolio continues to perform very well. They had very solid results. We are seeing the CMBS business starting to come back. So again, we have very good spreads in that business, in the US real estate lending business. We also have high utilization rates on the loans. So we are very encouraged with that business.

How -- from the CMBS business, what kind of growth are you going to get this year, do you think?

We think it could be material. So we think it could be very much double-digit growth in the CMBS business. So it's -- we see a material increase likely coming this year in CMBS in the US real estate.

And how big a contributor is that to wholesale banking overall?

It's a material contributor. Our real estate finance businesses, again, we don't disclose, I believe, specific numbers, but it would be a material contributor.

We'll notice if -- over the next year?

Yes. Hopefully so, yes.

Thank you.

Sumit Malhotra from Scotiabank.

My first question is for David Williamson. David, it has to do with net interest margin in the segment. Not only for CIBC, but for the sector as a whole, it seems like despite the drop in rates, NIM has held up very well.

Wanted to get the outlook for your business, in particular, considering not only the rate backdrop, but some of the moving parts you have. And specifically, has the benefit from the mortgage broker exit essentially run its course for margin? And at the same time, are you starting to get some pickup as the credit card initiatives, the new ones, are coming on board?

Yes, you are right. Our NIMs have been stable for a while now. And -- but you are absolutely right, there's always details in behind that. So the first line runoff and conversion over to CIBC, with retaining half the book, that is a lift. So that's helping us each quarter. That's not huge, but it's a net tailwind, for sure.

That is being offset, in part, by now, where net-net growing and mortgages. So, we've got a mix shift. Mortgages being an important product, but not the highest spread product. So although the conversion of first line into our CIBC branded mortgages is helping, the fact that mortgages as an asset class, in general, is going up at the rate it is, has a bit of an offset to NIMs.

The cards business, as per that earlier question, so travel is really coming on. The non-travel, we still have work to do. So our overall balances in cards is not yet really much of a factor. But I anticipate it will, given the success of the double-double card. We've got more in the pipeline coming. And the travel, now, is fundamentally a different direction than what it has been the last couple of years. So, those are a couple of the factors.

But going forward, I would stay with our guidance that we are expecting NIMs to be stable over the near-term. The other factor, I guess, is also interest rates. And the [tractors] are still a bit of a headwind. It's -- as lower interest rates continue to flow through the books, especially in business banking, that's deposit heavy.

Thanks for that. And my last question is also for Geoff Belsher. Going back to your business, and specifically the underwriting and advisory fees line.

You talked about some of the initiatives, specifically in the US, that are working well. But when I look at the 14% growth that business had this year, it certainly seems like, in the last couple of months, the new issue business domestically has been impacted by the trend in commodity prices.

Now, mining has been a challenge for four years. But when you think about how helpful energy has been to all Canadian bank investment banking revenue, revenue side of the business, how does that look to you in 2015?

It's a good question. Again, so when you look at energy, that's around, let's say, 11% of our wholesale banking business, when you look at all the different products. But half of that amount comes from our lending book, and that is very stable revenue. So the other half of that comes from various capital markets products, including equity, new issues and advisory.

And while we do anticipate that the equity new issue business in energy is going to be down, we expect that to be offset by strong commodity revenues. And we also expect some good advisory revenues, as some of these energy companies look to swap out assets. So all in all, we think the change in the energy business is quite manageable, in the context of our overall business.

And just to be clear, if I look specifically at, let's say, underwriting -- financing activity. Leave M&A, leave trading, leave lending out of the equation. If I say energy, with pipelines infrastructure included in that category, if I say it is 20% to 30% of underwriting, am I in the ballpark?

Again, if you look at just pure energy, without the infrastructure and all that stuff, it would probably be a little bit more than 30% of underwriting. But again, there's gives and takes. We've seen the real estate market starting to come back on the REIT side.

We've seen pretty strong issuance in the power and utilities market. So these markets have gives and takes all the time. And again, when we look at our overall business, we think that the extent that there is some weakness in the new issue business in energy, then there is other mitigants to that.

Thanks for your time.

Steve Theriault from BofA Merrill Lynch.

First, just a quick follow-up for David on cards, again. You've got exclusivity on the double-double like card that has the reward button on it. Just wondering, how long is that exclusivity? And do you expect to use that technology for some of the new card offerings you hinted at earlier, as you build out your non-travel card offerings? Or not necessarily?

It's a multi-year exclusivity. And we are in stages of just extending that out a bit further right now. So it's multi-year exclusivity, which is exciting. Because it's a technology, as you have highlighted, that does have different applications. The initiative in the non-travel we've got the pipeline right now is not a multi-button.

But we do -- the folks on the double-double, it's a big initiative. And the energy is really on launching that, and have it be successful. So that the next one down the pipe on that, I have very clearly in my mind, but we're still on launch mode for the current one.

So exclusivity for double-double, which is great as far as that offering, innovative and keeping it exclusive. But you are absolutely right. There is ideas that we have to use that technology in other applications.

Okay. Thanks for that. And then for Kevin or Laura, on page 7 of the regulatory supplemental, I noted that the real estate secured and personal lending, the risk-weighted assets associated with that line have been quite stable around CAD7 billion. But I saw it popped up to over CAD9 billion in Q4.

So just wondering if that has anything to do with the parameter changes that you mentioned earlier, Kevin? Or if there's something else, in terms of assumption changes? Or I'm not sure what, impacting that line?

Yes, it's Laura. So that had to do, principally, with model parameter updates that we did in that space.

So is that adjustments to, probably, the default or loss given default assumptions that go into the advanced ARB calculation?

Yes, it is.

Is that something that you've reviewed? That's been quite stable for some time. Is that just a one-off, in terms of the frequency that you update that line? Because it had been -- looks at fairly stable for at least the last year and a half.

Yes, I wouldn't say a one-off. We do annual reviews of all of our different portfolios and parameters. And so that was just part of that process.

Okay. Thank you.

Doug Young from Desjardins Securities.

Most of my questions have been asked. But I guess Victor, maybe I can go back to the -- your thought process in M&A in the US. And just wanted to confirm that I heard it correct, that you would prefer to do the asset management type acquisitions first through American Century partnership, there.

And then I'm just trying to get a sense of your preference between asset management and private banking. We know asset management valuations have been fairly robust, as you indicated. And from a fragmented perspective, looks like private banking is a better opportunity from a rolling up perspective. But it's not a CAD1 billion to CAD2 billion acquisition. There's a lot of smaller type of firms out there. So just trying to wrap my mind around that. And then I have a follow-up question.

Sure. So they are both attractive segments. American Century will probably -- the opportunity through American Century will largely be tuck-in and strengthening of their existing capabilities.

One thing we don't really want to do is build out the multi-boutique asset manager. If there's something that we feel really strongly about that doesn't fit within American Century, that might be a complement to it, but that would be it.

In terms of the private banking piece, and strengthening our private wealth management platform, we do think that scale matters. And we have received lots of overtures from our Atlantic Trust clients saying that, you are a strong bank. It would be great if you had some capability down here that we could bank through you. So that we see as a positive, as well.

So they are both attractive, Doug. I don't lean to one or the other. We look at it over the medium term. What helps us build a stronger, more robust presence in the US marketplace.

When you think of timing, Victor, I know it's a tough one to ask and answer. But is this something that you feel compelled to act upon sooner than later? Or you talked about discipline and the ability to wait. Is that more the way that you are approaching this?

You look at everything over the medium term, here. That's how we are thinking about it as a leadership team. There are some interesting companies that I would say have some level of scarcity value because of their unique attributes. We'd say if the culture fits, if the math works, we would do those.

If it doesn't work for now, we just -- we take our time. Not because we have leisurely time available, but because we have lots of opportunity to continue to grow our business in Canada. And that is a fact. You look at our retail and business bank, our wholesale franchise, and our wealth management franchise. While we are strong in our home market, there's still plenty of room to grow.

Okay. And then just on wealth, the -- it seemed like sequentially, you had good asset growth, you had great net flows. But earnings came up sequentially. It looked like non-interest expense popped up. And I think that's related to compensation. Just trying to get a little bit more detail. Because I didn't see the leverage in the wealth side this quarter that I would have anticipated, given the asset growth that we saw.

Why don't I pass that on to Steve Geist. You haven't heard his voice. He's here, too. So he can give you the answer to that, Doug.

Thanks very much, and hello, Doug. The Q4 earnings were flat to last quarter, as you note, with overall good growth year over year. We did have, in Q4, some higher compensation-related accruals, as well as some Atlantic Trust integration costs that increase expenses that we're expecting wouldn't repeat. If we backed Atlantic Trust out of the Q4 numbers, you would see some stronger operating leverage and positive operating leverage there.

And can you quantify what that amount was?

Apparently not. (laughter)

Okay. All right. No worries. Thank you very much.

I'm new to this. (laughter)

(Operator Instructions)

Meny Grauman from Cormark Securities.

You definitely talk about technology a lot. It's been an ongoing theme. And I'm wondering if you view technology as a sustainable -- or a sustainable competitive advantage for CIBC, one that you are developing? Or is it just the cost of entry, just what you need to do business in 2014, 2015?

Let me just give you the preface to how we think about it, as our bank actually has an innovative streak within it that dates back to the first bank to put PCs in the branches, to the first bank to launch PC banking, to the first bank to launch online banking in our country. And the first bank to launch mobile banking. That is in our DNA. As you hear the narrative from our business leaders, the technology we investments we are making now are to modernize our bank. In retail and business banking, I think David was quite articulate in outlining what he's doing there.

In wealth management, what we've been focused on is making it easier to do business with us. So less document laden, more digital, in terms of approach. Less paper, which makes it friendlier for our advisors and for our clients.

And we've been investing in our wholesale bank, in terms of strengthening the platform there. And some of the investments that we've made have allowed us to establish a leadership position by making it easy, easier for our clients to do business with us. And quite frankly, by making it more profitable to do business with us. I thought I would hand the mike over to Harry Culham, who is our Co-head of Wholesale Banking and Overseas Capital Markets, to talk about that.

Sure. What I would say is that the two components to serving your clients a lot better in capital markets areas is really are technology and talent. And we've made a lot of progress in both those areas over the last number of years. Technology has been a focal point, in terms of investment.

We have new systems in place across capital markets, across product, and this allows us for innovation, and also speed to market for our clients. So we're going to continue to invest in technology. It's very, very important to serving our clients in a more meaningful way.

Thank you very much.

Stefan Nedialkov from Citigroup.

I've got two questions. The first one is for Laura. Laura, sorry to bring you back to the risk weighted assets. In the credit RWAs, as we saw, there were some [modal] updates which pushed the RWAs higher. But there was also an offsetting other adjustment, which looks quite high relative to previous quarters. Can you just give us some color on what that download adjustment is due to?

And second question, I guess for Kevin, on the liquidity coverage ratio. Kevin, can you give us some color, how far away are you from the requirement of around 100%? And just a timeline as to when you will get there, if you are not there already. Thank you.

Okay. Stefan, I will start. So as it relates to your risk weighted asset question, I guess under the heading of other. So that is really related to time decay. It's really a reduction in the tenor of our exposures. So that's why you are seeing the lower risk weighted assets.

So that's basically due to the natural runoff of the books, rather than any proactive decline in the [tenor]? Is that how I should take it?

That's right.

Okay.

And then Stefan, with respect to liquidity coverage ratio, we will start reporting that in Q2, based on our calculations. Right now, we are in good shape. So don't anticipate any issues in that regard, whatsoever.

I see. Thank you very much.

Darko Mihelic from RBC Capital Markets.

Laura, can you provide some details on your oil and gas portfolio? Why is it actually so volatile, when I look at the balances, as well? You don't have any net impairs there, either. At what point would you, if oil stayed low?

And lastly, why is the fair value adjustment for CIBC so high? Is there any information capture in that? Does it tell us anything about how you trade, how you fund? Just curious on that. Thank you.

Okay. So I will take the first question, and I will leave the SCA to Kevin. So I'm not sure on your volatility question. So I'm looking at our SFI on page 19. So I don't know that I see that much volatility.

You are looking at exposure. So you can expect, quarter over quarter, you will see moves. And there is seasonality, as you know, on the oil and gas space, as it relates to when people are doing their drilling programs and whatnot. Anyhow, as it relates to oil and gas, you can see we are at CAD5.2 billion. So that's about just under 2% of our overall loans, and it's about 8% of our business loans.

So I'd make a few points. So we think our names are quite diversified domestically and internationally. About 80% of our authorizations in this space are to investment grade companies. I would say almost half of our clients are actively engaged in hedging.

So that if we have a short duration of a rapid decline in prices, it's manageable. And as you are pointing out in your question, it's really a sustained period of decline that would be more challenging for our clients.

That said, at CIBC, we are quite prudent in terms of how we extend credit in this space. We regularly review stress test our portfolio, and we do stress test not just for short declines, but for sustained price declines, as well. And when we look at our portfolio, and we do a sustained price decrease and really shock the book, losses would be quite manageable under either a scenario that we look at. And I would point out that we have not had losses in that space this quarter.

And Laura, of the 20% that's not investment grade, are those -- can you give us some color as to what kind of company those are?

Yes, so if you look at the breakdown of our book, so E&P, so exploration and production, is about 60% some odd of that number. And then it splits between the smaller and larger E&P type companies. And I would point out, because as you know, the sector within oil and gas that tends to get hit first is the services sector. And that only comprises 4% of our overall book.

That's helpful. Thank you.

Darko, it's Kevin. So with respect to FVA, I don't think it's any particular reflection of our trading strategies. And it's hard to tell -- it's impossible to tell, from our perspective, what our peers are doing.

There are a number of factors that could drive the difference. Because there are some methodology changes, just depending on how you treat FVA versus DVA. I think some banks have applied scaling factors.

I would tell you that our approach has been to be conservative. We think that we are appropriately reflecting pricing. We feel that we have approached this in the most appropriate basis.

And also, moving forward, we don't anticipate any significant volatility in this number. We'll price and hedge these risks on a portfolio basis. So the volatility moving forward will be low, as well. So I'm not sure exactly what our peers have done.

Also, some of them may have taken some reserves in prior quarters, as well. So that could have impacted it. But we're very comfortable with the charges we've taken, and feel that it's appropriate.

Okay. Thanks very much.

Mario Mendonca from TD Securities.

I'll be quick. For Kevin, the -- we know that there is at least one important tax change coming up next quarter. Rather than asking how much of your profits in domestic retail relate to creditor insurance, can you give me a sense of what you'd expect the tax rate to do from this quarter to next quarter, either in domestic retail or on the total bank basis? Like -- is it -- would it be about 100 basis point increase? Or anything there?

Sure. I think our tax rate this quarter was actually unusually low. And that was more a factor of some one-time credits that came through, Mario. So, we were low 15s. We think that we would probably operate more in the 16% to 18% range, and that's what I would look at moving forward.

But specifically, the change in taxes related to creditor insurance. That, on its own, does it have an impact on the tax rate in domestic retail, for example?

I certainly wouldn't want to get into specifics of any particular issue that may be out there. But I would say that particular item for us, on a tax rate basis, is not going to have a material impact moving forward. So that's not what driving this rate issue.

Okay. Thank you.

Brian Klock from KBW Securities.

Good morning. And just one follow-up question, energy related, for Laura. Can you give us the mix on that energy book, then? How much of that CAD5.2 billion is in Canada versus the US?

Yes. Hello, Brian. I can certainly do that. So we would find that about 35% of it would be in the US.

Great. Thank you very much.

Thank you. That concludes the question and answer session. I would like to return the meeting to Mr. Weiss.

Thank you, operator. That concludes our call. If anyone has any follow-up questions, please call our Investor Relations Department. Thanks again for joining us this morning. On behalf of the team at CIBC, I would like to wish everyone a happy and safe holiday season and new year. 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.