Canadian Imperial Bank of Commerce (CM) 2015 Q3 法說會逐字稿

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

(Operator Instructions)

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

Good morning and thank you for joining us. This morning, CIBC's senior executives will review CIBC's 2015 third-quarter results that were released earlier today. The documents referenced on this call including CIBC's third-quarter 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 the financial review; and Laura Dottori-Attanasio, our Chief Risk Officer, will close the formal remarks with the risk management update. After the presentations there will be a question and answer period that will conclude by 9:00 AM. Also with us for the question and answer period are CIBC's business leaders including Geoff Belsher, Harry Culham, Steve Geist and David Williamson as well as other senior officers.

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

With that, let me now turn the meeting over to Victor.

Thanks, Geoff. Good morning, everyone and thank you for joining us on the call today. Earlier this morning, CIBC released record third quarter adjusted net income of CAD990 million or CAD2.45 per share, up 10% from the same period last year. We're pleased with the overall quality of our earnings and performance across all of our businesses. Our client-focused strategy is generating strong loan growth and deposit growth underpinned by strong capital, stable credit quality and industry-leading returns.

Our adjusted ROE was 20.6% for the quarter. On the capital front, our Basel III CET1 ratio remains strong at 10.8%. This morning we also announced our fourth consecutive dividend increase raising our quarterly dividend by CAD0.03 to CAD1.12 per share. And this is consistent with our plan to move towards the upper end of our 40% to 50% target payout range. With this increase, our dividends paid will have grown by 12% over the past year.

Although the headwinds from a low interest rate environment and prolonged oil prices persist, we're confident that our earnings power, high quality loan portfolio and strong balance sheet will allow us to maintain this higher level of dividend. While energy producing provinces are likely to experience further weakness in the coming quarters, we are seeing some signs of rebound in the manufacturing data with growing demand from the US, our largest trading partner, which is in part driven by a more competitive Canadian exchange rate. These macro trends, combined with the benefits we're seeing from our client focused strategy, are expected to mitigate the negative returns impact from a prolonged downturn in energy prices.

Our focus on building a strong, innovative and relationship oriented bank is paying off. Our performance this quarter underscores the progress we are making in executing our strategy to transform our bank. A key pillar of our strategy is focusing on our clients. In the most recent JD Power and Associates retail banking surveys, CIBC was the only bank showing improvement over the last three years in both surveys. We're pleased with this momentum but we're setting our sights higher as a team when it comes to serving our clients.

Another pillar of our strategy is innovating for the future. We've talked about the importance of innovation as new technologies continue to reshape the way our clients bank with us and transact with us. As the pace of change increases, so do our clients' expectations for better, faster and more user friendly mobile banking solutions. While a lot has changed, our tradition of adopting technology to enhance the client experience has and will remain a constant.

In addition to developing in-house industry leading mobile banking apps for smartphones and tablets, we'll also enter into strategic partnerships where appropriate. In April, we announced our strategic alliance with MaRS Discovery District and this allowed us to be the first Canadian bank to allow a banking app for the Apple Watch. We're also the first Canadian bang to enter into a strategic partnership with suretap, a mobile wallet offered by some of Canada's leading wireless carriers for Android and BlackBerry devices.

In addition to focusing on innovation and clients, the third pillar of our strategy is simplifying our bank. We are simplifying and transforming the way we operate and we will continue to do this. We'll do this because it makes it easier for our clients to bank with us, we'll do it because it makes it easier for our team to get work done, and we'll do it because it'll increase efficiency and it will free up resources so we can reinvest in our business. We're confident that simplifying our bank, innovating for the future and building deep relationships with our clients positions us well to deliver value to our shareholders in the modern world of banking.

So now I'm going to turn to our business segments. Let's start with Retail and Business banking. Retail and Business banking reported year-over-year adjusted earnings growth of 7% with solid top line growth in both personal and business banking. Our Retail segment benefited from volume growth with new clients an increased depth of relationship with our existing client base, higher net interest margins and lower loan losses. As well, with a focused investment plan, despite a challenging economic backdrop, the team delivered operating leverage that was positive.

During the quarter we announced an expansion of our partnership with TELUS by offering a new Visa rewards card in TELUS retail locations across Canada. This means that clients visiting their store to shop for the latest mobile device can also walk out with an approved CIBC credit card and earn rewards towards their next purchase. My colleague David Williamson is here this morning to answer questions about Retail and Business banking.

Wholesale Banking reported year-over-year adjusted earnings growth of 8%. Strong growth in trading was partially offset by slower advisory and equity underwriting activity this quarter. Our Wholesale Group banking group continues to make progress in deepening client relationships within Canada where we hold a top three position in underwriting, advisory and lending. We're using this leadership position to help our clients, to help them navigate volatile markets which has resulted in solid trading revenue across our capital markets businesses. Strong client coverage also led to wins across a wide range of sectors, helping to offset lower activity in the energy sector.

We also support our clients as they conduct business outside of Canada. We won mandates ranging from the energy and utility sector in Europe to toll road infrastructure in the US. Consistent with our efforts across CIBC, our focus on innovation culminated in the launch of a new online site for Canadians to purchase foreign exchange and have it delivered to their home before they travel. A great example of how we're making banking easy and flexible. My colleagues, Harry Culham and Geoff Belsher are here to answer questions this morning.

Now let me turn to Wealth Management where we continue to have great momentum across all of our businesses and this resulted in record earnings this quarter with year-over-year growth of 15%. CIBC asset management achieved record year-to-date net sales of long-term mutual funds totaling CAD5.1 billion and we continue to grow our fee based business revenue across our platforms. These net sales and market appreciation have driven assets under management up 15% from a year ago. We're also seeing momentum in our brokerage business. As a result of recent changes to our self directed platform, CIBC investors edge third quarter account openings were the strongest that we've seen in 15 years. My colleague, Steve Geist, is here this morning to answer questions on Wealth Management.

To conclude, our results this quarter demonstrate CIBC's earnings power driven by our three strategic pillars. We're focusing on our clients, we're innovating for the future and we're simplifying our bank. And despite the economic challenges of the current economic environment, we continue to attract new clients and generate capital to grow our businesses.

Before I turn the meeting over to Kevin Glass, I'd like to remind everyone that we'll be holding an Investor Day on October 7 in Toronto for our analysts and our investors. And most importantly, 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. I'll turn the call over to Kevin.

Thanks, Victor. My presentation will refer to the slides that are posted on our website starting with slide 6 which is a summary of results for the quarter. CIBC performed very well again this quarter with reported earnings of CAD978 million and adjusted earnings of CAD990 million. All of our businesses had record earnings this quarter. Adjusted EPS was CAD2.45, up 10% year-over-year. It was a strong quarter with broad and balanced underlying growth in all of our businesses. We continue to make good progress towards our medium-term financial targets.

The quarter reflected strong volume growth and improved margins in Retail and Business banking. Wealth Management achieved higher earnings driven by solid asset growth. Strong performance in Wholesale Banking resulted from client driven growth in capital markets and our consistent and strong earnings allowed us to increase our quarterly dividend by CAD0.03 to CAD1.12 per share.

We have two items of note this quarter which resulted in a negative impact of CAD0.03 per share. An after tax loss of CAD5 million from our structured credit runoff business, an amortization of intangibles assets of CAD7 million after tax. The balance of my presentation will be focused on adjusted results which exclude these items of note. We've included slides with reported results in the appendix to this presentation.

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 CAD2.1 billion, up 5% from last year, driven by strong results in both personal and business banking. Revenue in personal banking was CAD1.7 billion, up 5% compared with last year. Performance benefited from broad-based volume growth as well as higher revenue from strong mutual fund sales. Mortgage growth of 6% was held by above market growth in CIBC brand mortgages of 15% partially offset by the runoff of the first line broker business. We continue to see strong personal savings growth with personal deposits up 12% year-over-year.

Business banking revenue was CAD410 million, up 5% from last year, driven by strong volume growth and higher fee income. Business earning balances were up 10% and business deposits were up 6% from the same period last year. Provision for credit losses was CAD165 million, down 7% on a year-over-year basis, mainly due to lower write-offs in bankruptcies and cards and lower business banking losses.

Non-interest expenses were CAD1.1 billion, up 4% from the prior year, primarily driven by our continued investment in growth initiatives. We delivered positive operating leverage of 1% this quarter. Net interest margins was up 3 basis points sequentially, mainly due to improved customer pricing and wider spreads on variable rate lending products. Going forward, we expect our NIMs to be stable. Net income for the quarter was CAD638 million, up 7% from the prior year.

Slide 8 reflects the results of our Wealth Management franchise. Revenue of CAD630 million, up CAD61 million or 11% from the prior year with solid performances from all business lines. Excluding the impact of foreign exchange in our results, revenue grew approximately 9%. Retail brokerage revenue of CAD312 million was up CAD5 million or 2% compared with the prior year due to continued growth in fee based revenue partly offset by lower commissions as a result of lower new issue activity. Asset management revenue of CAD225 million was up CAD38 million or 20% from last year. This was largely due to higher assets under management, driven by net sales of long-term mutual funds and market appreciation. On a year-to-date basis, we achieved CAD5.1 billion in net sales of long-term mutual funds.

Private Wealth Management revenue of CAD93 million was up CAD18 million or 24%, mainly due to higher asset under management driven by net flows and market appreciation as well as the impact of the weaker Canadian dollar. Managed expenses of CAD440 million were up CAD35 million or 9% primarily due to higher performance based compensation and other employee related costs. Net income in Wealth Management was up CAD19 million or 15% from Q3 of last year.

Slide 9 reflects the results of Wholesale Banking where we delivered another quarter of very strong earnings. Revenue this quarter was CAD698 million, up CAD79 million or 13% compared with the prior year. Capital markets revenue of CAD417 million was up CAD81 million or 24% due to significant client activity in equity derivatives, interest rates and foreign exchange trading, partially offset by lower revenue from equity issuance activity. Higher than usual market activity drove a particularly strong trading quarter. The degree to which we can sustain these results will depend on market conditions and client activity and so far, the fourth quarter is off to a slower start.

Corporate and investment banking revenue was CAD277 million, in line with our prior year. Higher revenue from corporate banking and real estate finance was offset by lower underwriting and advisory revenue primarily due to lower new issuer activity. Provision for credit losses was CAD9 million, compared with CAD6 million in the prior year. Non-interest expenses were CAD335 million, up CAD57 million or 21% primarily due to higher employee related costs. Net income for Wholesale Banking was CAD275 million for the quarter, up CAD21 million or 8% from the prior year.

Slide 10 reflects the results of the Corporate and Other segment where the net loss for the quarter was CAD66 million, compared with a net loss of CAD67 million in the prior year. Lower revenue in Treasury was largely offset by higher earnings in CIBC FirstCaribbean. We expect losses in this segment to remain at current levels going forward. CIBC's capital position remains strong.

Our Basel III Common Equity Tier 1 ratio was 10.8%, the same level as in the prior quarter. Internal capital generation was offset by the impact of higher risk weighted assets. RWAs increased by CAD7 billion from the prior quarter as a result of strong growth in our lending portfolio as well as the impact of the weaker Canadian dollar. Our Basel III leverage ratio was 3.9%, well above the minimum required by our regulator.

To wrap up, we are very pleased with our record results this quarter which demonstrate the broad and diversified strength of our businesses. This positions us well to deal with the challenging economic outlook. With that, I'd like to turn the meeting over to Laura Dottori.

Thanks, Kevin. Good morning, everyone. I'll be referring to the risk section which begins on slide 13. You'll see that loan losses came in at CAD189 million or 25 basis points. That's down CAD8 million or 5 basis points from the prior quarter. This was mainly due to lower losses in credit cards and our business banking and FirstCaribbean portfolios that was partially offset by higher losses in Wholesale Banking.

Turning to slide 14. New formations were down quarter-over-quarter at CAD317 million. Gross impaired loans were relatively flat from the last quarter as the decreases in CIBC FirstCaribbean were offset by the impact of the US dollar appreciation. Gross impaired loans as a percentage of gross loans and acceptances came in at 51 basis points which is down quarter-over-quarter and year-over-year.

Slide 15 shows our oil and gas portfolio. As it relates to our Wholesale and Business banking portfolios, we have CAD17.4 billion of direct exposure. That's up CAD700 million from last quarter. The majority of this is FX related. Our loans outstanding have decreased 2% quarter-over-quarter. 57% of our direct exposure is to exploration and production companies and only 5% is in the services space. 79% of this is in investment grade exposure. This quarter, one oil and gas account of less than CAD10 million became impaired with no material losses expected from this account at this time.

On the next slide as it relates to our retail portfolio, we have CAD38 billion of indirect retail exposure to the oil provinces of Alberta, Saskatchewan and Newfoundland. Excluding insured mortgages, we have CAD17 billion. There have been no notable increases in delinquencies in our retail portfolio. The credit quality of both the Wholesale and Business banking oil and gas portfolio and the indirect retail portfolios affected by the price of oil remain relatively stable despite a few down grades. Continued low prices may lead to additional loan losses. That said, these losses would be expected to remain within our risk appetite tolerance. We continue to be vigilant and to proactively monitor these portfolios.

Turning to cards on slide 17. Our net credit losses were CAD93 million this quarter. That's down CAD6 million from last quarter and this is attributable to lower write-offs. The overall delinquency rate continues to improve and credit quality of this portfolio continues to remain high.

Our Canadian residential mortgage portfolio is highlighted on slide 18. As you can see, 65% of our portfolio is insured with 84% of the insurance being provided by the CMHC. The weighted average loan to value of our uninsured portfolio is 60% and has remained stable over the past year. Condo mortgages account for roughly 11% of our portfolio and the loan to value of the uninsured portion is 62%.

Slide 19 shows our condo developer exposure which remains diversified across many projects. At the end of the quarter, our authorized loans to construction projects were just under CAD3 billion. Our drawn loans were CAD900 million. Both drawn and authorized loans have remained stable over the year.

Lastly, on slide 20, this shows the distribution of revenue in our trading portfolios as compared with VaR. We had positive trading days every day this quarter, compared with 98% of the time last quarter. Our average trading VaR was CAD3.7 million and that's down from CAD4.5 million last quarter.

With that, I'll turn things back to Geoff.

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

Thank you, Mr. Weiss.

(Operator Instructions)

The first question is from John Aiken from Barclays Capital. Please go ahead. Your line is open.

Good morning. Kevin, the net interest margins within the Canadian retail banking up 3 basis points sequentially, very, very impressive. I'm assuming a lot of that has to do with business mix. But how defensible do you think that margin is going forward with the Bank of Canada rate actions that we've seen as well as I guess the increasing possibility we may actually see another rate decrease coming at some point over the horizon?

John, the mix did play a part. I think I will do is also hand it over to David to give you a bit more color. But I think moving forward we would see NIMs being relatively stable. With rate cuts as we've seen, pluses and minuses, the prime BA spread helps us but then on deposit product, there's a bit of a hurt. So far, that's working out okay. Why don't I hand it over to David and he can give you a bit more color as to how he see things playing out.

Thanks, Kevin. Good morning, John. If I decomp it and this could maybe give some indication of what the future holds. If you look at Business Banking, margins were up in Business Banking. There it is mix. We're growing the overall book but the commercial mortgage book, as we've talked about in the past with the lower margin part, we're not growing. The over 10% growth that we're getting in Business Banking funds managed in the loan book is all coming in the higher margin business. None of it's coming in commercial mortgages. That mix change is what's lifting margins in Business Banking. I see that being something that could be maintained.

The second part of the business, Personal Banking, different factors there. So one is that we had a promotion on to build our deposit balances, successful promotion. That ended in the second quarter. So the quarter-over-quarter improvement as a result of that promotion coming off in the second quarter. So that's more of an isolated incident. But we do have, and will have for some period of time, 15% growth in CIBC branded mortgages and the offsetting impact of the runoff of the broker mortgage book.

So net-net, our mortgage growth is about at industry average, about 6%, maybe a bit better than industry average. But it's composed of 15% growth in the higher margin CIBC branded mortgages and a runoff in the low margin broker mortgages. So that's a wind assist on margins that we'll have for some foreseeable time and have had for a while.

All in though, with rate changes and so forth that you referred to, John, I'd say that looking to stable, flat NIMs going forward is the right thing to have in mind. So the improvement we had this quarter for the reasons I outlined, I think when you wrap it all in together, best just assume stable for the foreseeable future.

Great. Thanks for the color, guys. I'll requeue.

Thanks, John.

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

Hi, good morning. Just wanted to ask a question about the dividend and buyback in the context of the macro environment. John talked about rising odds of a Bank of Canada rate cut. I'm wondering whether your view on dividends and buybacks is changing given the big picture outlook?

Meny, it's Victor. I'll take that question. Good morning to you. Couple of things. First off, the bad, I'd say we feel good about the capital position that we're in at 10.8%. We feel that that's a very robust CET1 ratio. We also feel good about the quality of our earnings profile. We recognize the challenges that are ahead of us but we're really focused on the quality of our earnings growth.

And with that, as I said in the past, we have four capital allocation pillars. One is dividends. We've said in the past and I'll say it again today, we're working toward the higher end of our range on a consistent basis and that's why we increased our dividend by CAD0.03 again this quarter. We feel comfortable with working toward that higher end even given the macroeconomic environment.

The second thing is we're investing in our business. We're investing significantly to transform our bank. That will allow us to free up money so that we can further those investments into the future. Banking's changing rapidly and we need to stay ahead of the curve.

The third thing we've always talked about is the possibility of acquisitions. We monitor that. We're going to be prudent on that front.

And the fourth would be buybacks. As you know, we've announced again a new buyback program that starts in September. That buyback lever has not been active but in this price range we think there's value and we would see some activity on that front.

Any activity on the buyback, would that be any -- could we read into that anything about the acquisition front? Is there any connection between the two?

You should just read those four levers, those are the four levers that we as a leadership team look at regularly and we think that that's a lever that we can utilize. But all four levers are active in our mind.

Thank you.

Thank you. The next question is from Gabriel Dechaine from Canaccord Genuity. Please go ahead.

Thank you. Good morning. Victor, let's follow on with that dividend theme. So fourth consecutive quarter of an increase, I think a lot of people appreciate that. Why don't you take it a step further and move your payout ratio higher?

Gabriel, good morning to you as well. We are comfortable with our 40% to 50% range. We're in the midpoint of our range, Gabriel, so we're just working toward the upper end. I think that's the comfort zone that we want to work within.

And at the midpoint of the range, you view this quarter as good run rate, good representation of your earnings power and therefore, your payout ratio?

I view this quarter as being a very good quarter. Wholesale had particularly good activity that's sometimes idiosyncratic just given the market volatility that we've seen. There's large component of what we delivered this quarter that we think is sustainable. We feel very comfortable with the 40% to 50% range and working toward the higher end and we feel very comfortable that we can activate all four of those capital allocation levers.

My other question's for David. Banking fees and typically banks in Canada have offset weaker growth with steady increases to fee levels. I'm just wondering what your strategy is. When do you revisit your fees? What's the anticipated timing of the next round of fee increases and how are you managing your fee strategy, given some recent examples in the market that haven't been so favorable, plus maybe some changes in the government over the next few months that might take place?

Hi. Good morning, Gabriel. I think you've actually done a good job of summarizing some of the benefits and disadvantages and the need to be thoughtful on the fee front. Our objective is, as you know, in Retail and Business banking and throughout the bank, it's strong, innovative, relationship focused and client centric. So we need to balance our interest of the clients relative to some of the moves on fees.

You're right, a couple of recent examples where that has become an issue and we're keen to make sure that we balance the need to invest in the business and the interest of shareholders with the interest of clients. So the upshot is we continually monitor the competitive landscape and monitor what we're investing on inside our business and fairly thoughtful about what we do on the fee front.

Do you think there's less flexibility to adjust your fees than you have in the past or is it the same?

No, I think it's the same. I think periodically we'll look at fees. We haven't moved for a little while on some of those fees. So I don't think the environment or any competitive pressure adjusts our position. It's more a case of just being thoughtful about our competitive position, where we're investing, how we are meeting the needs of clients and, therefore, the receptivity to our fee structure. So, no, I think our flexibility remains the same it's just being thoughtful on that front.

Thank you.

Thanks, Gabriel.

Thank you.

(Operator Instructions)

The next question is from Robert Sedran from CIBC. Please go ahead.

Hi. Good morning. David, you talked about the business loan growth and the deemphasizing of commercial mortgages and so it would imply that the rest of the book is growing more rapidly than 10%. Can you give some color? I'd be curious both in terms of geography and industry where this growth is coming from and if there's any part of the country or any industry that you are emphasizing or deemphasizing right now?

Hi, good morning, Rob. Yes, it is. You're right. Given that commercial mortgage book is flat and has been for a while, the rest of the book is growing in the double-digit range, substantively more than 10%. So very strong volume growth and not just this quarter. We've had that strength for a while in Business Banking. And the genesis of a lot of that has been our continued investment in our relationship managers, our front line and client development.

To the geography part of it, it's broad-based, broad-based growth. Of course, one element is the oil based provinces, Alberta and other provinces. In the Business Banking side, what we see in Alberta and other oil based provinces, still strong growth. But down substantively from what it was even a year ago and now below the national average. So at one point Alberta would have been growing above the national average. Now it's growing below the national average but it's still growing and growing well.

Otherwise, if you look across the country and it's substantive growth countrywide. The way we set up our Business Banking operations is very much having relationship managers, not just in Toronto, but located across the country from coast to coast and that's supportive of meeting client needs and growing those books right across the country.

And is Alberta growing below average because you are -- there's less supply of credit or because there's less demand? And how do you feel about the risk profile of the loans you're putting on in that region? Are there tighter credit standards today than there might have been 18 months ago?

Regarding credit standards, I don't think we've moved to -- we're comfortable with where they were. We remain comfortable with where they are. As far as the change, I think that's really a function of what's going on in that marketplace. So it was very substantive growth when commodity prices were strong. And what we've seen now is not surprisingly, a pullback in investment and therefore, a pullback in demand for credit. But again, it's still year-over-year growth and year-over-year good growth. But I don't think within the context of that market it's surprising there's been a pullback in the demand for credit and we're very comfortable with the nature of the loans we're putting on the book.

Thank you.

Thanks, Rob.

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

Thanks. Just to stick with you for a moment, Dave, looking at the performance of operating leverage in your segment, you've obviously returned to positive status as was seen last quarter and as you indicated. But wanted to go back to maybe the bigger picture outlook on investment spending.

If I go back a couple of years, you had communicated some of the system and technology expenditures that CIBC had to make, not only to catch up with peers but to take the lead on some fronts. How should we think about the expense, and investment spend in particular, going forward and whether the operating leverage we've seen from the unit in the last couple quarters is what you view as sustainable now?

Good morning, Sumit. Let's decomp it a bit. We're talking about sustainability of operating leverage. Obviously two components, the revenue growth side and the investment comp side. Let's decomp it and look at both. For more than those two years we've had two objectives, enhancing client experience and accelerating profitable revenue growth. Let's focus on that latter one as it relates to operating leverage.

As Kevin said, 5% revenue growth in personal banking, 5% in business banking. If you go inside the onion a bit, it's been growing by more growth, (inaudible) growth in funds managed. On business banking, as we just talked about, more than 10% growth in business loans, holding commercial mortgages flat. Business deposit growth is 9%. So funding that side of the asset growth.

In personal banking, we talked about 15% in our own mortgages offset by the runoff of the broker business and 12% growth in CIBC deposits. Again, acting to fund the asset side of the balance sheet. So that funds managed growth is good for today but it also bodes well to be good for the future because you've got those deposits and assets for future sustainable revenue growth.

Victor talked about quality. So that also speaks to sustainability too. Product use count going up. Margins this quarter widening. So we're not buying the business, we're earning it. So that speaks to sustainability. Client experience, Victor touched on that too. There's two big inputs that measure client experience. One is JD Power. If you look at the three years since 2012 when we set client experience as being a key objective, we're the only bank that's had a positive move in the JD Power score. We're up 10 points, all the other banks are negative.

And the Ipsos Net Promoter Score Measure, again, if you look over those three years since we said client experience is a key objective, again, we're the only bank with a positive score. We're up 1.5 points. The next best bank of the big five is minus 5.5. So again, it speaks to the sustainability of the revenue in the sense that clients are happy with what we're doing, margins are holding or maybe doing a bit better than margins, depth is improving and we're building our assets and liabilities, both sides of the balance sheet. So that all speaks to a good foundation and sustainability on the revenue side.

Let's now move to the other part of operating leverage which is investments. So when you look to investments, I think the key point would be that the investments we've made over the last couple years are working. So we're predisposed to continue our investment in the business, maintain some of the progress we've given evidence to over the last couple of years.

If -- and this is a bit -- the question has kind of surfaced over the last little while. If macro conditions worsen and resulted in industry top line pressure, we would of course look at the pace of our investment or make other adjustments to manage operating leverage in a declining revenue environment. However, we are committed to the long-term transformation of our business and will continue to make the necessary investments to support our strategic objectives and create sustainable value for our clients and shareholders. That's the overarching mission.

Thank you. The next question is from Stefan Nedialkov from Citigroup. Please go ahead.

Hi, guys. Good morning. Stefan from Citi here. Question for Laura. Laura, you have traditionally given out some pretty interesting information about stress testing in the past couple of quarters. I was just wondering what is the latest? I assume you guys have done a couple more stress tests over the past couple of weeks as the oil price started declining more. Can you just give us some more color on assumptions used, outputs, risk appetite in terms of PCL or growth, impaired loans? Just any numerics as much as you can.

Because I think me plus my colleagues and a lot of investors are basically asking themselves so when are the provisions coming? We are not seeing anything yet. And at some point a 40% drop in investment must show up in higher provisions. We are not seeing that yet. So I was just wondering how are you thinking about this? How are you thinking in terms of output from the stress test as well as the eventual timing of the provisions? Thank you.

All right. Thanks, Stefan. Big question. I'm going to try to give you as much as I can without giving you our actual formula, because we could be here for a long time if I tried to break that down.

Maybe just before I get into the stress losses, I did want to point out that we've only seen limited losses in the sector so far. So you'll see in our disclosure that our gross impaired loans are CAD34 million and our loan loss provisions in this space are only CAD10 million. This quarter in the Wholesale Banking side, so corporate banking, commercial banking, only one account went impaired. That was less than CAD10 million. Three accounts moved into our watch list.

I'd point out in retail for as much as sort of top of the house, we're not seeing any real movement in delinquencies. When we look at our weaker population, and by weaker I mean our client base that has high leverage and low beacon scores, we are starting to see very small signs of stress in the oil provinces with that segment, where we're seeing early stage delinquencies that are up about 10%, 15%. And that's on a year-over-year basis. So very early days and it is a very tiny segment of our retail portfolio. It's about in the 1%, 2% range. So very tiny and that would represent about CAD2 million to CAD12 million of our stress losses.

So when we get into stress losses, we've been running stress tests for quite some time. We do a top down stress and we do a bottoms up stress and specifically with our oil segment, we run our stress tests and update them on a monthly basis. So we run stress tests quite conservatively. We've been running them at CAD50 oil, at CAD40 oil and at CAD30 oil. And when we run our stress test, we run it over three years of sustained prices. What does it look like if oil is at CAD50 for three years or at CAD30 for three years? And we also don't assume that things get better in other areas. So this would just be sort of the add on.

When we do that exercise, our losses -- and this would be over a three-year period. I'm just giving you ranges. And I will remind you that it's a stress test so there's our assumptions in there, it excludes any form of event risk. But our losses would go anywhere from call it CAD350 million to CAD650 million. I want to try to stay away from the term manageable because I know that you guys don't like the term. So I thought maybe I'd try a new one and see if I can get away with that one on this call and say that if we do have CAD30 oil over a three year period, we can sustain that. I'm going to use the term sustainability.

And I think what I did want to point out and I think you're seeing it with some of the, again, very early days, but some of our results is that our credit quality in this segment remains strong. There was a question earlier I'd just like to address, that we continue to have strong underwriting criteria. So we are not loosening any of our terms in terms of how we underwrite both in the corporate and retail spaces.

And I would like to point out, because I do think this is important, is that our clients have actually been very proactive in managing their affairs. So we've seen our clients early on reduce their cash burn, reduce their outstandings. Our clients are being very responsible in terms of how they're managing this and I believe that that is also helping. I guess I'd leave you with our portfolios are certainly performing as expected.

Okay. That is absolutely fantastic color. Thanks, Laura. Just to make sure that CAD350 million to CAD600 million, that's a cumulative three year loss, basically?

Yes, that's correct.

Okay. Thank you.

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

Good morning. And Laura, just to be clear, that's a pretax number?

Yes, it is.

Okay. Let me move on to a broader question, just looking at the balance sheet. So this quarter, I see that available for sale securities are up CAD15 billion quarter-over-quarter and that ties in directly to a significant increase, about the same amount, a CAD15 billion increase in business and government deposits. The first part of the question is what are we seeing here? Because I don't see that increase in any of the segment disclosure so it must be in corporate. So what is the bank doing? I get why the bank would increase the balance sheet. You certainly have the capacity for it, both capital and leverage. But what are you doing and how has that affected margins?

Mario, it's Kevin. I'll take the first part of that. And this is just part of our regular Treasury liquidity and investment management activities. We've been moving -- if you go back a few quarters, you'll have seen some movement essentially in the opposite direction. We're just rebalancing our investment mix and that's from reverse repos into securities. And frankly, just given the cost of funding and the nature of the AFS securities that we have purchased it hasn't made a significant impact on our margins.

Because I didn't see either an increase or decrease in the all bank margin even though liquidities on a total basis were up materially. What am I to take from this, that these are higher yielding securities?

No, I think just higher rated securities. So essentially many US Treasuries are not giving a significantly increased yield at all. That's why you wouldn't have seen an increase in the all bank margin.

Okay. And the follow-up question to this then is while the bank certainly has the capacity to build up the balance sheet, is there any risk that the bank is taking in this Treasury management longer term by building out the balance sheet this way?

No, I don't think so. In fact, the opposite. These are assets for liquidity purposes. So I'd say the answer to that would be no, Mario.

Okay. And then actually I'll stick with the one question. Thank you.

Thank you. The next question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.

Laura, just wanted to clarify one thing. The oil and gas portfolio is 79% of the exposure is investment grade. Last quarter, I think you had said that was about 77% investment grade. So are you seeing drawdowns by the investment grade borrowers or are you just adding to the investment grade?

In this particular case, Sohrab, that would have been an adding to the investment grade.

Okay. And so the RWA growth when we're talking about it, is that drawdowns of existing clients or is that just addition of new clients?

So the RWA growth we have, the majority of it related to growth in our businesses. Then there was a good segment that related to FX. And there was a smaller amount, I think it was CAD700 million that related to what we refer to as book quality. And so that would be a number that relates if you will to negative migration of the portfolio. And that's across Wholesale, retail.

And that kind of a move, Laura, is consistent with what you would have seen out of your stress testing scenarios?

Well, still early days. I think I would tell you that our -- like our stress is more aggressive than what we're seeing in these quarterly numbers.

Perfect. Thank you very much.

Thank you. The next question is from Doug Young from Desjardins. Please go ahead.

Hi, good morning. Just first, back to you, Laura, just so I understand this, the CAD350 million to CAD650 million, that's pretax, that's just for the oil and gas regions, that's your direct and retail, that's above and beyond any normal course provisioning, is that the way to think of it?

That's right.

And then my question is for David. Just on the Canadian banking side, I think even Victor mentioned in this quarter the benefits from deepening the relationship and the sustainable depth of relationship for your clients. And I know you don't give cross-selling statistics and happy if you're to obliged to do so, but can you talk -- I think you've done this in past quarters about some of the items and some of the cross-selling that you're seeing? Some of the successes that you're seeing in terms of cross-selling? If you don't want to provide numbers just talk about some of the successes you've had. Thanks.

Thanks, Doug. First comment I'd make is we haven't given product use account numbers in part because they're not that comparable across institutions. On October 7, we're going to have more time together and I think we might seize the opportunity to do a deeper dive on that space at the Investor Day that Victor referred to. So I'll maybe just touch on it lightly here.

The key thing is that going back some years, we talked about accelerating revenue growth but we talked about quality as well. One of the key tenants was to not have a lot of single product clients but to have deeper relationships with our clients. Historically, we'd focused on success of certain products and hadn't really worked to try to hug those clients and build deeper relationships and that was one of the fundamental tenets of how we wanted to grow going forward.

That meant in the early days, changing incentive plans to reward the depth of relationship as opposed to single product sales. It affected the nature of some of the products that we sold. Obviously, our messaging through to the front lines, some of our training. One I referred to some time ago, break-away where we just had a more active relationship program where we called out the clients. That's was calling out to existing clients that we could see their profile and we knew what kind of next products would make sense for them.

We were feeding leads based on our database to the front line to say call this client because the next product would make sense for a deeper relationship as an X and a Y. So they were sensible intelligent leads resulting in good conversations. So we called that next best offer. That program was a real success and continues to be a success. Just greater connectivity with our clients and on an intelligent basis, based on the data that we have.

And then the big investment we made a while ago in what we used to call multi-product sales origination, now called Compass, and that's a front line system that uses the data we have on clients to again say in the discussion what products would make the most sense for that client. And it has a client based adjudication engine in the back. It doesn't sound like a big deal but it is. Normally adjudication engines are by product and this now takes it to a client-centric view. If I as a client say maybe I wish less in the way of credit card limits, then I can use that for an overdraft limit. So I can look at the amount of credit you'd be willing to give to that client and they can move it in between products. And the engine behind Compass facilitates that type of client based adjudication.

So those would be some of the steps that we've taken and like a lot of things in retail with 11 million clients, it works on the next one through the door. It builds over time. So we get together in October, you won't see a hockey stick on product use count. You'll see a change in direction. It was going the wrong way a few years ago. It's now going the right way.

But it is a gradual process of getting 11 million people into a deeper relationship with us. But the trend lines are the right way and the number of initiatives, I could go on at length but I won't, as to the things that we've done to try to get to those deeper relationships. Thanks, Doug.

And just maybe a follow-up is how much -- you had great growth. How much of that growth is from just from existing clients versus new clients?

The bulk is existing clients, building deeper relationships. But having said that, the new client growth has improved over the last couple of years. Things like the airport, center of new Canadians and growth in the client base in Canada. One of the important levers is new Canadians. So things like being so present at the airport is linked to our desire to proactively build our client base.

But the key thing in getting to deeper relationships is just lesser attrition. If you have a single product relationship, attrition rates are about 15%. As we drive to deeper relationships, what we're seeing is less attrition in our existing base. It just speaks to less churn. We have you new clients come in, you have one product and a while later they leave.

So two levers, new clients focused on new Canadians but then the second step is proactively build deeper relationships to mitigate attrition and frankly, make for happier clients. Deeper relationships are happier client relationships. The other part is just to build and retain our existing base and that's gone well also.

Thank you.

Thanks, Doug.

Thank you. The next question is from Steve Theriault from Bank of America Merrill Lynch. Please go ahead.

Thanks very much. Hopefully a couple of quick ones. Just to follow up with Laura. The CAD350 million to CAD650 million of cumulative losses, would you suggest the losses would come more in the latter part of the three years? Just trying to think about that a little. Have a hard time envisioning the losses would come through over such a prolonged period of time. How does that work through in your stress test, if you can?

So you're right, so we're really looking at ugly events and they move a bit. So when we look at our numbers, they peak a bit more towards the end of the second year. And the distribution between the two more would be weighted to the commercial corporate book than to retail.

Okay. That's helpful. And then for David. First, can you remind us how long we've got until the first line runoff has run its course? And it's hard given all the noise in recent years. What I really want to ask is, do you think you'll be in a position to take share once the runoff normalizes? So will you still be punching below your weight in mortgages or will you be more at a normal share once all the dust settles here?

As far as the runoff, on average -- I'd say another big one year left of substantive runoff. There will be five-year mortgages, even longer term mortgages. It will run off for some extended period of time. As far as high volume, another year.

As far as our overall sustainability of mortgage growth, maybe just make sure we're on the same page. On a net basis, we're growing at 6% and I think that's probably at industry or maybe better. Now, that consists of 15% growth in the CIBC mortgage book. There's a wind assist, as stuff comes across from first line. But even then it's -- even without mortgages coming across from first line to our own brand, we're still substantively over 10%, like well over 10%. So you've then got when first line quits burning off, that kind of underlying growth in the mortgage book.

So subject to what happens in the macro environment, just from our own perspective on the sustainability thereof, there's a couple of drivers of that which should be sustainable in the near-term. One is, we've been focusing on processes and simplifying which Victor spoke to, being easier to deal with and speedier response times. That's helped our sales. The other is our investment in the mobile mortgage advisors which we're changing to mobile advisors generally. So we're not just focused on mortgages. But that's a channel that we've been growing for a period of time.

Eventually that growth will ebb as we get to a level that we think is the right optimized level across the country. But for next year we see continued growth in that channel and that channel's becoming more effective as they get into communities, build their books, productivity levels are going up as well. So that lever will continue for the foreseeable future. On the areas of things that we can control, whether it's the investment in our processes or investment in mobile advisors, that mortgage growth should be sustainable and the first line book will start to reduce the outflow after another year or so.

Okay. That's helpful. I'll leave it there. Thanks.

Thank you.

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

Hi. Couple quick follow-ups just for Laura. On page 15, the oil and gas exposure looks like you have 6 roughly drawn, 11 undrawn. Of each for drawn and undrawn, what percent is below investment grade credits?

I don't know that I actually have that information right readily available. You would likely see though, because our large investment grade companies tend to borrow less, so if you were to go from your commitments to your undrawn, you would have less investment grade companies, but it wouldn't move that much. Maybe you'd take 10% off the number and hold on. I have somebody's handing me a piece of paper so I will be able to tell you if I can read what's been handed to me. Yes, so that's about right. Take about 10% off. So I said 79%, so you're still at about 70%.

Okay. What's the loss given default you're assuming when you go from -- you gave us that CAD350 million to CAD650 million.

What I had said to Stefan, I didn't want to get into all of the mechanics of how we go about doing our stress testing. But needless to say, things get worse when we do the stress testing without getting into the detailed numbers.

Would it be materially different from what you show in the regulatory sub pac for corporate exposures which is about 33%?

Again, difficult question to answer, just given how we go about doing our stress testing. I really don't want to go there. It's quite long and complex in terms of how we do our stress testing. So that number moves around quite a bit.

Okay. And then you have to make an assumption, the bank has to make an assumption about what oil prices will be next year, 2016. And then that's going to determine probably how you deal with your clients in the oil patch. What are you actually going to assume the oil price will be next year?

So we do run price decks, you're right, where we do that. And we actually, just given what's happening in the space, we have recently updated our price deck. That's not information, however, that we disclose. But what I can tell you is, you can appreciate, is that that number has come down quite significantly versus what it would have been last -- at the last borrowing base determination date.

Does that force your hand to begin to maybe encourage your commercial banking colleagues to start reducing lines and calling loans?

Well, what happens, we have -- for our borrowing base clients, we have what we call our determination dates, our borrowing based determination dates that happen about twice a year and we have one coming up in the fall. And so our clients are quite aware what we're doing. They know where the price of oil is and where it's going. So as I mentioned earlier, our clients have been very proactive in terms of how they're managing their borrowings. We don't expect there to be that much conflict, if you will, in terms of us arriving at a different number than our clients will. I think we're all pretty well aligned. We work well with our clients. I'm not expecting to see much surprise there. That said, there will obviously be more stress in the system, given oil is trending lower.

Okay. Thank you very much.

Thank you. There are no further questions registered at this time. I'd now like to turn the meeting back to Mr. Weiss.

Thanks, Operator. That concludes our call. If they are any follow-up questions, please contact our Investor Relations department. Thanks again for joining us and we look forward to seeing you on October 7.

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