Canadian Imperial Bank of Commerce (CM) 2015 Q1 法說會逐字稿

Good morning ladies and gentlemen, welcome to the CIBC first-quarter results conference call. Please be advised that this call is being recorded.

( Operator Instructions )

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

Good morning. And thank you for joining us. This morning CIBC senior executives will review CIBC's Q1 2015 results that were released earlier today. The documents referenced on this call, including CIBC's Q1 news release, investor presentation, and financial supplement, can all be found on our website 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 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 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 low turn the meeting over to Victor.

Thanks, Geoff. And good morning everyone. We're pleased to announce a strong start to the year. CIBC reported record adjusted earnings of CAD956 million, or CAD2.36 per share, up 2% from the same period last year.

We continue to generate industry-leading returns. With an adjusted return on equity of 20.6%, our capital position remains strong, with a Basel III common equity tier 1 ratio of 10.3%. We also announced a CAD0.03 increase to our quarterly dividend.

We are confident our client focused strategy and high quality asset based positions us well to deliver consistent, sustainable returns and industry-leading yield to our shareholders. During the first quarter, we made progress on our priority to strengthen our CIBC franchise. By focusing on our culture, our clients, and our shareholders.

Our culture is evolving. From an inward focus which was required during a time of de-risking and stabilizing our bank, to an outward orientation that's focused on our clients. We remain committed to growing our shareholder value, through prudent investments and strategic initiatives that support organic growth, which includes investing in our brand.

We recently announced the strategic partnership that will see CIBC provide a number of services to enhance the travel experience for rider of the new express rail service between Union Station and Toronto Pearson International Airport. The new express rail service is expected to be used by more than 2.5 million people annually, and is viewed as an extension of our exclusive banking partnerships with the greater Toronto airports authority.

Under the agreement with Metrolinx, CIBC will have exclusivity in offering the marketing, its financial services directly to travelers using the Union Pearson train link. These two partnerships, combined with our lead sponsorship of the Pan Am games are providing us with a platform to elevate our brand in the eyes of Canadians and enhance opportunities for client acquisitions.

We also remain focused on delivering shareholder value through inorganic investments that will generate consistent sustainable earnings for our shareholders. Our interest is to build on our US Wealth Management business. With a focus on private banking and asset management.

To date while we've been actively assessing opportunities, we have not identified anything that meets our acquisition criteria. We will be patient. And remain disciplined on valuation, as we seek to deploy capital to grow our CIBC franchise. So now let's turn to our results from each of our business units.

Retail and Business Banking reported adjusted earnings growth of 2% and this excludes the impact from the Aeroplan sale, which closed in December 2013. During the quarter, we experienced strong core consumer lending and deposit growth of approximately 10%.

Business Banking revenue was the highest on record, driven by strong volume growth in both lending and deposits. And we are tracking more clients to CIBC and deepening client relationships with our existing client base. Average product health per client has increased steadily. While the number of single product clients continues to shrink.

We also continue to invest in strategic initiatives to better serve our clients. In the first quarter, we launched eDeposit for cash services which allows our business owner clients to get credit for cash they've taken in from their clients before those deposits have been physically delivered to CIBC for deposit. This timely service has been well received by our clients who are business owners.

During the quarter, we were also recognized for our online banking innovation. Forrester named CIBC the best in Canada for online banking in the first quarter, and this follows their most recent mobile banking benchmark report from May 2014, which also ranked us first. We, as a team, are proud of these accomplishments. My colleague David Williamson is here to answer questions about our Retail and Business Banking franchise.

Our diversified client-driven wholesale business delivered very strong results this quarter, despite challenging conditions, with adjusted earnings growth of 26% from last year. It was driven by strong client-driven trading and corporate banking revenues which drove record results in the segment. We participated in 9 of the top 10 capital markets deals priced in the quarter, and acted as a bookrunner for 4 of those. My colleague Harry Culham and Geoff Belsher are co-heads of Wholesale Banking, are here this morning to answer questions on our Wholesale Banking business.

In Wealth Management, our integrated offer delivered a strong result in the first quarter with adjusted earnings growth of 13%. Our investments in technology to improve customer service and grow our client base are starting to pay off. Late last year, our CIBC investors Edge platform introduced a reduced directed brokerage rate of CAD6.95 per equity trade. This, combined with an approved account opening system that shorted onboarding time from 45 to 10 minutes, as well as improved -- helped us improve penetration in our Retail segment.

Online brokerage account openings up 55%. It's a great example of how our strategic investments in technology and collaboration amongst our various business units can result in increased market share for our bank, and increased satisfaction for our clients. My colleague, Steve Geist, our head of Wealth Management, is here to answer questions about our Wealth Management business.

In closing, our goal is to be a strong, relationship-based and high-performing bank that will continue to deliver consistent and sustainable earnings and create significant value for our shareholders over time. Despite a challenging operating environment, we have delivered strong first-quarter results and are confident we can continue to build on this solid base.

In the first quarter, we also undertook actions to streamline our operations and realign resources to allow us to better serve -- to better meet our customer needs. We will continue to be prudent and flexible with our expense base. Ensuring we adapt to the changing macroeconomic environment, while continuing to make investments in our people, and in our technology, to build further strength in our business.

So with that, I'd like to turn the call over to my colleague Kevin Glass to review our first quarter results in detail. Kevin?

Thanks, Victor. So 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. So we're very pleased with our first-results which were driven by solid contributions from all of our businesses. We delivered adjusted net income of CAD956 million, CAD2.36 on a per-share basis.

In our Retail and Business banking segment, we continued to experience strong volume growth in core products. Wealth Management delivered 13% earnings growth, driven by solid asset growth. And we achieved record results in Wholesale Banking, executing on our client-focused strategy. Credit performance continued to be favorable and we increased our quarterly dividend by CAD0.03 per share.

We had a few items of note during the quarter, the more material ones being that as part of our ongoing efforts to align our resources to better serve our clients, and ensure that we are operating efficiently, we incurred a restructuring charge of CAD62 million after tax. We also had a gain from accounting adjustments on credit card related balance sheet demands of CAD34 million after tax, and again on sale of an investment to our merchant banking portfolio of CAD13 million after-tax. In aggregate, the impact of these items of note on our earnings netted to a negative CAD0.08 per share.

The balance of our 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.

Let me now turn to the performance of our business segments, starting with the results for Retail and Business Banking on slide 6. Revenue for the quarter was CAD2 billion, down 1% from last year due to the impact of the Aeroplan credit card transaction in Q1 of last year. But excluding this impact, revenue was up 3%.

Looking at individual lines of business, revenue in Personal Banking was CAD1.6 billion, up 3% compared with last year. Performance benefited from volume growth across CIBC brand products, including a higher fee revenue on strong mutual fund sales, partially offset by narrower margins. CIBC brand mortgages grew 14% and our total mortgage portfolio, net of the first on mortgage run-off, grew approximately 5%. Personal deposits were up 9% and mutual funds were up 18% year-over-year on strong net sales.

Business Banking revenue was CAD402 million, the highest revenue on record, and up 6% from last year driven by strong volume growth. Business lending balances were up 10%, and business deposit balances were up 12% year over year. The Other segment had revenue of CAD22 million, which was down CAD18 million compared with last year, and that's due to the impact of the Aero transaction in the first quarter of 2014.

The provision for credit losses was CAD164 million, down 11% on a year-over-year basis. The decrease was due to lower write-offs and bankruptcies in the credit card portfolio, as well as lower provisions arising from the sale of the Aero portfolio. Both our consumer and business lending portfolios in Canada performed well this quarter.

Noninterest expenses were CAD1.1 billion, up 3% from the prior year primarily driven by a continued investment in gross initiatives. Net income was down 4% from the prior year quarter. Excluding the impact of the Aero transaction, net income was up 2% year over year.

Net interest margin on an adjusted basis was down 4 basis points, due to the impact of the declining rate environment, asset mix and customer pricing and deposits during the quarter. Going forward we expect that to be stable.

Slide 7 reflects the results of our Wealth Management franchise. Revenue was CAD621 million, up CAD117 million, or 23% from the prior year, with solid performances from all business lines. Retail brokerage revenue of CAD302 million was up CAD18 million, or 6% compared with the prior-year due to higher fee-based revenue.

Asset Management revenue of CAD210 million was up CAD36 million, or 21% from last year. This was largely due to a combination of higher assets under management, resulting from market appreciation and positive net sales of long-term mutual funds and also a higher contribution from our investments in American Century Investments.

Private Wealth Management revenue of CAD109 million was up CAD63 million, mainly due to the impact of a full quarter results from Atlantic Trust versus one month in the first quarter last year. And annual performance fees earned in Atlantic Trust, which added approximately CAD25 million in revenue in the current quarter.

Noninterest expenses of CAD444 million were up CAD95 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 CAD132 million, up CAD15 million or 13% from Q1 of last year.

Slide 8 reflects the results of Wholesale Banking, where we delivered a strong quarter with record earnings. Revenue was CAD694 million up CAD100 million, or 17% compared with the prior year. Capital markets revenue of CAD395 million was up CAD65 million due to strong client activity in equity derivatives and foreign exchange trading.

Corporate and investment banking revenue of CAD279 million was up CAD29 million, or 12% largely due to higher revenue from corporate banking, including US real estate finance and higher advisory revenue. These were partially offset by lower investment gains.

The provision for credit losses was CAD14 million, compared with a provision of CAD2 million in the prior year due to high losses in the legacyUS real estate portfolio. Noninterest expenses were CAD327 million, up CAD17 million or 5%, primarily due to higher employee-related expenses including performance-based compensations. Net income for Wholesale Banking was CAD271 million, up CAD56 million from the prior year.

Slide 9 reflects the results of the Corporate and Other segment, where the net loss was CAD65 million, compared with a net loss of CAD24 million in the prior year, which was largely as a result of lower securities gains in treasury, partially offset by a lower provision for credit losses in CIBC FirstCaribbean. As I mentioned last quarter, going forward we anticipate losses in the segment to be in line with this current quarter's number.

CIBC's capital position remained strong. Our Basel III common equity tier 1 ratio is 10.3%, which is in line with the prior quarter. Strong internal capital generation was offset by higher risk weighted assets and the impact of the decline in long-term interest rates on our pension portfolio. RWAs increased by approximately CAD6 billion, which is driven by business growth, the impact of the weaker Canadian dollar and capital model parameter updates, offset to a certain extent by the sale of investment portfolios.

At 3.8%, our Basel III leverage ratio, which we now disclose as a regulatory measure of leverage, was well above the minimum required by our regulator. To wrap up, we're very pleased with these results and the continued strength across our three business units. With that, I'd like to turn the meeting over to Laura Dottori.

Thanks, Kevin. And good morning. So I'll be referring to the risk section which begins on slide 13.

As Kevin mentioned, this was a good quarter, loan losses came in at CAD187 million, or 28 basis points so that's down CAD7 million, or 2 basis points from the prior quarter. This was mainly due to lower losses in Retail and CIBC FirstCaribbean.

Turning to slide 14, new formations were relatively flat quarter over quarter, at CAD325 million. The decrease in our consumer portfolio reflects continued strong credit performance. The CAD12 million increase in our business and government portfolio relates to about a handful of accounts in various industries that are not energy-related.

New formations continue to be at very low levels. Growth in paired loans were up from last quarter and over 95% of the increase is due to the appreciation of the US dollar. So as a consequence, growth in paired loans as a percentage of gross loans and acceptances, came in at 0.56% which is up from 0.53% last quarter.

In light of the decline in oil prices, we've added additional disclosure that you'll find on slide 15 and in our MD&A. So as it relates to our commercial corporate portfolio, we have just under CAD17 billion of direct exposure, of which 58% is to exploration and production companies and only 4% is in the services space. About 80% of this is to investment grade names. To date, we haven't seen any significant stress in this portfolio and there have not been any new additions to our watch list this quarter.

As expected, we have seen an increase in our drawn exposures on both a year-over-year and quarter-over-quarter basis. A large portion of this increase is attributable to new names in our portfolio and to foreign exchange impacts. The balance, comes from increased draws by some of our clients primarily in the investment grade space.

As it relates to our consumer portfolio, we have just under CAD30 billion of indirect consumer exposure to Alberta, or CAD12 billion if we exclude our insured mortgages. The bulk of this exposure is to borrowers with strong credit profiles. And to date, we have not seen any stress in this portfolio and there have not been any notable increases in delinquencies or write offs. The credit quality of both the commercial and corporate oil and gas portfolio and the indirect consumer portfolios affected by the price of oil, remain strong.

Notwithstanding this, we do continue to proactively monitor these portfolios and we have conducted numerous stress tests at low oil prices, increased unemployment rates, et cetera, to assess possible impacts. And we believe those potential impacts to be manageable and because everyone is asking, by manageable, we mean that we could absorb stress credit losses and remain at capital levels we're comfortable with. So that includes remaining well within our risk appetite and our medium-term publicly stated objective of targeted losses below 60 basis points.

So if you turn to cards on slide 16, you'll see our net credit losses were CAD19 million, or 3% this quarter. That's down CAD6 million, or 22 basis points from last quarter. You will notice a small increase in our early-stage delinquencies and this is a seasonal trend. In addition, this quarter was impacted by the month ending on a Saturday, given that payments are not processed until the following Monday. The take away on this slide is that the cards portfolio continues to perform well and that's reflective of high quality credit and enhanced account management practices that we put in place last year.

Our Canadian residential mortgage portfolio is highlighted on slide 17. As you can see, 67% of our portfolio was insured with 87% of the insurance being provided by the CMHC. The weighted average loan to value of our uninsured portfolio is 60%. And it has remained stable over the past few years. Condo mortgages account for roughly 11% of our portfolio and the loan-to-value of the uninsured portion of this portfolio is 62%.

Slide 18 shows our condo developer exposure which has also remained stable over the past few years and remains diversified across many projects. At January 31, our authorized loans to construction projects were just under CAD3 billion, and our drawn loans were CAD1.1 billion, which is up slightly from CAD1 billion last quarter.

Lastly, on slide 19, this shows the distribution of revenue in our trading portfolios as compared with VAR. We have positive results every day this quarter as compared to our having had two negative days last quarter. Our average trading VAR was CAD3.8 million, up from CAD3 million last quarter and this increase was primarily due to increases in credit spread risk. We continue to be comfortable with our market risk positions. And with that, I'll turn things over to Geoff.

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

John Aitken, Barclays.

Good morning, Victor. I think first off, the increase in the dividend was a bit of a surprise in the street, or at least was from our stance, is this any change in stance or in terms of -- is this a greater return to capital to shareholders? Does this mean that in the near-term, you're not necessarily seeing any acquisition targets? Or does it just simply reflect payout ratio you're comfortable with going forward?

Good morning, John, thanks for your question. So our stated payout ratio is in the 30% to 40% zone. We're actually below the midpoint today and we've been quite clear as a leadership team that over the medium-term, we'd like to be toward the high end of the payout range. And really it's a function of a couple of things. One is our businesses performing well, the investments that we're making in our client franchise are continuing to deliver consistent and sustainable earnings. So as long as we continue to have a constructive economic environment and as long as our business continues to perform well, which we are very confident that it will, we'll continue to work towards that higher end of the payout range of the medium-term.

Thanks, Victor, and in terms of acquisitions, how patient or impatient are you and the Board willing to be and have you actually targeted any specific regions that you're looking at?

So, John, in terms of acquisitions, we've been active. And we've been disciplined. We've actually turned away things that don't meet our valuation criteria. We've been quite clear in terms of our parameters around size, quite clear in terms of our parameters around valuation, quite clear that we are interested in the US market primarily, primarily in asset management and private banking. But our view is that the valuation has to make sense for our shareholders. If we're going to deploy capital we have to have a reasonable expectation of accretive returns over the medium-term, and until we can get that we will remain patient because there's lots of room to grow in our Canadian franchise.

Great. Thank you very much.

Gabriel Dechaine, Canaccord Genuity.

Good morning. I've just got a couple of number questions. The Atlantic Trust performance fee -- how does that work -- over Q4? Or calendar Q4 kind of thing? And is it a profit share with some of the sub advisors there? And is this year unusual? And then, just on the margins in Canada, down 4 basis points and you said stable from here, was it a quarter -- in quarter decline caused by some, anything unusual that's going to pick up like promotional stuff?

Hi, there, Gabriel. It's Steve Geist. I'll start with the performance fee. That is earned by Atlantic Trust on its master limited partnership mandates and that is an area that they really have developed quite a specialty in and have really grown the assets quite rapidly and delivered some very strong returns. It's actually accrued at the end of the calendar year, so it's a December 31 thing, so it's something that we would see in Q1 each year. And that is earned on assets they in fact manage and it finished the end of the year at about $2.3 billion and they've grown it quite rapidly over the last several years.

They have had these products in the markets for the last eight years. They've earned a performance fee in seven of the eight. They've been quite consistent. The last five years it's averaged about $20 million and this year it came in at $21 million.

Thanks for that.

Gabriel, David Williamson will pick up on the NIM question.

So, a little bit of both. Environmental and situational. From an environmental perspective, the recent move to lower rates definitely put pressure on NIMs. But I think the greater story is from a business perspective. The total funds managed in personal banking exceeded the other banks that have reported so far this quarter, on a quarter-over-quarter basis in CIBC.

And as Kevin and Victor pointed out, Business Banking seen strong funds management growth as well. So there's a couple of inherent impacts on NIMs included in that funds managed growth, so one is mix. We've seen strong volume growth across Retail and Business Banking. But credit cards is moving slower than the other lower margin products, so that affects NIMs on a mixed basis. But we are seeing credit card outstanding starting to accelerate now, so that will mitigate that factor.

And the other is enhanced rates on deposits. So in Q1 in both personal and Business Banking we were very effective in using promotional rates to attract additional deposits in excess of a couple of billions in deposits than we otherwise would have brought in. So we're now a leader in deposit gathering. That has a cost attached to it. But now we're using analytics to drive targeted versus mass offers, which we've used successfully in the past to significantly increase retention of those deposited balances. But there was a concerted effort in the first quarter. Going forward, as you said, Gabriel, we're looking for NIMs to stabilize.

So the deposits that you -- were they new customers, or was there a migration from checking accounts at CIBC to some high interest accounts -- what was the story there?

Yes. The CAD2 billion was incremental funds in the door, actual deposits grew by quite a bit more than that. But we're saying that of that substantive growth in deposits book, CAD2 billion actually in excess of that was new funds in the door that wouldn't have occurred without those promos.

Okay. Thank you for the responses.

Okay. Thanks, Gabriel.

Sohrab Movahedi, BMO Capital Markets.

Thank you. Good morning, everyone. Just a quick question for just staying with David, David, the expenses, I mean, you have talked about the need to make some investments. You've talked about operating leverage for the full year being a tale of two halves. Were expenses a bit better than you had hoped or you had expected or you had guided us to this quarter? And can you give us a bit more color as to what, if there are any updates to the expense expectations and operating leverage, kind of thoughts for balance of the year?

Hi, Sohrab. Yes. Be happy to speak to that. Yes, they were a bit better than what we expected, but let me just give a bit of an overview. So as Kevin said, you take our revenue for Retail and Business Banking, adjust for the impact of the sale of the Aeroplan assets and you're looking at 3% revenue growth, or more specifically, 2.5%. Expense growth came in at 3%, or more specifically 3.1% so off leverage for the going forward business was slightly negative at 0.6%. So that was better than you may have expected and we've continued to guide to negative for the first half, but a bit better.

I mean, we continue to look for expense efficiency opportunities and we did some of that in the most recent quarter. But, hopefully, there isn't any uncertainty that we continue to invest in our business, so better than expected. And consistent with what we indicated otherwise, again, for the first half. I think it's important that we recognize we continue to invest and we're getting benefits from those investments and if you'll allow me, I'll just review a couple of those investments that we are making.

Because we are seeing an impact in our funds managed growth, I think as a result of some of these investments. So we continue to invest in COMPASS, that was rolled out last year across all the branches in the third quarter, but there's more products put on to it. The early indications from COMPASS are its having a desired impact, both in the depth of relationships we're getting through the speed of onboarding new clients, but onboarding them not with products but with deeper relationships. We're investing in the mobile sales force, we continue to do that and it's resulting in mortgage growth that's double the industry average and the CIBC name even, excluding the impact of conversions from FirstLine. We're investing in innovative new products, such as the Tim Hortons' Double Double Card which has gone over quite well, and we have another card in the hopper for later this year, non disappeared non-travel card.

We are investing in online and mobile and as Victor said, we've been recognized for by Forrester as a leader in both online and mobile now in Canada against the big five. International Banker in the UK recognized us as the best Innovation in Retail banking within Canada recently which is supportive of the investments we're making in payments and innovation.

So that, along with what Victor mentioned, with the Toronto airport and the uplink sales training and additional relationship managers in Business Banking, and we continue to invest right across the board in Retail and Business Banking. And we're looking for efficiency offsets against that, we've called it back to front in the past where we're trying to reduce service costs but enhance our sales team.

And all that's -- we're getting traction, so we're feel good about the investments and will continue to make it. Client experience is improving, our relationships depth is improving, and as I said before on a quarter-over-quarter basis, so far the reported banks, we've shown the most growth in funds managed. So the investments are getting traction, we'll continue to make them, so although this quarter was maybe a bit better in expectations, the story remains true regarding continued investment.

Okay. So just to clarify, David, as far as the full year was concerned, you had said that you would be -- I think I've heard you say that you in the past, that you would be happy with flat operating leverage that would be a win. And you're not changing that -- those thoughts past the first quarter results.

Yes. Thanks for asking just to clarify -- you're absolutely right. So same message before, but better this quarter, but the investments continue and the overall comments we made for FY15 remain the same.

Thank you very much.

Thanks, Sohrab.

Robert Sedran, CIBC.

Hi. Good morning. David, just since you have the microphone a follow-up question. Is it fair to say FirstLine is now having a diminishing impact on the margin, or is it still a positive?

Hi, Rob. It is diminishing. So we still are getting a 50% retention on FirstLine and I haven't had a chance to report on that recently so that -- we're still very pleased with how we're retaining those balances. But you're absolutely right, as where before it was having a more marked impact as far as the lift on NIMs, that's still there but diminished.

Okay. And I just wanted to follow-up on -- I thought I heard Laura say, in talking about the energy loan book that part of the reason that drawn exposure went up is that there are new names in the portfolio. So I kind of understand supporting existing clients and then drawing on their lines, but perhaps Geoff can talk about what the bank is doing to grow that exposure and where it's doing it.

So, Rob, what I would say is we're very selective. We're very focused in managing this situation in a prudent way. There are opportunities, as some people may retreat from certain accounts, to selectively go in, but that is a highly selective thing on a few cases, so it's not a large-scale type of event. Basically, our clients which as Laura said are primarily investment grade, are using this to shore up their balance sheets and in some cases, build some capability to do some acquisitions in what may be a depressed commodity environment. So again, I'd say it's highly selective but it's not widespread.

Is it more Canada or US, Geoff?

We see it in both. We have books in both places, again we're more in Canada than in the US or a little bit in the US and a little bit in Canada.

Thank you.

Stefan Nedialkov, Citigroup.

Yes. Hi, it's Stefan from Citi. I have two questions. The first one is on the oil exposures. If I look at your previous quarter disclosure on undrawn oil and gas facilities, that basically went down by around CAD400 million to around CAD8 billion this quarter. The drawn amounts went up by CAD1.7 billion, so I guess as a full of really, are we seeing drawn amounts being increased because of new clients? Or are you simply increasing the available undrawn facilities to existing clients? So it's CAD400 million versus CAD1.7 billion.

And my second question is on model updates. There was some talk in your press release again, and I guess that some of the numbers show that model updates -- what is driving that? Is that regulator driven? And what types of risks are you guys updating your models on? Thank you.

Hi, Stefan. It's Laura. So I think I'll take both of those questions. So as it relates to drawdowns in our oil portfolio, so a large portion as I mentioned of what you're seeing the drawdowns, we did bring in new clients. There has been foreign currency impacts relating to the US dollar and as we expected, we did see increased drawings, and as Geoff pointed out, from some of our clients, and that would've been primarily in the investment grade space.

So it was expected, but there is an increase and so we do actively monitor that and I can tell you that our team is in regular contact with our clients and, from what we see, they're adjusting, they're behaving in a very prudent manner given the circumstances. And as a result, we remain comfortable with the increase in the drawdowns that we're witnessing.

As it relates to models, I guess, in part, I could refer you to the piece of that Gabriel Dechaine put out, and I thank Gabriel for that. As you know, we can't comment on any specific regulatory reviews. That said, all of our material model parameter updates, they do need to be reviewed and approved by regulators, and that's prior to implementation. So that would mean that our old models would've been regulatory approved and it also means that any new models we have would be regulatory approved. And this is really just considered normal course of business for any Canadian bank.

Right.

Did I answer your question?

Yes. Well, there was a Wall Street Journal article talking about acquisition-related risk increases that the regulator is not very comfortable on, and obviously, you guys cannot really talk much about what's going on with the regulator, but in terms of acquisitions, within Canada or outside of Canada, are you completely comfortable with the risks you're taking on your books?

And I guess, for those of us who do not subscribe to Gabriel's research, maybe you can you give us a summary of that as well?

So can I -- I'm going to hand that question over to Victor, but I can tell you that as Chief Risk Officer, I am quite comfortable with the risks that we are taking and, of course, we would ensure that we were comfortable as a team prior to making any new acquisition and with that, I'll hand it over to Victor.

Yes, Stefan. Thanks for your questions. So I don't generally respond to articles like that, but I'll respond to your specific question and that is around acquisitions. So we are under no restrictions when it comes to acquisitions and growth. The only restrictions that we're under are our own self-imposed restrictions to be very disciplined and as you would know, and acquisition would have to meet -- we have to get approval from regulators just as every other bank would. So we are under no restrictions when it comes to growth.

Okay. Great.

Sumit Malhotra, Scotia Capital.

Thanks, good morning. First for Victor, just tying in your comments on capital return and the lack of what sounds like an imminent acquisition from the bank. Since your appointment to the CEO role, the bank has not been active on share repurchase activity. Is it fair to think, given where your capital position is and that your comments on the acquisition outlook that it would be reasonable to expect CIBC to resume returning capital to shareholders in that form in the near-term?

Sumit, thanks for your question. So the four areas that we always look at when it comes to our financials are in terms of return and investment would be dividends, maybe organic investments, and we have significant organic investments that we're making, David, listed a number of them, and they're important because they are going to provide very good returns, we believe to our shareholders. There are the inorganic investments and there are the buybacks.

First and foremost, I think our shareholder's value and I think it's the most important reflection of the strength of our business that we work our way toward the high end of the payout ratio. Secondly, investing in our core organic franchise is very important to us. We've seen returns in Retail, Business Banking, Wholesale and Wealth, that are a direct function of the technology investments that we're making to make it easier for our clients to do business with us.

The other two areas of buybacks and M&A are simply, I think a pillar of additional flexibility that we would use when we see fit. It's important to maintain that financial flexibility as we go forward, so I wouldn't read anything into imminent or not imminent. What I'd look at is, the core underlying results are strong. The investments that we're making are delivering stronger results and the leadership team at CIBC feels very confident that we can continue to do that over the short, medium, and long term. And the best reflection of that is to work our way toward the high end of the payout ratio when it comes to our dividends.

All right. I hear you there and then I want to switch it over to Harry and Geoff. Record quarter, at least the way I've looked at the numbers here, for the Wholesale Bank. And Victor, in the last few months has talked a lot about I'll paraphrase here, essentially CIBC moving from defense to offense again after a number of years of de-risking. Can you talk specifically about some of the initiatives that you gentlemen have transferred over to the wholesale part of the business from a growth perspective? And what specifically underpinned what was very strong results, particularly in the trading part of the business?

Hi, it's Harry, I'll kick that off. As you probably know, Geoff and I have been responsible for this business for quite some time now so the strategy remains consistent. We are very, very focused on deepening our relationships with clients in Canada and abroad. As you probably will have noticed, the earnings this quarter are well diversified across bank. That's corporate bank, investment banking and capital markets, with a specific emphasis on client activity in pre-volatile and reasonably liquid markets.

So we've seen good results in areas where we have invested, those initiatives you spoke about have been in place for quite a while. So we've invested a lot, as David is doing in Retail and Wholesale over the years in our trading platforms and our people. And that's showing good results in working with our clients in difficult volatile markets. At the same time, well diversified across all trading products.

Meny Grauman, Cormark Securities.

Hello. Can you hear me? Sorry. Hello? Good morning. So just a broad question about the credit picture. Definitely a good picture across the peer group. With no real warning signs, despite fears of the future. So I'm wondering, what you read into that. Is it -- does the credit picture in Q1 give you confidence that maybe the drop in oil prices is really going to be a nonissue from a credit perspective? Or is it just the case that it's just too early to tell and we don't have good information this quarter one way or the other?

Hi Meny. I think it's a bit too early to tell. It's known loan losses -- I mean they're in part dependent upon our underwriting criteria and the state of the economy. We continue to have a strong underwriting criteria, quality in the books as I pointed out. From a watch list delinquency perspective to date, we're comfortable. That said, the economy is facing headwinds, given low oil prices, so it's really a question of how sustained these low oil prices will be.

And maybe it's sort of -- looking out into the future, sort of, if we see the same kind of performance in Q2 or Q3, like, at what point do kind of start to look at these numbers and say I think this is actually giving us information that you know the situation maybe is looking better than maybe what some people expect.

Well, again, we watch oil prices closely and it'll be a question of how sustained low oil prices are. That said, we do look at indicators in our portfolio for early warning indicators. We watch things like drawdowns and to what degree they're increasing, revolving, we look at our watch list in the commercial corporate space to see if we're seeing signs of weakness there.

In our consumer books, we look at our delinquency rates. We also look at downgrades to upgrades in our portfolio and so where, from your perspective, I think you would start to see things as you look at our results would likely be more in that downgrades scenario. So the first place we'd start to see some pressure as we have downgrades would be an increase in our risk-weighted assets.

Okay. Thank you very much.

Peter Routledge, National Bank Financial.

Hi, this is for Laura's as well. On page 15 of the presentation, under indirect exposure, at Alberta HELOC and other exposures, have those -- have households in Alberta been drawing on those lines at all? In the last quarter?

No. We haven't seen any changes in the last quarter.

If you start to see households draw on those lines, does it change your view of their credit worthiness and how do you respond?

So it doesn't necessarily change our view in terms of credit worthiness. However, we do -- we would look at that closely to see to what degree, if you will, drawdowns are increasing and are not revolving. Because that would indicate, if they haven't moved and they're starting to move up, and not come back down, that there is some stress in the portfolio.

And do you start to revoke those lines for certain customers if you get worried like that? You certainly have the ability. Do you have plans to execute on that?

Well, we do like to support our clients and so we monitor the situation and it depends, of course, on the terms under which credits are granted. In that normally there needs to be a breach and an agreement before you can sit down with a client to discuss whether or not you want to continue a relationship and under what terms and conditions.

But the household credit lines are generally revocable. Right? Or do I have that wrong?

Well, again, if you have -- if you're referring to HELOC, you would have to be in default of your condition, so you would not be paying your interest for example, you'd be delinquent on that and that would be a moment where we could decide if we wanted to revoke credit or not. I think if we look more -- the question is perhaps more appropriate when we get into the cards where we do manage sort of our authorizations that we grant people. And if we start to see things happening there, we do have the ability to adjust how much credit we're giving someone.

Okay. And then, just on your stress testing, and this question will apply either to commercial or household portfolios. To what extent in your stress testing do you incorporate a deterioration in credit quality? So probability of default and/or loss given defaults rising as things get worse?

So that is -- if I call it a bit of a what happens when we do the stress testing in that we look at multiple variables and we look at it all kinds of different ways. But essentially when we go at it we look at, what if, for example, unemployment rates rise, gross domestic product retracts, and what happens to asset valuations. And from that, we then look to see what happens to our clients so, as you'd expect, the probability of default would increase, and depending upon what you're doing with your asset valuation, your loss in the event of default would change.

So, in the context of that 60 basis point comment you made in your opening remarks, that includes a material deterioration in probability of default in loss given default across your portfolios?

That's right.

Right. Thank you.

Doug Young, Desjardins capital markets.

Most of my questions have been asked and answered but maybe, David, just on the -- and I think this was mentioned in Victor's prepared remarks in terms of, you notice an increase on average product per client. You've made a lot of investments, I think you've described them quite well in this call and past calls and in technology and product. Can you talk -- give us a sense of what the outcome has been and, I guess, the best way to do that is if you could quantify it in terms of product by client or if there's other ways you can kind of quantified some of the success that you've seen? Thanks.

Hi Doug. Yes. Let me speak to that. Back in 2011 when we said we had two objectives, enhancing client experience and accelerating profitable revenue growth, to make that happen, we spoke about a pivot from a product focus, which pretty much by definition results in more single product relationships to a client focus, and depth really became a key element of the prioritization, so that was back in 2011 and you're right. We've been focused on that since.

So we talked about the progress since then. FirstLine, a source of single product relationships, we tried to get to deeper on FirstLine, couldn't get there. And then we made the decision to not grow that book any further. And in the adjustments to our new profile and travel cards, where we activated a focus on Aventura but retained Aeroplan as you know as part of that, we sold that part of our Aeroplan book that only had that product with us, so the single product relationships.

So since then, from a day-to-day operating perspective we've changed a lot. We've changed everything from incentives to, at the other end of the spectrum, our investment in the COMPASS program and a heck of a lot of points in between those two extremes. And we have seen quite a change, so in 2011 we were actually heading the other way. We were heading a thinner relationship, so our product use count, our depth measurement of relationship depth was heading in the wrong direction, and again that was because we focused on maybe card sales or FirstLine sales or other kind of product oriented focus.

Since then, we have changed the direction and over the last few years, we've seen on the overall book, about a 4% CAGR as far as increase in depth of relationship measures to product use count. In the new clients, through the door clients, we've seen double that rate. Which makes sense because that's where you can kind of effect a greater depth rate at the front end and the aggregate book will move a bit more slowly.

Maybe give you another example. Of the transition and the results. So some years ago, we introduced the Petro Canada card. At that point, we were focused on products. And if we look at the depth of relationship we got with the Petro Canada card, it was about 4% of the clients that took a second product with us, so it was really a card sale.

With the Tim Hortons Double Double Card, we have focused on incenting a deeper relationship with us, and with that card, the depth of relationship has changed from 4% to over 50% that have more than a product with us. So we incentive that so we didn't incentive just a hollow relationship. We have incenting that most important second product which is a checking account, to be one where either the payroll is being deposited or there's at least two prearranged payments out of that account. So it's not a hollow secondary relationship, it's a robust one.

So from Petro Canada, less than 4%, to the Tim Hortons Double Double Card or over 50%, have deeper relationship with us, really I think is a tangible evidence in the change in focus and the results that we're getting from that change in focus. Thanks, Doug.

Yes. That's great. Thank you.

Darko Mihelic, RBC Capital Markets.

Hi. Thank you. Good morning. Maybe I'll come back to my corporate and other after the call, because it's jus simple question I think we can hammer it out after the call, so just focusing back, Laura, I want to go back to the discussion on the stress test and the comment that you'd be below 60 basis points. And I guess what I'm really looking for, and I do appreciate the extra information you provided on slide 15 it's excellent, but I just want to make sure that we are talking about a stress test per se. Can you actually give us some meat as to what the assumptions are with respect to oil price, what the assumptions are with respect to unemployment and what the assumptions are with respect to real estate declines. That are baked into your stress test that results in a loss ratio that would be below 60 basis points?

Sure. So I'd like to start -- I was actually hoping that comment would avoid a lot of these questions, but I did say that we would be well within that number and so, yes, it does relate to the stress testing that we do, and we have run a variety of stress test as it relates to our oil portfolio, including both direct and indirect exposures.

We have looked at oil going down as low as CAD30. We have run unemployment in the Alberta area coming up to the Canadian national standard. We have dropped housing prices just under 20%. And we also took, I think, about a half a point off of our GDP. So we've run, as I said, a variety of stress tests and those were probably the big headline items that we moved around to look at potential stress losses.

Okay. I appreciate it, I guess where I'm going with that is I'd always thought that when you say below 60 basis points, through the cycle, quote, meaning that at certain bad parts of the cycle, you could actually lose more than 60 basis points, as you did 70 basis points in 2009. So I would've thought that a true stress test could of actually pierced that 60 basis points. So maybe you can clarify my thinking on that, am I wrong in thinking of the 60 basis points through the cycle, meaning that at some point you can actually exceed that number?

So a, we do talk about this being our medium term so we talk about that. I guess I would caution that they are stress tests that we run so they don't -- like there's a possibility they might not be correct and so we run a variety of them to get a feel for how bad things can be and for the stress tests that we run, both are mild and severe stress test, we still come within those guidelines. Now, that's not to say we might not have called things right. All kinds of different things can happen in this world, but when we run our various stress test, we fall within our risk appetite.

Okay. That's great. Thanks very much.

And the only thing I guess I would add to that, of course, we're talking about when we run the stress -- a sustained decrease in oil price and that really affects Alberta primarily so we're not talking about some other impact that could come into the Canadian market and affect other areas of the portfolio. So that would just be the other important thing to point out.

Okay. Thanks very much.

Steve Theriault, Bank of America Merrill Lynch.

Thanks very much. Thanks for squeezing me. If I could ask Laura, I'll burden you with one more stress test question. I'd be interested in knowing --

Steve? It sounds like you are on the states? Can you speak a little louder?

Apologies.

That's better.

So to Laura, just one more follow up on the stress case, I'm curious, how much RWA inflation do you get -- we talked about PDs and LGDs moving higher. There is an obvious impact on earnings but I'd be interested -- I don't know if you can put this in terms of basis points of CET 1, or just in terms of gross risk-weighted assets, but interested in knowing how that migration in a stress case affects the CET 1 ratio.

Yes. So when we look at -- if you were to assume a one notch downgrade in our business portfolio for commercial corporate loans, so imagine an overall one notch downgrade of the portfolio, that would equate to about CAD1.5 billion of increase in risk-weighted assets and so that would be about a 10 basis point corresponding decrease in the CET 1.

Could you map that on the consumer side as well? Somehow?

Yes. So on the consumer side, we thought we'd probably be just under CAD1 billion, sort of if we had an overall one notch downgrade.

Okay.

And again, whether or not that would continue to increase would really depend upon sort of how sustained and low oil prices are and just how low they actually remain.

Okay. So that's fairly modest. And then, lastly, for David, just to follow up on your commentary around the Double Double Card and the cross sell, or multiple product customers going from 4% previous example to 50%, how much of that would be sort of creditor type insurance versus savings accounts type branch products, sorry if I missed that in your discussion earlier, but I'm curious on that front.

No problem, Steve. No. That's actually the savings account affecting those numbers. Not the creditor insurance, so it's really getting to that deeper kind of transactional banking relationship that we're getting to and Petro Canada, at less than 4%, just really we are focused on the product and not the relationship around it. So it just speaks to just a mindset shift to the client and building that relationship relative to a product and having sales of the products.

Okay. And any sense of the timing of the new card that you mentioned is coming down the pipe?

Later, much later this year. It's in development now.

Thanks so much.

Thank you.

Thank you. I would now like to turn the meeting over to Mr. Geoff Weiss for closing remarks.

Thank you, operator. Well, that concludes our call. If anyone has any follow-up questions, please contact our investor relations department and thank you for joining us this morning and we'll see you next quarter.

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