Canadian Imperial Bank of Commerce (CM) 2015 Q4 法說會逐字稿

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

(Operator Instructions)

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

Good morning, and thank you for joining us. This morning CIBC senior executives will review CIBC's Q4 2015 results that were released earlier today. The documents referenced on this call, including CIBC's Q4 news release, investor presentation and financial supplement, as well as CIBC's annual report can all be found on 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 will conclude by 9 AM. Also with us for the question-and-answer period are CIBC's business leaders, including Harry Culham, Steve Geist, and David Williamson, as well as other senior officers.

Before we begin let me remind you that an 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 further 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, and greetings everyone. Thank you for joining us on the call. So this morning CIBC reported annual adjusted earnings of CAD3.8 billion, with earnings per share up 6% from last year. We also delivered an industry-leading return on equity, 20%, while increasing our capital strength with a Basel III common equity Tier I ratio of 10.8%.

We entered FY15 as a team with three goals in mind. One was to rejuvenate our corporate culture. The second was to reengage our clients. And the third was to enhance shareholder value. And I believe we've made excellent progress in all three areas. Throughout the year we invested considerable time and effort as a team to change the way we think and to change the way we operate.

We also made a concerted effort to reengage with our clients to better understand their needs. Personally I met with over 500 of our corporate and business banking clients to convey our commitment to putting the commerce back into CIBC. Our vision is to become the leader in client relationships. And aligned to that vision we repositioned our brand, from the tagline For What Matters to Banking That Fits Your Life.

Our clients, they want a bank that knows them, values their business, advocates for them, fixes their problems quickly, and listens to their needs. Our team members are feeling energized by our renewed client-focused strategy. In 2015 we received our highest employee net promoter scores on record. In terms of shareholder value we increased our dividends by 12%, which helped drive our industry-leading total shareholder returns in 2015.

Now although we've made progress, the work is far from done. We're going to continue to evolve our culture and we're going to place a greater emphasis on performance orientation. We're going to continue to focus relentlessly on our clients and deliver to them what's relevant to them. And we're going to unlock shareholder value by transforming our foundational business, by optimizing the use of our balance sheet, and by redeploying capital to business that our core to our strategy and core to the future.

So our goal is clear. It's to build an innovative, relationship-oriented bank that provides consistent and sustainable earnings growth through a three pillared strategy. We outlined that three-pillar strategy at our invested presentation. I'd like to go through it again this morning.

The first pillar is to simplify our bank. We will transform CIBC into a nimble financial institution. We will leverage technology and we're going to redeploying the resources to improve our efficiency. We're going to be better at cost management and better at growth. We believe we can get to -- our efficiency ratio down to 55% from the current 59% over the medium term.

The second pillar of our strategy is to continue to focus on innovation. We are the innovation leader today in banking. But the rapid pace of change in the industry, especially from [FinTech] and disruptors, is forcing all of us and CIBC to continue to innovate for our clients as they adopt new technologies and look for secure, easier, more flexible ways to do their day-to-day banking. We recognize at CIBC that we can't build everything ourselves, and that's why we're open to collaborating with high-quality third parties where appropriate.

Our third pillar is the relentless focus on our clients. Our goal is to be number one in client experience over the medium term. Since we've shifted our focus from being a product-centric bank to being a client-centric bank four years ago, we've had third-party validation that our strategy is working.

For the past three years, CIBC was the only Big Five Canadian bank with positive momentum in client experience, as reported by both the IPSO's Reid and the JD Power client satisfaction surveys. So we're making an impact in the marketplace, but there's still a lot of work to do to be number one. So we've declare client experience as a bank-wide priority, and we've made changes to the executive compensation programs such that client experience goals are a meaningful part of our compensation program.

So if I could now just turn briefly to the macroeconomic front, we expect the Canadian banking industry will continue to face headwinds from a low interest rate environment and sustained low commodity prices in 2016. While we are cautious about the economic environment, we're confident that our risk management protocols will detect the early warning signals that allow us to react appropriately and still work with our clients.

Now I'd like to give you some highlights from each of our business units. In Retail and Business Banking we transformed our branches into banking centers. That's an important point, we don't call them branches anymore and the focus is on providing personalized advice and deepening our client relationships.

For day-to-day banking transactions we are leveraging our digital technology and encouraging our clients to access banking through their tablets and through their mobile devices, and obviously the ATMs that exist at our banking centers. At our banking centers we also simplified the leadership structure and introduced the new role of a Banking Center Leader. This will give each of our over 1000 banking centers across Canada a single leader responsible for building and deepening client relationships and strengthening ties in their communities.

For our mass [offering] clients we expanded our Imperial Service Direct Offer. This is an offer that connects clients with a dedicated financial advisory team remotely. This offer enables us to deliver financial advice and deepen relationships with those clients who visit our banking centers infrequently, yet they prefer a dedicated team to meet their needs.

In Business Banking, we added more relationship managers to meet our clients needs and offer them advice to help them with the growth of their businesses. To build our Business Banking client base we recently entered into an exclusive partnership with a Montreal-based lender, Thinking Capital, and we announced that recently, who provides short-term online loans to small businesses with unanticipated needs.

The size of the loans range from CAD5000 to CAD300,000 and the unique selling point here is the adjudication can be done in less than 10 minutes using technology. Funds from approved loans are deposited in a matter of days instead of weeks, as is the case for traditional small business banking. This partnership, like many of our partnerships, are about leveraging innovation to broaden the options for our existing business clients and attract new business and personal banking relationships to CIBC.

To further CIBC's innovation leadership for our clients we also entered into a partnership with the MaRS Discovery District in Toronto to create a new corporation innovation hub. We're also part of MaRS' new FinTech cluster to continue our focus on developing the next wave of banking innovations for our clients. My colleague, David Williamson, is here this morning to answer your questions about Retail and Business Banking.

Our Wealth Management franchise also has made good progress in 2015 against our strategy of enhancing the client experience and attracting new clients. Our Canadian asset management business achieved its sixth consecutive record with CAD5.5 billion in net sales of long-term mutual funds. New account openings at CIBC's Investors Edge were up 36% year over year, and that was driven by a strong partnership in our retail banking centers and it was also driven by innovation where we've significantly shortened the account opening time for a self-directed brokerage account.

Within CIBC Wood Gundy we continue to invest in a technology platform to significantly streamline the new client and account opening process, again using technology. And we've used the technology to provide personalized service. We launched a new planning capability which will help us to deliver comprehensive and individually tailored financial plans to each of our clients.

We also experienced strong net flows in our Atlantic Trust business in the US, which continues to perform well. My colleague, Steve Geist, our Head of Wealth Management, is here to answer your questions on Wealth Management this morning.

Now In early October at our Investor Day, we announced the name change of the Wholesale Banking business to CIBC Capital Markets. We're Moving away from wholesale banking, we're moving away from world markets, we're moving into the future and calling ourselves CIBC Capital Markets. We believe that this name better reflects what we do in this business unit, which is to provide advice, insight and execution in the capital markets for those clients that are particularly reliant on that source of financing.

Throughout 2015 our Capital Markets franchise continued to hold leadership positions in syndicated loans, debt and equity underwriting, M&A advisory and trading activities. We also made good progress against our strategy of helping our clients grow globally by expanding our lending and advisory mandates, particularly in areas of our core competency in energy, utilities and infrastructure finance. To support our clients' businesses we continue to expand our suite of capital markets products in key regions globally in the areas of foreign exchange, fixed income, commodities, and equity derivatives.

On the innovation front Capital Markets recently introduced two new products for the convenience of all our clients at CIBC, products that our clients are already embracing in a very important way. The first is CIBC Global Money Transfer, a no-fee service allowing our clients to send money overseas easily and affordably online from their online banking account or from our banking centers. The second offering is CIBC Foreign Cash Online, which allows our clients to order any of 75 foreign currencies online for secure delivery to their home or their local banking center, and then Toronto at Pearson Airport at no extra charge.

These two innovative products underscore our commitment to simplifying banking for our clients, and being the leading provider of foreign exchange in Canada. It's also a classic example of where our capital markets expertise works with our retail expertise to deliver to Main Street Canada what they need each and every day. My colleague, Harry Culham, our Head of Capital Markets, is here this morning to answer your questions.

So I'm going to close now and as a reflect on my first year as the leader of CIBC, I am very pleased with the progress we've made as a team. And I'm very excited about what lies ahead for our shareholders and for our employees and for our clients. Our strategy will allow us to unlock value, will allow us to redeploy resources for growth, and we're going to remain vigilant when it comes to managing risk and managing our cost structure.

And on behalf of CIBC's Executive Committee and our Board, I'd like to take this opportunity to thank our shareholders for their continued support and all of our team, our 44,000 employees, for their ongoing dedication of serving our 11 million clients. I'd be remiss if I didn't wish everybody a Happy Holiday if I don't get the opportunity to do that again on this call. We have a lot to be thankful for. And with that thankfulness, let me turn it over to Kevin to review our results in detail. Kevin?

Thanks. Thanks, Victor. So my presentation will refer to the slides that are posted on our website, starting with slide 5. And before I review the fourth quarter in detail, let me start with a brief overview and just a reminder of the full year where our adjusted net income was a record CAD3.8 billion and adjusted EPS was CAD9.45, up 6% from 2014. I think our performance in 2015 reflects the strength of our client-focused strategy and our diversified business segments.

Adjusted revenue growth of 6% was driven by strong asset growth, improved margins and higher fee income. And we delivered an industry-leading ROE of 20% and a year-over-year increase in dividends paid of 9% per share, and the highest total shareholder return among our peers. We finished the year with a Basel III CET1 ratio of 10.8%.

So moving onto our results for the fourth quarter, CIBC delivered adjusted net income of CAD952 million and adjusted EPS of CAD2.36. Record earnings in Retail and Business Banking reflect strong loan and deposit growth. We had stable results in challenging market environment in both our Wealth Management and Capital Market segments and we increased our quarterly dividend by CAD0.03 to CAD1.15 per share.

We have three items of note during the quarter which resulted in a negative impact of CAD0.43 per share. The most significant item of note was a restructuring charge of CAD161 million after-tax and noncontrolling interest, reflecting the initiatives we have been implementing to simplify our bank and better align our resources to meet the changing needs of our clients.

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 a result of Retail and Business Banking on slide 7. Revenue for the quarter was CAD2.2 billion, up 6% from last year driven by strong performance in both personal and Business Banking. Revenue in personal banking was CAD1.7 billion, up 7% compared with the same period last year.

Performance benefited from volume growth across most products, with total personal funds managed up 9%. Wider spreads on our variable rate lending products and higher fee income, primarily driven by strong sales of long-term mutual funds, also drove higher revenue.

Revenue in Business Banking was CAD414 million for the quarter, up 5% compared with the same period last year and Business Banking benefited from strong loan and deposit growth and higher fee income. Business loans were up 10% year over year and business deposits up 9%. Revenue growth was muted due to the persistent low interest rate environment, which continues to narrow margins on business deposits.

The other segment had revenue of CAD20 million, which was down CAD7 million from the same period last year due to the continued runoff of the exited FirstLine Mortgage broker business. Our provision for credit losses in the segment was CAD190 million, up 11% from last year due to higher Business Banking losses largely to company-specific losses in the oil and gas sector. Noninterest expense were CAD1.1 billion, up 4% from the prior year, primarily driven by our continued investment in strategic growth initiatives (inaudible) towards innovation and transforming our business to better serve our clients.

Our net interest margin was up 1 basis points sequentially, mainly due to wider spreads on variable rate lending products. In the quarter, Retail and Business Banking reported record adjusted net income of CAD656 million, up 7% from the same period last year.

Slide 8 reflects the results of our Wealth Management segment. Revenue for the quarter was CAD612 million, up CAD25 million, or 4% from the prior year, with solid performance for most business lines. Retail brokerage revenue of CAD304 million was relatively flat year over year, as growth in fee-based revenue was offset by lower commission revenue mainly due to a decline in transaction volumes.

Asset management revenue of CAD217 million was up CAD11 million, or 5% from last year, this was largely due to higher assets under management driven by strong net sales of long-term mutual funds. On a full-year basis, CIBC achieved a record CAD5.5 billion in net sales. Private wealth management revenue of CAD91 million was up CAD12 million, or 15%, mainly due to the favorable impact of foreign exchange rates and higher assets under management driven by net flows.

Noninterest expenses of CAD443 million were up CAD19 million, or 4%, primarily due to higher employee-related costs including performance-based compensation and the unfavorable impact of foreign exchange rates. Net income in Wealth Management was up CAD5 million, or 4% from the fourth quarter of last year.

Turning to Capital Markets on slide 9. Our results reflect the challenging market conditions that I highlighted, but despite these headwinds we delivered results in line with last year. Revenue for the quarter was CAD578 million, again in line with the prior-year quarter. Global markets revenue of CAD310 million was up CAD2 million from the prior year as higher revenue from debt issuance activities was largely offset by lower equity underwriting and trading revenues.

Corporate and investment banking revenue of CAD269 million was up CAD4 million from the prior as higher revenue from corporate lending and advisory was partially offset by lower underwriting activity. There was a net credit recovery of CAD5 million this quarter compared with a provision of CAD14 million in the prior year. Noninterest expenses of CAD321 million were up CAD29 million from the prior year primarily due to higher employee-related costs. Net income of CAD211 million was in line with the prior year.

Slide 10 reflects the results of the Corporate and Other segment. The net loss for the quarter was CAD44 million compared with a net loss of CAD45 million in the prior year. Higher earnings in the CIBC FirstCaribbean due to favorable foreign exchange and good credit performance was largely offset by lower investment gains. The current quarter also benefited from certain year-end tax credits. Loss within this segment of [authority] being in the CAD60 million to CAD70 million range, and we would anticipate it being at that level going forward.

CIBC's capital position remain strong. Our Basel III common equity Tier 1 ratio is 10.8%, the same level as in the prior quarter. Solid organic capital generation was offset by the impact of higher risk-weighted assets, and our RWAs increase by CAD2 billion from the prior quarter as a result of strong growth in our lending portfolios. Our Basel III leverage ratio was 3.9% which is well above the minimum required by our regulator.

To wrap up, we're very pleased with our results this quarter which capture a record year in which we had strong performances from all of our businesses. In 2015 we performed well against our medium-term financial objectives with strong earnings growth and continued capital strength. Heading into 2016 we feel confident about delivering long-term value to our shareholders.

And 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 where you'll see that loan losses came in at CAD190 million, or 26 basis points, which is up CAD9 million, or 1 basis point from the prior quarter. This was mainly due to higher losses in Business Banking related to two oil and gas accounts, and that was partially offset by recoveries in our capital markets.

Turning to slide 14. New formations were up CAD64 million quarter over quarter due to the two accounts I mentioned earlier. You'll see that gross impaired loans were down, and that's primarily as a result of declines in CIBC FirstCaribbean and in the US region. Gross impaired loans as a percentage of gross loans and acceptances have trended down over the past few years, and they've come in at 49 basis points this quarter.

To review our oil and gas portfolio, you'll see slide 15 shows our corporate and Business Banking portfolios. We have CAD17.3 billion of direct exposure, which is down slightly from CAD17.4 billion last quarter. Our loans outstanding have declined CAD131 million, or 2% quarter over quarter. 78% of our exposure is investment-grade, and this has remained stable throughout the year. 56% of that is to exploration and production companies with only 5% in the services space.

On slide 16 you see our retail portfolio exposure to oil and gas where we have a CAD39 billion exposure to the provinces of Alberta, Saskatchewan, and Newfoundland and that's up from CAD38 billion last quarter. If we exclude insured mortgages we have CAD17 billion, which is unchanged from last year. Overall our portfolio is performing as expected, given the stressed oil prices. We continue to be vigilant and to proactively monitor our exposures.

Turning to cards on slide 17 you'll see that our net credit losses were CAD88 million this quarter, that's down CAD5 million from last quarter and this is attributable to the seasonality, as we typically see lower write-offs in our Cards portfolio in the fourth quarter. In the oil provinces we've seen some increases in delinquencies, but this performance has been, as I mentioned earlier, as expected. The increase was mainly in the segment of customers with lower credit quality, which accounts for just over 1% of our total retail portfolio.

The overall Cards portfolio continues to perform well. The delinquency increase in this quarter was driven by seasonal increase from the low levels in the summer. We continue to monitor our exposure in the oil provinces across all retail lending and remain cautious, given that we are seeing increases in unemployment claims.

Our Canadian residential mortgage portfolio is highlighted on slide 18. As you can see, 64% of our portfolio is insured with 82% of the insurance being provided by the CMHC. The weighted average loan to value of our uninsured portfolio is 59% 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 61%.

Slide 19 shows our condo developer exposure, which continues to remain diversified across many projects and 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 one negative trading day this quarter compared with none last quarter. Our average trading VaR was CAD3.9 million, roughly in line with last quarter at CAD3.7 million.

I'll now turn things back to Geoff.

Thanks, Laura. That concludes our prepared remarks and will now move onto the Q&A. Operator, can we please have the first question on the phone?

(Operator Instructions)

John Aiken, Barclays.

Good morning. David, wanted to explore the loan growth that you had in your operations in terms of what's underpinning the mortgage growth, as well as what you're seeing on the commercial side in terms of pricing pressure or what's going on in covenants with your competitors?

Okay. Good morning, John. So growth is pretty broad-based in Personal Banking and Business Banking. By that I mean asset side, liability side, both showing growth. But you did mention specifically mortgages, so let's focus in there. A couple of drivers for the mortgage growth, and again we have the dichotomy where we're coming out of the brokerage side, the first line, the mortgage broker side and then working on our own brand to grow that part.

So first comment I'd make is on FirstLine, we're still retaining about 50% of the balances, double the target we set out at the very beginning of that effort to come out of that brokerage channel. So that's what's happening on that side and we focus on building our own brand. We are seeing substantive growth there, for sure. It's working quite well. A couple of drivers, as I said. First is expanding the mobile channel. So as we continue to focus on remote banking and banking that fits the life of our clients, building up that remote channel of the mobile advisers, we were certainly below where we needed to be. So as we've built that channel, that's an impact on our growth rate from two perspectives. More relationship folks out on the street. And two, as they've had the role for a while, their productivity has been improving as well. So kind of two elements of lift there.

And then the second driver for growth in mortgages is just process improvement. A couple of examples. On the credit adjudication side we've tightened it up, sped it up. We're getting answers back to our clients faster. And even simple things like documentation, we've refined it, simplified it, tightened it. So I'd like to believe there's two drivers. One is expanding the sales channel, mobile advisers and the productivity thereof. And two is just tightening our processes, making us quicker, faster, tighter when we respond to clients.

And then you asked on the Business side. So on the Business side, we're seeing a growth on the lending of about 10%. We've been seeing that for a while. I think that's sustainable. No doubt it's a competitive space but we seem to be maintaining our margins. And on the deposit side we're high single digits growth in that space as well. So I think there's nothing that would indicate that we're coming off of that. We see Alberta, which used to be -- it's still a very much a growth market. It was growing faster than the national average. Now it's growing slower than the national average, but it's still showing substantive growth.

Great, David. In your comments on the margins for the consumer side, you're not actually seeing any pricing pressure, or is this just because of the dynamics of the spread on the variable rates moving out?

Okay. So when I commented on pricing pressure, I thought you'd ask John about the Business side. So I was speaking about Business. So let me speak about margins on the Personal side. Go to that directly. So we've been guiding to stable NIMs for quite some time, and outperforming a bit relative to that. So I think this year up 3 basis points, this quarter up 1 basis point.

As I look forward, I think maintaining a stable NIM is going to be a bit of a challenge from a couple of perspectives. From an industry perspective, the low interest rates in our non-interest sensitive ladders just continue to grind. And then the second is, it's a competitive world for deposits. So we've shown substantive deposit growth and we'll continue to seek that deposit growth. But to do it requires promotional rates at points of time. We're in with the promotional rate in the market now. So that puts near-term pressure on NIMs.

I think it's the right thing to do. I'm confident it's the right thing to do for the long-term value of the franchise. But because of the non-interest sensitive rate impact and just the level of competition for deposits in the market, there is pressure. On the Personal Banking side there is pressure on NIMs in the industry, and we'll continue to need to manage through that.

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

Thanks, John.

Rob Sedran, CIBC Capital Market.

Hi. Good morning. Kevin, the capital ratio, the CET1 ratio, has been flat now for a couple of quarters. I wonder if you can give us a better sense as to what's going on and whether there's any opportunity to return to more normal levels of growth in that ratio, just based on retained earnings going forward? And then Victor, whether the fact that the ratio isn't really moving up as much as it was colors your thoughts on the dividend growth?

Sure, Rob. It's Kevin. Let me take the first part of that. So I'd say, and I think it back in Q1 of this year we were actually up 50 basis points, but it's been relatively flat since then. And I think that essentially what's happened is our capital growth has being impacted by business growth and also changes in FX rates. And so if I look at the current quarter, again strong capital growth but we did have the restructuring charge which would've decreased the CET1 build from that. And then offsetting that was regular business growth that you'd have seen. So we had a couple of billion dollars of RWA growth, and so that would've offset that. Going forward, we would anticipate the continued strong capital generation that would be offset to a certain extent by business growth and -- but overall we continue to see increasing our capital ratios.

So this number should migrate higher, even if it's 10 or 15 basis points a quarter, we should expect to see some growth in that ratio over time?

Absolutely. I mean, if I think even for this quarter, I think the restructuring charge was about 16 or 17 basis points in and of itself. So absent that we'd have had -- we would have certainly have had that growth this quarter.

And Rob as a follow-up on the dividend side, just consistent with all the messages we've delivered in the last number of quarters, we're just going to keep going at CAD0.03 a quarter is what we be doing this year consistently quarter after quarter until we get to the upper end of our range, which is 50%. We're at 45.5% now. So we have room to move up.

Thank you.

Gabriel Dechaine, Canaccord Genuity.

Good morning. A couple of quick questions. Victor, can you give us a sense of the timing, and or what's the talk around the potential increase in mortgage risk weights? Sounds like it's been kicked down the road a little bit. And then, on -- for Laura, on the redetermination, you didn't mention average credit lines, how much they were cut and all that stuff. But I'm also interested in how many of these E&P firms had their loans restructured, so from revolving to term, stuff like that. And if that just means we might see some credit issues a few months away if some of these clients or borrowers can't sell off the assets to repay the loans.

So Gabriel, on your first question, as you know, I'm not the regulator, I'm not the Minister of Finance. So it's hard for me to predict where that's all going. But I look at what's happening around the world, as you do. And other countries and other regulators, they are increasing the risk weights. I and the team here, we always plan for a more conservative stance, which is why we have a higher CET1 ratio in the event that that does change. So I think we have to plan for that. The extent of the change, I can't comment on, although I suspect over time risk weights will increase, but in such a way that the industry can continue to provide to Canadians mortgages at a reasonable level to help them buy their homes that they wish to buy.

But you don't expect that in the next couple of quarters, anything like that?

Look, Gabriel, you know what? I don't know. I just, as I said to you, the most important thing for us is, how are we planning for this? Higher -- being at the higher end of CET1 in our peer group is something that we feel very comfortable with for a number of reasons, one of which is possible regulatory changes.

Okay. Thanks.

Thank you.

Sorry, there were -- yes, it was one question that had various segments to it. (Laughter). So nice way to go about it. On the borrowing base redetermination. So the majority of our clients have been through this redetermination calculation. And so what we've seen as it relates to our borrowing base facilities is the reduction in amounts of about 5%. And that's with our price deck that we've brought down about 15% from the previous one we were using.

And so your other question within the one question was how many of the loans had been restructured? And I can tell you that at this point in time, very few. We're probably -- we are well under 10% of our borrowing base redeterminations that either have off-cycle determination dates or we've been discussing some form of extension. I would expect to see some increase in that number through 2016, particularly if oil continues to remain below $50 on a consistent basis.

All right. Thank you very much.

Meny Grauman, Cormark Securities.

Hi. Good morning. Victor, you talked about online lending in your remarks. I was wondering if you could just give us a little color as you think about this developing opportunity or platform. Where is it going? How big can it get? What do you see in that regard?

Well, we see on both sides of the border emergence of players in this space. We saw OnDeck Capital sign a relationship with JPMorgan just two days ago. They're trying to provide faster, smarter, sharper adjudication to the small business segment. Thinking Capital is the Canadian equivalent of that. We believe that there is a gap to fill for our small business clients. And this adjudication process is data intensive. Is paperless. It's quick. And it's something that our clients appreciate. The relationship we signed with Thinking Capital is an exclusive relationship. It also allows us to deepen our relationships with those clients, not only from a getting a small business loan but also opening up a small business banking account and a personal banking account, David, if you'd like to add to that?

Yes, just a couple of comments. If I go up a few thousand feet and picking up on what we talked about at Investor Day, and as we transformed our operation. So if you look at it, as we talked that day, about three horizons. We're innovating within our core banking, innovating within boundaries to what we do currently and what we might be doing soon. And then the third horizon being innovations and stuff that's out there further.

Thinking Capital's in horizon two. It's algorithm-based, online lending which is not exactly what we do currently but pretty close. And it's us learning and exploring in that space. Is critical for us, as Victor said in his opening comments, to be laser-like focused on meeting the needs of our clients. And this currently is a faster, tighter response to small business which can be, in traditional banking, a bit clunkier and not as crisp as what's being done by FinTechs, like Thinking Capital with algorithm-based lending. So hence the partnership. It's good for Thinking Capital, it's good for us as we learn and explore in that space.

And things we're doing in the third horizon, our investments in Blockchain, our digital currency group, we're looking at crypto currencies. And then horizon one, all the stuff we talked about at Investor Day, where we are doing network transformation, just getting more digital on our operations in the kind of banking we do today.

So Thinking Capital's in horizon two and it's an important step for us to explore a space that we can learn from and make sure that were meeting the needs of our clients as quickly and as effectively as possible as that space evolves.

Thanks for that. And then just another quick question. The sequential drop in fixed income trading revenue, is that all market-related? Or is there anything else notable going on there?

Meny, why don't we get Harry Culham to answer that question.

Hi, Meny. How are you?

Hi.

Actually, we are coming off of very strong trade performance in quarter three which benefited from a combination of good client activity and market volatility. And quarter four, on the other hand, had lower client activity really around uncertainty in the markets and lower activity coming out of the summer. If you look at the full annual trading revenues 2015 versus 2014, we're very proud of the performance where it's up significantly on 2014.

Thanks for that.

Mario Mendonca, TD Securities.

Good morning. Before I get to my actual questions, just to clarify that on the trading side, were there any mark-to-market losses this quarter? It doesn't appear to be on page 20 of your presentation, but anything you can help with there.

There are no significant mark-to-market losses. Nothing material.

Maybe the right way to ask is, were there big mark-to-market gains in Q3 then?

We had some significant transactions in quarter three, All client-driven transactions that led to a very strong performance. In fact the first three quarters were very strong. Quarter four is essentially in line with quarter four last year. And we're actually off to a good start as we start quarter one here. The outlook is quite positive with some solid client activity in the first part of the quarter.

And did those significant client transactions in Q3 result in significant mark-to-market gains?

Yes, there was some significant gains from some client transactions. There was some larger transactions in quarter three. This is, as you well know, this is a well diversified client franchise across various different products.

Okay. Let me get to my actual question then. So David, you referred to -- actually let me start it this way. From Q1 to Q3 -- sorry, Q1 to Q2 in domestic retail, there was a sharp change in the bank's performance, both earnings growth, operating leverage. It was like a switch got flipped. And what I'm thinking about going into 2016 is operating leverage in particular. The sort of operating leverage you've seen in the last three, quarters, is that sustainable going into 2016 given the pressure on margins and your need or your desire to spend more aggressively in that business?

Hi, Mario. Yes. Let's go back to the message from Investor Day early October. So at that point, I'd said that 2016, it'd be a challenge maintaining positive operating leverage. And if you to look to the last few quarters, you're right, they've been strong, and I got to say in particular Q4 came in better than I anticipated. So if we decomp it a bit, the expenses which are just inside 4%, I think that's indicative of what we'll expect in the near term, given our continued investment in the business. Revenue I'd say came in stronger than what I anticipated. And may -- is -- let me turn it to is, stronger than what I anticipate in the near term. So my perspective for 2016 hasn't changed.

In Investor Day we talked about some of the investments that we're lighting up currently, The simplifying of our leadership structure. We talked about moving clients into Imperial Service where they are better served there and out of core. We talked about our network transformation. We talked about investing in digital sales. So all those steps we are taking to make our bank better caused me to stay with the guidance that I provided at Investor Day.

And the guidance, to be clear, is challenge maintaining positive operating leverage?

That's correct, Mario, yes.

Thanks very much.

Yes.

Sumit Malhotra, Scotiabank.

Just to pick up on that, David. I was surprised to hear you say that even with this investment spend that you're contemplating for 2016, the expense growth level isn't likely to change. I had thought that was the lever that was more likely to push the operating leverage down in 2016 as opposed to revenue. So is there -- do you have some offsets in mind that is going to keep expense growth at the same level of 4% next year to offset the investment spend?

I guess I'll make a couple of comments. Like, we're talking near term as opposed to quarter to quarter. And one thing I'd say is that although we're a substantive enterprise, CAD10 million moves operating leverage 1 percentage point and CAD10 million isn't really a big number on the expense base that we're dealing with, which is CAD1 billionish per quarter. So there's some volatility. CAD10 million moves it a turn on operating leverage.

So you'll see that number move around as it has in the past. I guess I'm saying, we have been investing. There are some specific things that we said on Investor Day that we want to do, and that will put some pressure on expenses for sure. And you'll see some movements in the quarter, especially, as I point out CAD10 million can move it a turn. But I'm just saying that take, for example, the non-interest income line and -- which has been flat for some period of time. It's up this quarter about CAD20 millionish. When I look at that number and dissect it, it's a whole lot of small items, many of which aren't reoccurring. So we just had a bit of a tailwind in Q4 that pushed us to a level beyond what I'd hoped for.

Fair enough. That's clear. And then one final one for Victor. Victor, you've mentioned many times since taking the seat that getting the dividend payout ratio to the high end of the range is a target for the bank as long as earnings permit. I just wanted to ask you, what happens when you get to 50%? Have you discussed, either with the Board or with the regulator, the possibility of taking it above the for now magic 50% mark? Would you want to do that? And is there capacity in terms of what the regulator thinks for you to move above 50% in the future?

Sumit, I think we're going to move to 50%, and we're going to try to grow our earnings. And that way we can continue to grow our dividends by growing our earnings. The payout range of 40% to 50% and being at the upper end of that is where we feel comfortable. And that is really where the discussions have stopped. Our real focus is on how can we drive earnings growth, both from the top line and bottom line, and managing our costs better to deliver more value to our shareholders. That's the preoccupation of the leadership team at CIBC.

So dividends go up because earnings go up, not because the payout ratio moves?

Right.

Thank you.

Thanks.

Doug Young, Desjardins Securities.

Just maybe starting, Laura, can you talk a little bit about the evolution of your watchlist over the past year, and in general? And then specifically related to the evolution of the watchlist on the energy book.

Hi, Doug. Yes, overall watchlist. So across the organization, has actually been very good. So we haven't seen any increases. In fact, I'd say it's been down a bit as it relates specifically to the oil and gas space. We have seen increases in our watchlist. However, none this past quarter. And I'd say that accounts that are of higher concern to us, there's about a handful of those.

So it -- so there hasn't been any change in the number of loans in the energy book on the watchlist over the past year?

There certainly has been over the last year. There haven't been this quarter. In fact, when we look across the broad spectrum of accounts, so including our small business accounts in the oil space, we've had 100 names that have been downgraded. And just to give you an idea, that represents an increase in our risk-weighted assets over the year of just under CAD400 million.

Okay, interesting. But overall, over the last year, your total watchlist hasn't really moved? Your oil and gas has increased there's been changes elsewhere? Is that the right way to think of it?

Yes.

Okay. And then just quickly, if I could sneak another one in here. On the Wealth Management side I noticed that your earnings were up 4% year over year but your assets were up 12%. And if I recall at the Investor Day [it was] 71% of your Wealth Management earnings is driven by asset management. And so I'm just a little perplexed as to why you're not seeing more leverage to asset growth? And is there anything in the numbers that has caused the lack of leverage there? Thank you.

It's Steve. Good morning. Overall the quarter this year to quarter last year growth in assets is relatively consistent with the revenue growth. The real reason why our earnings this quarter were down somewhat from previous quarter is really just the market pullback that we saw, primarily in August and September where the TSX was down about 8%. And so our revenues really were fairly much in line with the overall asset movement. And so that's really why we were down, but we still did produce 4% revenue growth -- or 4% [NIET] growth rather Q4 this year to Q4 last year. So still positive, but much less than the momentum we have been seeing previously.

Okay. Maybe I'll follow-up. Thank you.

Okay. Thanks.

Peter Routledge, National Bank Financial.

Hi. Question for David. Great mortgage results. I saw a report where CIBC is a market leader in terms of mortgages for foreign investors in Vancouver, and at least one competitor now is making a push into that market, dropping their LTV limits to minimum 20% down. So how are you -- how do you respond to these types of competitive threats?

Hi Peter. Good morning. No anticipated change in that particular respect. We are strong in that region, and I'd like to believe it's that the team we've got there. And I know that may sound a bit generic but it is a team that's very strong, been established there for quite some time, very connected within the community. We've got a consistent support throughout the bank with risk and so forth regarding the limits that we have established, have allowed us to be competitive. So yes. There's more of a push from one of the -- one of our competitors into the space, but I guess the simple statement would be we feel good about our position in that market, good about our team, and we'll just push on with what we're doing.

How important is that market, and maybe the Toronto market which may be a bit smaller, but how important is that submarket to your overall mortgage growth?

Well, Ontario is a core market for us generally, and Toronto obviously the epicenter within. So if you look at our mortgage book, which I think in Laura's slide, she's got it cut by province, or we have it in our materials. So you can see that the center of Canada is strong for us. But when you actually look at those two cities as a percentage of our overall book, it's actually not that substantive. We're a broad-based Canadian lender, even into the smaller rural communities.

So they're important, but the key thing is for us to be competitive in all the spaces that we're active. And Toronto and Vancouver are different from other markets. Rural markets have different dynamics. What we have done over the last few years is to change our pricing to reflect the dynamics in each of those markets, as where before we used to be kind of one price fits all across the country, which oversimplifies the dynamics within our country.

And just on credit, you mentioned you do credit mitigation. For, say, the high net worth foreign buyer that puts 20% down on a home, I mean obviously they would have financial assets beyond just their home. What credit mitigation techniques do you use? I mean, I guess the question I'm asking is, do you ensure you have assets custodied in Canada when you do that type of business?

Maybe what I'll do is just hand over to Laura, who's my colleague, to make sure that what we're doing as we pursue growth is appropriate in nature. So why don't I just hand over to Laura and she can comment.

Yes. Hi, Peter. So I would say we absolutely qualify all of our borrowers. And if we are making loans where we're taking security, particularly in the mortgage space, of course, the security we're taking is in this country. And just to elaborate a bit, as it relates to nonresident Canadians, the percentage of our portfolio, as David said, is really small. It's under 1%.

Okay. So this isn't a huge driver. Okay.

Not a huge driver. And I'd also tell you that from a delinquency perspective or performance perspective, it's a very well performing segment of our book. It just happens to be an incredibly small one.

Yes, but the new resident would be a lot bigger.

Yes.

So people coming to Canada and staying here.

You are right, it would be. And again, the same. We do all the qualifications for all borrowers. And what I can tell you as it relates to our mortgage growth, most of it for that segment is coming out of Vancouver and Toronto. And our originations actually look quite good and performance to date. So we've got really good profiles. And in fact when we look at our late-stage delinquencies in that segment, we are actually down in the Greater Toronto area and in British Columbia.

Okay. Thanks for that. I appreciate it.

Sohrab Movahedi, BMO Capital Markets.

Thank you. I just wanted to stand back a little bit and look at the higher level. You've obviously had pretty good ROEs, even on a higher capital ratios. At the Investor Day you talked about a medium-term target of 18% to 20%. I mean, if you had a chance to revisit that, would you stick with it or would you reduce the lower end of that range?

It was only six weeks ago, Sohrab. (Laughter).

But I think the world has changed quite a bit even since.

The world keeps changing week after week. We are at the high end of ROEs for banks of our size around the world. I don't think that the 20% level is something that's sustainable. I think competition will continue to eat away at that. We're prepared to deal with it. We're not prepared for a precipitous drop in ROE. Is 18% the right number, is 18.5%, is 17.5%? I'm not sure. But all I can tell you is we're guiding that ROE will drift downwards over time.

And what we were clear about in the investor presentation is we want to get to an earnings per share profile of 5% to 10%. We want to be well within that range in a 1.5 years from now. We want to get our [NICs] ratio down to 55% run rate in the medium-term at that level. ROE will be in the 18% to 20% range and dividends will be at the upper end of 50%. We're really just focusing on core quality earnings growth, staying really close to our clients in all our businesses, working across all of our businesses. And just delivering good old-fashioned earnings growth to our shareholders, and hopefully share price appreciation with that.

That is perfect. Thank you very much.

Thank you.

Mike Rizvanovic, Veritas Investment.

Good morning. Quick question for David on the strong mortgage growth that you've been seeing. In terms of new originations, can you tell us roughly how meaningful the contribution is on the -- or from the 5% cash-back offer? And as a quick follow-up, in your view is the risk profile for someone who chooses that product meaningfully different than your average mortgage borrower?

Hi, Mike. Well, I'll answer the first bit and maybe hand over to Laura for the second bit. To be honest, it's not that meaningful. The key thing, to be honest, is it's a discussion point for our front line to have with clients and to have a basis to reach out to clients who don't currently have their mortgage with us. It's more a tool to facilitate a conversation and to catalyze the focus of our front line team on that area to continue to push for the deeper relationships that we seek as a fundamental part of our strategy. Regarding those that we do book and the credit risk associated with them, I'll turn to Laura, if I could.

Yes. Mike, similar to my earlier comment, risk profile actually tends to be better as it relates to Beacon scores, loan-to-value, delinquencies.

Great. That's helpful. Thanks.

I would now like to turn the meeting back over to Mr. Weiss.

Thank you. Well, that concludes our call. If there are any follow-up questions, please call our Investor Relations Department. Thanks again for joining us this morning. And on behalf of the team at CIBC, I'd like to wish everyone a happy and safe holiday season.