Canadian Imperial Bank of Commerce (CM) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CIBC second-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, Mr. Weiss.

Good morning, and thank you for joining us. This morning CIBC senior executives will review CIBC's Q2 2015 results that were released earlier today. The documents referenced on this call, including CIBC's Q2 news release, investor presentation, and financial supplement can all be found on our website at 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 I will conclude by 9:30 AM. 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.

Thanks, Geoff. Good morning everyone, and thank you for joining us on our call today. CIBC reported solid second-quarter results this morning, with adjusted earnings of CAD924 million, or CAD2.28 per share, which is up 5% from the same period last year.

We also delivered our 22nd consecutive quarter of adjusted return on equity in excess of 20%. And our Basel CET1 ratio remains strong at 10.8%. As well, this morning we announced a CAD0.03 increased to our quarterly common dividend to CAD1.09 per share, Consistent with our plan to move our dividend payout ratio to the upper end of our 40% to 50% payout range.

Our strong results were driven by growth from all of our business units, backed by continued progress on our client-focused strategy. To strengthen relationships, we're listening to our clients and delivering to them services we need they need in the manner they want.

With today's fast-paced lifestyle and increasing dependence on technology, what they want is banking that's easy, flexible and personalized. Easy, so that banking is not a time-consuming task. Flexible, so they can bank where, when and how they want. And personalized, so that our financial advice is customized to their needs.

And that's why we've repositioned our brand, from For What Matters to Banking That Fits Your Life. We want our brand to reflect our strategy of focusing on our clients needs, our relationships with them, and the quality with which we serve them.

So while there's more to do, we are well on our way to realizing our vision of being the leader in client relationships. To make banking easy, we've upgraded several platforms and streamlined several processes in all of our business units. To make banking flexible, we provide our clients with multiple channels from which to do their banking, be it by person, by phone, at an ATM, online or on their smartphones.

CIBC has been at the forefront of technological innovations by delivering convenient banking access to our clients. And to make banking personalized our new Compass platform, introduced late last year in our retail branch network, uses client information to recommend relevant services to our clients based on their personal needs. We've also refined our training and incentive programs for our front-line teams to work together and support our client-focused strategy. And with this, our ongoing efforts are reflected in the profitable growth we have delivered in each of our business units this quarter.

Retail and Business banking reported adjusted earnings growth of 4%, with revenue growing in both personal and business banking. Personal banking revenue was up 5% year over year, benefiting from strong volume growth as well as increased interest income and fee income. Business banking revenue was up 9% from last year driven volume growth and higher fee income.

And during the quarter, as you know, we were the first of the big six banks to launch a mobile banking app for the Apple Watch, furthering our commitment to innovation for our clients. As well, we introduced the new CIBC Telus co-branded Visa rewards card, offering clients the opportunity to use their rewards for smartphone upgrades and other lifestyle rewards. This offering further strengthens our non-travel credit card lineup, as we advance our strategy of providing our clients with leading value and choice in cards that meet their needs. My colleague David Williamson is here this morning to answer your questions about Retail and Business banking.

In Wholesale banking we reported year-over-year adjusted earnings growth of 12%. Results were driven by strong performances in our trading businesses reflecting increased client activity and continuing market volatility. Advisory and underwriting revenues were also higher, and mandates were well diversified across industries in Canada and abroad.

Our Wholesale bank also continues to focus on both innovation and investments in technology that benefits our clients across CIBC. For example, our e-business platform seamlessly supports our in-branch foreign exchange service and multi-currency ATMs at Pearson airport. Our clients traveling through Pearson are embracing the easy and flexibility of this convenient service, and uptake has been strong. My colleagues Harry Culham and Geoff Belsher, our co-heads of Wholesale banking, are here this morning to answer your questions.

In Wealth Management, adjusted earnings increased 11% and revenue increased 12% compared to the same period last year. In addition to contributions from the acquisition of Atlantic Trust, revenue growth was driven by higher fee-based revenue, higher assets under management resulting from market appreciation, and record net sales of long-term mutual funds totaling CAD2.5 billion.

During the quarter, Atlantic Trust received two awards. In the United States, these rewards were recognized for the fourth straight year by Private Asset Management for Excellence in Investment Management and we were named the Best Multifamily Office at the Annual Family Wealth Report Awards. We're very proud to be recognized for our contributions in the investment community, and we'll continue to deliver to our clients easy, flexible and personalized services that meet their needs. My colleague Steve Geist, our head of Wealth Management, is here this morning to answer your questions.

In closing, while we are pleased with our second-quarter results the macro environment continues to challenge certain industry sectors. Although somewhat stabilized, oil prices and interest rates remain weaker than in the prior year. Now, we're navigating through these challenges by being more vigilant in our risk management, continuously addressing our clients' needs, and maintaining an appropriate balance between expense management and investing for growth. Our capital position allows us to invest in our business for the long term, as well as to return capital to our shareholders, which we did today with the announcement of a 3% increase in our quarterly dividend. I'm confident that our client-focused strategy and our investment in innovation and process improvements can generate organic growth in our strong franchise.

Before I turn the meeting over to Kevin Glass to review our financial results in detail, on behalf of CIBC's Executive Committee and our Board I'd like to thank our shareholders for their continued support, and I'd like to thank all of CIBC's team members for their ongoing dedication to serving our 11 million clients. Thank you. And Kevin, over to you.

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. CIBC delivered reported net income of CAD911 million and adjusted net income of CAD924 million in the second quarter of 2015. Adjusted EPS of CAD2.28, which was up 5% year over year.

These results were driven by strong performance across all of our businesses. The quarter reflected strong volume growth and higher net interest margins in our Retail and Business banking business. Wealth Management achieved 11% earnings growth, driven by solid asset growth. And we delivered strong client-driven performance in Wholesale banking. Also, we increased our quarterly dividend by CAD0.03 per share.

We had two items of note during the quarter which nets to a negative impact of CAD0.03 per share, an after-tax loss of CAD5 million from our structured credit runoff business and amortization of intangible assets of CAD8 million after tax. The balance of my presentation will be focused on adjusted results, which exclude these items of note. We have included slides with reported results in the appendix to this presentation.

Let me now review the performance of our business segments, starting with the results for Retail and Business banking on Slide 7. Revenue for the quarter was CAD2 billion, up 5% from last year driven by strong results in both personal and business banking. Revenue in personal banking was CAD1.6 billion, up 5% compared with last year. Performance benefited from volume growth, higher fee income and strong mutual fund sales. Mortgage growth of 5% was helped by above-market growth in CIBC-brand mortgages of 15%, partially offset by the runoff of the FirstLine broker business. We've continued to see strong personal savings growth, with client deposits up 12% year over year.

Business banking revenue was up 9% from last year, driven by strong volume growth and higher fee income. Business lending balances were up 11% and business deposits and GIC balances were up 6% from the same period last year. The other segment had revenue of CAD25 million, which was down CAD10 million compared with last year due to the continued runoff of the FirstLine portfolio. The provision for credit losses was CAD188 million, up 9% on a year-over-year basis, and Laura Dottori will discuss credit quality in her remarks.

Noninterest expenses were CAD1.1, billion, up 4% from the prior year, primarily driven by a continued investment in growth initiatives, including expanding our sales force as well as new product launches and innovations in mobile banking. We delivered a positive operating leverage of 1% in retail and business banking this quarter. Net income for the quarter was CAD584 million, up 4% from the prior year. NIMs were up 3 basis points sequentially, and going forward we expect our NIMs to be stable.

Slide 8 reflects the results of our Wealth Management franchise. Revenue was CAD617 million, up CAD67 million, or 12% from the prior year with solid performances from all business lines. Retail brokerage revenue of CAD312 million was up CAD20 million, or 7% compared with the prior year, mainly due to growth in fee-based assets. Asset management revenue of CAD219 million was up CAD36 million, or 20% from last year. This was largely due to higher assets under management driven by market appreciation and higher net sales of long-term mutual funds.

During the quarter we achieved a record CAD2.5 billion in net sales of long-term mutual funds. Private wealth management revenue of CAD86 million was up CAD11 million, or 15% mainly due to higher assets under management driven by both net flows and market appreciation. Noninterest expenses of CAD443 million were up CAD51 million or 13%, primarily due to an increase in performance-based compensation driven by higher revenues. Net income in Wealth Management was up CAD13 million, or 11% from Q2 last year.

Slide 9 reflects the results of Wholesale Banking where revenue was CAD668 million, up CAD59 million or 10% compared with the prior year. Higher client activity in foreign exchange and commodities trading, and higher underwriting and advisory activity drove capital markets revenue of CAD417 million, which is up CAD86 million from the prior year. Corporate and investment banking revenue was CAD259 million, down CAD16 million from the prior year. Higher underwriting and advisory activity was more than offset by lower investment gains in the quarter. Noninterest expenses were CAD336 million, up CAD19 million, or 6% primarily due to higher employee-related costs. Net income for wholesale banking was CAD255 million for the quarter, up CAD27 million, or 12% from the prior year.

Slide 10 reflects the results of the Corporate and Other segment. We had net loss for the quarter of CAD49 million compared with a net loss of CAD25 million in the prior year, largely as a result of lower revenue in treasury and the impact of increased regulatory costs partly offset by higher earnings in CIBC FirstCaribbean. As we've indicated previously, going forward we anticipated losses in the segment to be somewhat higher than the CAD50 million -- the CAD49 million in the current quarter.

CIBC's capital position remains strong. Our Basel III Common Equity Tier 1 ratio was 10.8%, up 50 basis points from the prior quarter. The increase was due to strong organic capital generation, the sale of our stake in Butterfield Bank and the impact of rising rates in the quarter on our pension portfolio. RWAs remain stable, with business growth offset by the impact of the strengthening dollar. Our Basel III leverage ratio was 3.9%, well above the minimum required by our regulator.

To wrap up, we're very pleased with the results this quarter, with all of our business units performing well. And with that, I'd like to turn the meeting over to Laura Dottori.

Thanks, Kevin. Good morning, everyone. So I'll be referring to the risk section, which begins on Slide 13. You'll see that loan losses came in at CAD197 million, or 30 basis points. So that's up CAD10 million, or 2 basis points from the prior quarter. And this was mainly due to higher losses in our business banking portfolio, higher insolvencies in retail, both of which were partially offset by lower losses in Wholesale Banking.

Turning to Slide 14, you'll see that new formations were up slightly quarter over quarter. They came in at CAD338 million, which is in line with the same quarter last year. Gross impaired loans were down CAD86 million from the last quarter, and that's largely due to decreases in the personal lending portfolio and the business services sector, as well as the impact of the US dollar depreciation. So gross impaired loans as a percentage of gross loans and acceptances came in at 0.53%, which is down quarter over quarter and year over year.

Slide 15 shows our oil and gas portfolio. And as it relates to our commercial corporate portfolio, we have just under CAD17 billion of direct exposure. That's unchanged from last quarter. 58% of it is to exploration and production companies, and only 4% of it is in the services space. 77% of our exposure is to investment-grade companies. This quarter, one of our oil and gas accounts became impaired and we took a CAD10 million provision on it. Our loans outstanding decreased 6% quarter over quarter and that was due to reduced drawings and foreign-exchange impact.

On the next slide, Slide 16, you can see our retail portfolio as it relates to the oil and gas provinces. So we have CAD38 billion of indirect retail exposure here. And if you exclude insured mortgages, we have CAD16 billion. The bulk of this exposure is to borrowers with strong credit profiles. So overall, the credit quality of both our commercial and corporate oil and gas portfolio and our indirect retail portfolios that are affected by the price of oil remained relatively stable. Notwithstanding this, we do continue to be vigilant and to proactively monitor these portfolios.

So turning to cards on Slide 17, our net credit losses were CAD99 million. That's up CAD9 million from last quarter. This was mainly due to an increase in insolvencies, which included an administrative delay in the processing of these files. The delinquency rate is actually returned to the Q4 2014 level after experiencing a seasonal increase in the first quarter of 2015. And I'd say that credit quality of this portfolio continues to remain high.

Our Canadian residential mortgage portfolio is highlighted on Slide 18. And you can see that 67% of our portfolio is insured, with 87% of the insurance being provided by the CMHC. The weighted average loan-to-value of our uninsured portfolio is 61%, and that has remained stable over the past year. Our condo mortgages account for roughly 11% of our portfolio, and the loan-to-value of the uninsured portion is 62%.

Slide 19 will show you our condo developer exposure, which has also remained stable over the year. And it remains diversified across many projects. At April 30, our authorized loans to construction projects were just under CAD3 billion. And our drawn loans were CAD1 billion, down slightly from CAD1.1 billion last quarter.

Lastly on Slide 20, you'll see the distribution of revenue in our trading portfolios as compared with VaR. We had one negative trading day compared with none last quarter. Our average trading VaR was CAD4.5 million and that's up from CAD3.8 million last quarter. And we continue to be comfortable with our market risk positions. Now I'll turn things back to Geoff.

Thank you, Laura. That concludes our prepared remarks. We'll now move to the question-and-answer segment of the call. Operator, can we please have the first question on the phone?

(Operator Instructions)

John Aiken, Barclays.

Good morning, Victor. In terms of the capital position that you've got, the 10.8%. Obviously, the lift in the quarter from the sale of Butterfield, and I'm not complaining in context of your ROE. But I was a little surprised that you haven't been active on the in NCIB through like the program.

Presumably this is because you still continue to see, or seek out, opportunities within Wealth Management for acquisitions. But at what point do we essentially shutter this and start to return additional amounts of capital over and above the dividend increases that you provided?

A couple of things. One is our CET1 is at 10.8%. That's only slightly above our stated range of 9.5% to 10.5%.

This quarter as you noted, we did get a lift from Butterfield. We actually got a lift from the impact of rising rates on our pension plan, which are one-off lifts.

Our strategic objective, and it's important to note this. Strong financially, innovative technologically, and relationship-oriented are the three factors that we're really focused on as a bank. And we believe as the leadership team that strong capital ratios are going to be an important element of our strategy. We've been clear in the past about our four avenues for investing in our business and delivering and returnings to our shareholders. One is dividends. We did that again today.

Two is investing in our business across all of our business lines, particularly in technology to modernize our bank. Three is M&A. And four is buybacks. On those last two, those are always avenues. But on the M&A front we're going to be disciplined, we're going to be patient because we don't see any criteria from an acquisition standpoint that meet our criteria.

And the last thing I'd say is, buybacks are an avenue. I wouldn't consider shuttering them. I think that's an avenue that needs to be left open to the management team. And we'll pursue that when we see fit.

Thanks, Victor. Just as a follow-on. In terms of the sale of Butterfield during the quarter, was this -- can we read anything into this, or was this just timing in terms of the buyer and yourselves coming to an agreement?

Butterfield's a good bank. You should just read into this focus. It was a minority investment for us.

We're getting focused on our business, and our core businesses where we have significant presence and we wish to grow. That's really what it was.

Understood. Thanks, Victor.

Steve Theriault, Bank of America Merrill Lynch.

Couple questions. First for David, if I could. David, you delivered positive operating leverage a little earlier than expected. I think you were telegraphing second half of the year. So that's certainly a good thing.

Wondering how you feel about the sustainability of the momentum? Do you feel like you've turned a corner now after a period of reinvestment and lagging some peers on that front? Have you -- how are you feeling second half of the year and into next year?

Good morning, Steve. Yes, operating leverage was positive this quarter. And as we've stated in prior conversations and calls, we are investing in the business. We'll continue to do so. So the expense side of the equation came in on track with our expectations. The revenue growth came in a bit stronger than expected. And that's what resulted in positive operating leverage occurring earlier in the year than we had originally anticipated.

So to speak to going forward, let me give you a sense of the nature of the results that we've -- that have generated at that revenue growth. First comment I'd make, is it's coming out of both sides of the balance sheet, both the liabilities side and the asset side. And that's as a result of our focus on deeper relationships with our client base.

So if we look at the liability side, for the year to date we're the leader in market share growth in deposits. And we're the leader in overall money into the bank across Personal and Business banking. And that's while supporting a record CAD2.5 billion in net sales in long-term mutual funds through our retail channels. If we look on the lending side, as Kevin commented in his remarks, we've got a 15% growth in mortgages balances outstanding in the CIBC brand.

Highlight, Steve, a point that we are excited about this quarter, which is some time ago we'd set a target of retaining 25% of the FirstLine book. We achieved that this quarter. And there's still CAD16 billion of FirstLine mortgages available for potential conversion. If we include the runoff of the FirstLine book, we've still this quarter grown our overall mortgage book by 5%.

In personal lending, second in market share growth. And that is a business that quite frankly we lagged in for most of the past decade. So it's good to see that business coming onstream. Credit cards, a mixed story. So on the travel side, growth in outstandings is quite strong as a result of the efforts over the last couple of years. Growth in outstandings in non-travel is not where we want it to be. And that is an area of focus.

So you've seen us do some new cards, as Victor mentioned, a new card with Telus this quarter. The relationship with Tim Hortons a while ago. And more work to do there that's underway.

And then a couple of final points. Business banking. So this quarter, lending growth year over year up 11%. Revenue up about 9%. So business banking really, really strong. And all of this done while we're expanding our margins. So we're competing not based on price.

So the investments, I guess, the conclusion of that. And I want to take you through some detail. The conclusion of that is the investments that we're making are resulting in us achieving our two objectives. One, accelerating profitable revenue growth. And two is enhancing the client experience, and we are seeing some good trending on our Net Promoter score, which is a key indicator of how our clients are feeling about dealing with CIBC.

So going forward, I'd like to believe that we'll see our investments paying off in revenue growth that is strong relative to our peers. The macro environment we can't control, but our relative performance seems to be coming on fairly well.

Just to follow up. The non-travel card, do you have other potential partnership cards in the hopper? Or going forward, is it going to be just doing better with what you have?

Steve, I'd say going forward, and it's been going on in the background, but I think now the focus is the stable of cards we have and working with them to optimize them. So a couple of launches. And there's, as you know, a lot involved in getting a card launched. And there's a period of time thereafter that that does adversely affect earnings until outstandings build. We're in that period now on two cards.

So the intent really is focus on the cards in the stable, including our cash-back cards where we're looking to make sure that they're set up ideally in the current market place. And we haven't looked at those cards for a number of years, so they're ready for a refresh.

So if I take everything you said, it sounds to me like you sound pretty confident that the revenue momentum will likely persist, at least in the near term?

Yes. We're up against strong competitors. It's a competitive marketplace. And we've got, as Victor talked about, some macro factors that still have to play out in the marketplace.

Our mission is to make sure on a relative basis we're performing well. And I feel like after a period of years where the Retail and Business banking operations at CIBC lagged somewhat, we're now definitely not lagging. And in a few areas leading, and I'd like to believe we'll maintain that.

Okay, great. Thanks. Second question was for Harry, likely. The federal budget targeting some tax-efficient trading businesses. I know the outcome's uncertain. Can you tell us how much of your TEB or your capital markets or your consolidated earnings are linked to the tax strategies that have come under scrutiny?

Thanks, Steve, for the question. So as you might imagine, we are working with our clients to determine how they would maintain exposure to equities in the future if the proposals are enacted as written. And it is possible that some of the current strategies would continue, potentially at different price levels, or that clients will seek different strategies.

The outcome of our analysis with clients may result in some resources currently used in the business being freed up for other deployment opportunities. So with that said, to quantify at this point in time, if the budget is enacted as tabled, our best estimate is a 2% to 3% earnings impact in the first year of implementation with a diminishing impact thereafter as resources are deployed into other strategies.

And that 2% to 3% is after some level of mitigation, or you're not really thinking of the mitigation until year two and forward?

There's some mitigation built in there.

That's helpful. Thank you.

Stefan Nedialkov, Citigroup.

Question for Victor, really. What's the latest on your Wealth Management strategy in terms of M&A? Particularly, how do you see valuations? And what is the direction of travel here? Are things becoming more expensive or cheaper?

How about geography? And how about size? Are you guys still looking at around CAD2 billion? Thank you.

Stefan, I'll have a few comments, and also pass it on to Steve Geist. We've been pretty consistent. From a very top line view, our goal is to grow Wealth Management to be a more important contributor to CIBC's earnings. The goal we set at a couple years ago was 15%. We are almost there, thanks to the performance of our domestic business and the investments that we've made in the US.

We've been pretty clear about our parameters, which are we're really interested in the private banking and asset management space. We're really interested largely in the US market, being the most natural -- building on our existing foundational investments that we've made.

And we've been pretty clear that the size range is in the CAD2 billion-ish range. It could be CAD2 billion to CAD3 billion, but that's the range that we're looking at. That hasn't changed. Now on valuations and what we're seeing out there, Steve, maybe you want comment on that.

Sure. Thanks, Victor. Hello, Stefan. There are always opportunities, and we continue to have discussions. And we're being very, very disciplined in terms of valuation and consistency with our strategy and looking for opportunities, exactly as Victor has highlighted and we've been highlighting for some time.

Things are definitely not cheap. I don't know if they've ever really been cheap. But we will continue to have discussions and pursue opportunities, if appropriate. The important thing with respect to the Wealth Management story is to highlight our organic growth where this quarter we did deliver double-digit asset and revenue growth, strictly organically. So we expect to deliver solid growth independent of any inorganic activity. And so that takes the pressure off of us needing to pursue other opportunities, and they will just be accentuators and added opportunities on top of the momentum that we have once we are able to put something together that fits our parameters.

So clear, consistent, disciplined. That's the focus that we have, Stephan. Thanks, Steve.

That sounds great. Thank you.

(Operator Instructions)

Sohrab Movahedi, BMO Capital Markets.

Victor, just a quick question. I guess you've talked about the modernization process, evolution, whatever that you're on right now. David is giving us the operating leverage [helps] with the top-line growth and what have you. But you haven't taken a restructuring charge. Is that something you may do at sometime in the future, or are you just doing it with without having to take those types of charges?

So Stefan -- sorry, Sohrab, thanks for your question. What we do is we take a medium-term to long-term view. And we've been really working diligently as a leadership team to balance the need for expense management with investing in the smart areas that are most relevant to our clients. And we've been able to deliver that over the last number of quarters. We'll continue to remain -- maintain that focus. It's always a balance.

We need to see what traditional expenses we can remove from the banking system, but then we can reinvest those into modernizing our Bank. And I would say that we're well on our way, not only in Retail and Business banking, which David has been articulating and signaling for quite some time now, but we've been doing the same thing in Wholesale, where you see our derivatives business and our foreign exchange business has grown as a result of technology investments, as well as in Wealth Management.

So just absorbing it in the run rate?

That's the goal as best as we can. But we need to be smart about things. And sometimes if you need to do things faster, we'll manage things accordingly. Kevin, do you have any things you want to add here?

I'd say we did take a charge in Q4. And I think we need to, as Victor says, run the business on a consistent basis, and where required we will take a charge. So going back to Q4, we did take a charge and -- but it's, I think it's a case of staying on top of our business and adjusting where appropriate. It was relatively small. But we'll adjust as appropriate.

Okay. Thank you.

Robert Sedran, CIBC.

Victor, I'd like to come back to the topic of the dividend. And I know it seems like you're comfortable operating higher in the target range than some of your peers are. And if I had to guess, your international ambitions don't require as much capital to support your organic growth. It will need the odd slug here and there to absorb goodwill, I guess, but you don't need as much for organic growth. So would you contemplate a 45% to 55% payout ratio, and would that give you enough capital to sustain organic growth and still maintain that higher payout?

So Rob, thanks for your question. Our stated payout range is 40% to 50%, and I'd see it staying there in the foreseeable future. What we said in the past call and what we are telling you today is that our goal is to move to the higher end of that. Right now on a year-to-date basis we're in the midpoint of that range. We're at 44.9%.

Our intention is to continually increase our dividends until we approach the higher end of that existing range of 40% to 50%. And the reason we feel comfortable in doing that, you need -- we're setting this all in the context of our business performance. Our businesses are performing well.

The strategy that we laid out around consistent sustainable earnings, smart organic investments to drive those earnings is delivering the ability to deliver dividends to our shareholders and dividend growth to our shareholders. And as long as the macroeconomic environment remains constructive, we're confident that we can move to the higher end of that range of 40% to 50%.

So even with Harry's disclosure of the 2% to 3% from the budget impact, you still feel like there's room to continue to move this dividend from higher from here?

I think there is, Rob. We're being very, very sensible, right? We said the higher end of the existing range.

We're trying to really give clarity to our investor base that we'll continue to do this on a consistent basis until we get there. If there's an exogenous macroeconomic event, everybody sensible would take a pause and say okay, how should we be managing this going forward? But that's what we'd like to do, yes.

Thank you.

Peter Routledge, National Bank Financial.

Just a question on trading revenue, equity trading revenue. I noticed in the sub-pack, the TEB adjustment is part of the equities trading revenue line. But it's greater, the TEB adjustment is greater than the equities trading revenue, which I'm curious as to why.

And I guess if I look at non-TEB equities trading revenue, it's negative. Maybe I'm making an overly simplistic equation there. I just wondered if you give me a little more color on what's going on?

If you go back historically, you'll see that's generally the case. And that's because in our equities business when we do some of the TEB business does have friction costs relating to that. So that would be going against the TEB stuff and the TEB revenue, and that's what would result in the difference that you've spoken about.

Would that be negative spread revenue related to the synthetic equity arrangements?

No, it's on negative revenue spread revenue, but it's just a certain segment that we pass on and certain other related friction costs relating directly to the transactions that we undertake.

And I guess maybe a question for Harry on those arrangements. What's the likelihood, or how worried are you that whatever comes out of the discussions with Ottawa disrupts the market and maybe produces an asymmetric loss that we don't see coming?

I think -- hi, Peter. We get this question a lot. Obviously, we're working with our clients to better understand the uncertainties around the pending legislation. At this point in time there are just so many uncertainties that it would be too early to comment on market disruptions. But I would say just in general, liquidity has become a concern in markets. We must factor that in. Having said that, I did make the comment earlier that some of these strategies may remain in a different form as well. So there's just too many uncertainties to comment on potential market disruption at this point in time.

Okay. Thanks. Victor, I appreciate your comments on the Apple Watch app. And I think it reflects the innovation CIBC has had in the payments industry. But does that oblige CIBC to participate or support Apple Pay in Canada?

So I think, Peter, we are obliged to the following. Our clients tell us that they want certain things. They want to make banking easy, flexible, and convenient. And anything that we can do to make life easier for our clients that will give us a competitive advantage, we will do.

And there are lots of payment ideas coming out. There are lots of peer-to-peer ideas come out. There's a lot of innovation happening in the financial space. And all I can tell you is philosophically, CIBC is an organization that is really attuned to what our clients want. And we want to advance our technology strategy very much in line with our client strategy.

So if a if the client wants a particular alliance partner in the payment space, that's what you'll give them?

As long as there's enough scale there. Not to the individual client. And the final thing I'd say is, what's really important in all of this, and it's always at the forefront of everything we look at, is making sure that any innovation that we're focused on is safe and secure for our clients.

And then, David, on your partnership card strategy, or maybe your card strategy more broadly. Is that really just a payment strategy or are you actually more focused on winning a greater share of your customers' credit needs?

Peter, actually there's a couple things going on there. You're right, there is an element of a payment strategy and also just client needs. So some of the cards we've been focused on are longer payback to a client, so to speak. They're just deferred rewards, like travel you have to build for some time before you actually have an event.

So what we're doing with some of these co-branded cards is to introduce cards that have a more immediate reward and fit more with the day-to-day lives of our clients. Tim Hortons, a fundamental part of the Canadian lifestyle. And here's a way to have a reward rapidly after you've spent money.

And smartphones, phones again, the same thing. And that card fits the life of our clients. They're looking, try to get their smartphone renewed cheaper, sooner, through -- and other things they get through Telus in the electronic space. But, so point one, yes, they're cards that fit the lives of our clients by faster rewards.

But there is also a payment strategy to this. So we're now building up a relationship bank with Loblaw's where if you like to do banking in a store. We've got a relationship with Tim Hortons in the convenience space. We now have a Telco. You can see us building up a bank of loyalties, such that in the fullness of time, if there's an opportunity for couponing or putting together something that we can offer to our clients a suite of relationships, these are all, you'll notice, high-end partners that focus on client experience. All of them are very much client-oriented and very, very strong brands. So frankly, nothing that definitive at this point but there is this element of those relationships in the fullness of time could have additional value.

Thanks for that.

Meny Grauman, Cormark Securities.

You've been very clear about your acquisition appetite and focus. But I'm wondering, given the fact that you have been out in front in terms of technology, in terms of talking about the importance of technology and banking, I'm wondering what your appetite would be in terms of maybe making significant acquisitions or investments in fintech companies and going down to Silicon Valley and going shopping there? Is there any contemplation of that as a potential use of excess capital?

Meny, the first and most important thing we focus on as a bank is safe, secure bank, good for clients, good for depositors, high-quality lending, high-quality capital ratios. But we're highly attuned to what the evolutionary space is and the technology landscape. We have been focused particularly on the payment space.

We talked about that through some of the applications, including the most recent smartwatch application. David, maybe you can comment on this because we've been particularly active in the retail space when it comes to the new technologies that are emerging.

I'd be happy to. Thanks, Victor. I'm down at Silicon Valley a fair amount, and so are our team members. So we're looking at what's occurring down there and how we can best participate. And Victor outlined that there's a lot going on in this space. So we need to pick our spots, be aware. But we'll also be active. So the Tim Hortons card came out with a new technology, which is the multi-button card. It's an interesting card and has a lot of potential applications.

In that particular case as rewards card, technically a prepaid card with one button and a credit card with another button. In that card in addition is an antenna, because it's tap-and-pay; a chip, so if you skin that card there's a lot of technology in it. So we like that. And we see other potential applications. So we actually did invest in the company that produces that card.

So that was an example of not a huge investment, but what we did is invest in that company to help their growth and to, frankly, also ensure we had the exclusive rights to elements of what they can build in our key marketplaces. So we're down there looking at what's going on. And as given evidence with that manufacturer of that card, we will -- we have invested.

Absolutely. I think, Meny, just to reinforce that point. Any investment that we do make, as we did in that instance, has to reinforce the value proposition of our core franchise. We're not going to be looking at creating a cornucopia of interesting fintech investments. We're going to look at things that matter to our business and that will drive our business forward, whether it retail banking, business banking, wholesale banking, wealth management.

Thanks for that. When it comes to those investments, is there certain dollar value or some sort of quantum that you think about that you don't feel comfortable crossing, or is it just open to opportunities?

I think it stay open to opportunities. Smart, sensible, small is better.

Thank you.

Doug Young, Desjardins Capital Markets.

Just on the CET 1 ratio, you're targeting 9.5% to 10.5%. So 10.5% seems to be above maybe where some of your competitors are targeting, and you've got obviously a very strong ratio. I'm wondering your thought process of why -- is there a reason why you would need to have a stronger CET 1 versus your peers?

And is there something that you're at all concerned about, such as risk-weighted floors? And any model refinements that are on the horizon that we should be thinking about?

So Doug, let me start off here and then I'll pass it on to Laura and Kevin if they want to reinforce a couple comments. As I said, it's only slightly above our range. Core to our strategy is being a strong bank financially. We are very comfortable with where we are.

If I look around globally, what's happening in banking today, CET 1s above 10% are the norm. They're not the abnorm, they're the norm. So that's what we're focused on going forward.

If we start getting higher, we'd start to think about, what else do we need to do to deploy capital, right? Either in our business by investing, or by returning capital to our shareholders. We'll evaluate that when we get to that point. Now, from a risk-weighting standpoint or any other concerns, Laura, you want to comment on that?

Sure. Doug, we don't have any -- don't foresee any big model changes that'll impact significantly risk-weighted assets. We just have normal course stuff, so as that goes through.

And as for floors, as you know we already do have the Basel 1 one standardized traditional floor. There is some consultation process underway with the Basel Committee. Not expecting to hear anything on it until the end of 2015. So really, too early to tell what the impact to risk-weighted assets could be as it relates to that.

So doesn't seem like there's anything else that's behind this? It's just your core to your strategy is a strong capital ratio, but there's nothing that's potentially going to impact that down in the next six months that you foresee?

That's right. Nothing that we foresee.

And then Victor, just quickly. I think on the acquisition side, I think before, correct me if I'm wrong, you were looking at CAD1 billion to CAD2 billion. Now I think you talked CAD2 billion, maybe CAD3 billion. Is that a change, and are you finding that to get businesses that would fit in the US private banking or asset management space you're having to go better than what you otherwise thought?

Not necessarily. I think it's important to let our shareholders know that the patience and disciplined aspect is the most important thing for us. As we look at our business, with our new leadership team, we look at uncovering value on our existing business and unlocking growth in our existing business. And we think that's a good way to deliver value.

It's a good way to build up our balance sheet, make a strong Bank, deliver strong earnings, grow our dividends. But at the same time, we're highly engaged on interesting companies that would contribute to CIBC's growth. But the thing here I want to emphasize more than range is patience around valuation and discipline.

Okay. Thank you.

Sumit Malhotra, Scotia Capital.

First question is on credit quality, and it's probably for Dave and Geoff. You mentioned that while oil prices have rebounded somewhat, there's still somewhat of a threat level to the credit quality, or the health of the economy for the Bank.

And when you think about the energy backdrop, clearly there's been a very large level of issuance on the producer side in the past few months. And I think that's calmed the market down insofar as that portion of the book is concerned.

So maybe for the two of you, when you think about credit quality and the threat from energy, has it in your mind shifted almost exclusively to consumers as the impact of CapEx cut plays out? Or is there still some concern in the producer portfolio as well?

Sumit, it's Laura. So why don't I maybe kick it off, and then I'll leave Geoff and David sort of weigh in. So we have, as it relates to our commercial corporate lending portfolio, we have had some downgrades in the portfolio, but those are really expected.

I'd say we've had minimal movement in our watch list accounts. And as I mentioned earlier, our drawn balance has actually decreased somewhat. So apart from the increase in gross impaired loans and that provision that related to the one name we spoke of even last quarter that was experiencing some difficulty prior to the drop in oil prices, overall our portfolio is actually performing very well. And I'd say it's performing as expected.

So we're not seeing anything that is worrisome. We're actually seeing our clients that are being very proactive in terms of how they're managing their affairs. And so we remain quite comfortable in the commercial corporate space.

And then if we look over to the retail side, notwithstanding some of the stuff we're seeing in the macro environment or that you've been reading in the press out west where we're seeing higher unemployment claims and insolvency claims, I think in Alberta, we're not seeing this in our portfolios at this time. No consistent trends that would indicate stress in our retail portfolios.

Now that said, it still is early days. But when we look at our credit fundamentals, so we look at our delinquency rates, our Beacon scores, risk ratings, they're all quite solid.

All right.

What I could add to that, Sumit, if it's helpful [in the game] we've just gone through a borrowing base redetermination season. I would say that was a successful program. So we've been working with our clients on both sides of the border.

They've been very proactive. They've been cutting dividends, they've been cutting CapEx, they've been taking the steps they need to take and we've been supporting them as a Bank. So I'd say it's been encouraging. We've seen a rebound a little bit in energy prices to the high [$]50s. That's given people a little bit of a breather here, but we're still staying very watchful in the event that energy prices take another dip. So I'd say at this point, the results are encouraging. The client response is encouraging, but we're staying vigilant.

From my perspective, I don't think there's anything I need to add. I think Laura and Geoff covered it, unless you have a follow-up question.

I do, but it's going to be on a different topic, if I can. We'll move away from that and go back to Victor. Just back in terms of acquisitions and some of your commentary. I think you've been very clear in talking to the market on what form potential, not only targets but financing would take.

And in the past, you've mentioned, if I have this right, that you would be reluctant to let the ratio fall below the low end of the range, which is at 9.5% and give yourself maybe a couple of quarters to let it build back. Does that still hold? And if so, am I right in saying that you could probably do close to a CAD2 billion acquisition today and not issue any equity and still be at the low end of the range? Is that an appropriate way to think about it?

I think it is. You're asking your second question, Sumit. I thought the rules were one question. I'll answer that one. (Laughter)

I would be a stretch to say this was part B to the park A, right?

(Laughter). Fair enough. So mathematically, that would be correct. We've always said we don't want to go below 9.5%.

I think the new world norm is 9.5% to 10%. Wait, we think it's 9.5% to 10.5%, quite candidly. We operate in that range. And mathematically if you take 10.8% and subtract 9.5% you get 1.3% and you can kind of do the math. 7 basis points of CET 1 is about CAD100 million. So that is feasible. That's not necessarily how we think about it. We think about the business holistically, Sumit.

We think about our existing platform and how we can unlock the value. We think about how do we invest in that. We think about dividends. And we think about M&A and buybacks, all on a kind of -- those of the four levers of the business.

So I wouldn't drive down at that math and say, you can do that. Yes, you can technically, mathematically. But that's not necessarily how we're thinking about it right now.

Thanks for your time.

Darko Mihelic, RBC Capital Markets.

I have one question, but it's got a couple parts to it. And it's really for David, and maybe you can help me or refresh me on the FirstLine. What I'm getting at is you're at your target already.

You've got CAD17 billion left. That could potentially run off. So the question is, do you still target 25% of what's left or are you still targeting 50%?

Perhaps more importantly, and I'll get to why I'm asking this. I guess you've converted some of these FirstLine mortgages to core CIBC-branded mortgages. And what I'm curious about is the success rate of converting them to the core client. So switching them over, getting them to cross-sell, I guess, is one way to think of it.

And ultimately I'm a little bit guilty of modeling your Company with lower asset growth and lower revenue growth than peers. But it seems to me that you mentioned this for a reason, that perhaps you're targeting stronger growth rates, in maybe all of your loan categories and deposits categories, because of you being ahead of schedule on FirstLine. So I'm not trying to ask you entirely to size the upside from what's left in FirstLine and perhaps the switch-over from core, but can you give me an idea of what you're targeting? And perhaps wrap it in for me in the sense that is cross-sell where you want it to be? Where can it go from here? And I'll stop talking now, and maybe throw the floor over to you.

Okay. I understand where you're going with that. A couple of comments.

My longer answer to the operating leverage question was in part because you're not the only one that's modeling us with lower asset and revenue growth. And I guess part of what we're trying to say is that's not unreasonable given our history, but given our more current performance that it's maybe time to relook at how we grow relative to our peer group. So that, I guess, is part of the message.

There's lots more for us to do. But I think we are in a different place than where we were just a few years ago. And it's not unreasonable for the perception of our business banking and retail banking operations to lag that a bit. I guess we're trying to signal we're in a different spot now.

FirstLine, a separate effort to shut down that book, it was a CAD50 billion book. And you've got it right, the reason being we couldn't get deeper relationships there, and how we're trying to grow is through deeper relationships. So the conversion was to get them into CIBC and then build that relationship.

So at the beginning we weren't great at that. We weren't smooth on the hand-off into our core operations, but we adjusted fairly rapidly on that front. And now we are quite pleased with welcoming those FirstLine clients into the CIBC family and building a deeper relationship. So that has gone well after a slower start in the first couple quarters. So that is working. We are -- the primary strategic objective of the FirstLine shutdown and building deeper relationships is working.

As far as the third point you've got there, as yes, we've hit the CAD12.5 billion that's now been converted, there's CAD16 billion-ish that are still available. We are now running at about a 50% retention rate, have been for some time. In fact, we're over that this quarter.

So the new target would be roughly about CAD20 billion that will come across once this whole book is ground down over still a couple year period of time for that to occur. But that would probably be the new reasonable target based on performance to date.

And can you give (multiple speakers).

Hope that gives you a bit of context.

Yes, And can you give any other metrics in terms of cross-sell or anything else to help me size the upside?

Not so much on the product use count. Again, we've touched on this before. It's tricky because in there we'll include in our product use count, do people set up bill pay? Are they using our mobile? All these things that one wouldn't consider a product per se. But when you look at the outcome we're trying to achieve, which is a sticky robust relationship, they are important determinants to determining whether attrition levels are going to be what we'd like them to be. So that's why to date, and we'll have to think about what we do going forward, we haven't gone forward with a product use count because it would be hard to compare to something else and we would have to be honest and say there's things in that you wouldn't normally consider to be a product. But for us as we monitor our relationships with clients, they're quite important to tracking the nature of that relationship.

Okay. Thank you.

Thank you. This concludes the question-and-answer session. I would like to turn the meeting back over to Mr. Weiss.

Thank you, operator. It's 9:30, so that concludes our call. If there are any follow-up questions, please contact our Investor Relations department. And thanks again for joining us this morning.