Canadian Imperial Bank of Commerce (CM) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CIBC second-quarter results conference call. Please be advised that this call is being recorded. I would now like to turn the meeting over to John Ferren, Senior Vice President, Corporate CFO and Investor Relations, CIBC. Please go ahead, Mr. Ferren.

Thank you. Good morning, and thank you, everyone, for joining us. I know it's a busy day for you all with three banks reporting today.

This morning, CIBC's senior executives will review our Q2 2016 results that were released earlier this morning. The documents referenced on this call, including our Q2 news release, investor presentation and financial supplement, can all be found on our website at CIBC.com. In addition, an archive of this audio webcast will be available on our website later today.

This morning's agenda will include opening remarks from Victor Dodig, CIBC's President and Chief Executive Officer. Kevin Glass, our Chief Financial Officer, will follow with a financial review and Laura Dottori-Attanasio, our Chief Risk Officer, will close the formal remarks with a risk management update. After the presentations, there will be a question-and-answer period that will conclude by 8:30 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 of the Bank.

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, John. Good morning, everyone. And thank you for joining us. This morning, CIBC reported adjusted net income of CAD962 million or CAD2.40 per share and that's up 5% from the same period last year. We had solid performance this quarter from all of our businesses.

Most notably, retail and business banking delivered another strong quarter of top-line growth and positive operating leverage and capital markets reported very strong broad-based and client-driven trading results. Overall, our adjusted NIX ratio for the quarter was 58%.

We continue to make good progress on our journey towards our medium target of achieving a 55% NIX ratio, which we outlined at last year's investor day presentation. We've controlled expenses and we've balanced that with an approach to investment and cost discipline and solid revenue growth to get these numbers.

Turning to our capital position. We ended the quarter with a strong CET1 ratio of 10.4%. With the closing of our American Century divestiture last week, our CET1 ratio increases to approximately 10.9%. Our return on equity for the quarter was 18.4% and we increased our quarterly dividend another CAD0.03 to CAD1.21 per share.

Our seven consecutive quarters of dividend increases have achieved our goal of moving our dividend payout ratio to the high end of our 40% to 50% target range. Going forward, our intention is to remain near the 50% payout level by aligning our dividend increases with our earnings growth.

Our results this quarter were strong, especially given the continued headwinds faced by the financial services industry of low rates, weak energy prices, and low economic growth. In recent months, I participated in a number of economic forums where a wide range of business leaders have discussed Canada's economy and the market challenges we all face. The overriding theme from these forums is the importance of innovation for growth and competitiveness.

In the financial services sector, the threat of disruptive innovation is here today and it's not going away. Consumers are embracing new technologies that make it easier and more convenient for them to carry out everyday transactions. If CIBC is to stay relevant, we need to adopt new technologies and look for secure, more flexible ways to service our clients.

Much has been said about the fintech revolution and its perceived threat on traditional banks and services. At CIBC, we look at fintechs as both competitors and potential partners. We see opportunities to work with them side-by-side. They've embraced leading edge technologies to help financial services organizations deliver our services in new and innovative ways. By working with them, we believe that we can deliver a better bank for our clients.

Now let me turn to our business units. Retail and business banking reported a strong quarter with adjusted earnings growth of 7%. The quality of retail earnings was very strong, as revenue growth outpaced higher loans losses and expense growth from investments we continue to make in our business.

Year-over-year, funds managed growth of 8% was the highest on record and it was driven by strong client-driven volume growth across all personal and business banking products. Our retail business continues to focus on innovation for the benefit of our clients. With the Hello Home app, we launched earlier this month, our clients are able to initiate mortgage applications using their mobile devices and securely capture and upload information from required documents.

This new app provides convenience, ease of use and reduced processing time for our clients and it recognizes the growing opportunity we have to use mobile channels to sell our services as well as to service our clients. With Apple Pay, clients can now pay for their everyday transactions with their CIBC credit and debit cards using Apple devices, wherever contactless payments are accepted. This simple and secure method of payment is another way for our clients to keep CIBC credit and debit cards in a digital wallet instead of a physical one.

Both of these new offerings are a great fit with our brand promise of banking that fits your life and represents another important step in delivering on the growing mobile needs of our clients. My colleague, David Williamson, is here this morning to take any questions you might have on the progress of our retail and business banking strategy.

Let me turn to wealth management, where adjusted earnings were down 14% year-over-year. Excluding the impact of our divestiture of American Century, earnings were up 7%. Our wealth business is achieving solid growth in the face of challenging markets that have reduced asset values and impacted revenue from our retail brokerage business. We're particularly pleased with the volume growth we've experienced in Canadian-based loans and deposits within the private wealth segment, which is evidence that our client focused strategy is working.

During the quarter, CIBC achieved the second highest average rating among the big six bank owned brokerages in the investment executive brokerage report card, improving from third place last year. This score card, voted on by investment advisors, is a good measure of CIBC Wood Gundy advisor satisfaction and reflects the positive impact of culture and process improvements we've made in our business.

During the quarter, we also launched two new products for our high net worth clients, the Renaissance Flexible Yield Fund and the Renaissance Private Investment Program. The flexible yield fund is managed by US bond portfolio manager, Jeffery Gundlach of DoubleLine, who is recognized as one of the world's foremost global fixed income managers.

For high net worth investors looking for customizeable innovative investment solutions, the Renaissance Private Investment Program provides multi-style investment approaches and diversification. My colleague, Steve Geist, is here with me this morning to answer any questions you have on our wealth business.

Our capital markets business reported revenue of $756 million and adjusted earnings growth of 6% year-over-year, as market conditions and client demand drove strong results as cross our foreign exchange, equity and interest rate trading platforms. Our capital markets team continues to support our clients as they navigate market uncertainty and volatility by delivering integrated advisory lending, trading and research solutions.

We continue to hold market leadership positions in Canada, in syndicated loans, debt and equity underwriting, trading and M&A advisory. We have also strengthened our coverage and execution capabilities with addition of new talent in our global markets and corporate banking segment.

During the quarter, our capital markets team was financial advisor to Suncor on its $7 billion acquisition of Canadian Oil Sands, the joint lead book and book runner on a $2 billion US issue for the province of Quebec, co-underwriter and joint book runner and co-lead arranger on a CAD1 billion asset sale bridge loan to support Shaw Communications' acquisition of Wind Mobile and several other notable transactions. My colleague, Harry Culham, who oversees our capital markets business, is here this morning to answer any questions you may have on our capital markets business.

To conclude, our strong result this quarter demonstrates CIBC's earning power and our progress against our strategic pillars. Those strategic pillars have been very, very consistent: focus on our clients, innovate for the future and simplify our bank. We're pleased with our progress but recognize the challenges and work we have left to do to achieve our goal of being number one in client relationships, while delivering our medium-term financial targets for our shareholders.

I'd like to thank our entire CIBC team for a strong quarter and I remain very confident that our team will continue to deliver against our strategies to deliver for our shareholders over the medium-term. And with that, let me turn it over to our CFO, Kevin Glass.

Thanks, Victor. My presentation will refer to the slides that are posted on our website, starting with slide 5. So we're very pleased with our broad based performance in the second quarter and our results reflect strong execution of our client-focused strategy. We delivered adjusted net income of CAD962 million and adjusted earnings per share of CAD2.40 for the quarter.

Our expense growth was well controlled and we achieved positive operating leverage of 2.8%. And our strong capital position allowed us to increase our quarterly dividend by CAD0.03 to CAD1.21 per share.

We had a few items of note this quarter which resulted in a negative impact of CAD0.05 per share, the more significant ones being a CAD56 million after-tax increase in legal provisions, a CAD47 million after-tax gain net of related transaction and severance costs on the sale of a processing center, a CAD29 million after-tax charge against our non-impaired loans which has been included in the collective allowance, and a CAD30 million income tax recovery arising from the settlement of transferred pricing related matters.

The balance of my presentation will be focused on adjusted results, which exclude these items of note. We have included slides with reported results in the appendix to this presentation. Let me now review the performance of our business segments, starting with the results for retail and business banking on slide 6.

Revenue for the quarter was CAD2.2 billion, up 6% from last year driven by strong results in both personal and business banking and a modest benefit from one extra day in the quarter. Volume growth was strong, with both loans and deposits up 8% year-over-year.

I look now at the individual lines of businesses. Firstly, personal banking revenue was CAD1.7 billion, up 7% from the same period last year. Performance benefited from volume growth across all products as well as higher insurance income. Personal banking assets were up 7%, driven largely by strong growth in mortgages and personal deposits and GICs were up 6%.

Business banking revenue was CAD423 million, up 6% from last year driven by strong lending and deposit volume growth and higher credit related fees, partly offset by narrower spreads. Business lending balances were up 13% and business deposits and GICs were up 10% from the same period last year. The other segment had revenue of CAD14 million, which was down CAD12 million from the same period last year, due to the continued runoff of the first line mortgage balances.

Provision for credit losses was CAD199 million, up CAD20 million, or 11%, from the same period last year, due to higher losses in our consumer lending portfolios. Non-interest expenses were CAD1.1 billion, up 4% from the prior year. We continued to invest in strategic growth initiatives to support our transformation into a modern, convenient and innovative bank, while remaining committed to improving productivity.

Strong top-line growth contributed to positive operating leverage of 1.4%, which resulted in a NIX ratio of 51%, an improvement of approximately 7 basis points from the prior year. Net interest margin was down 1 basis point from the prior quarter, mainly due to business mix. The retail and business banking reported adjusted net income of CAD623 million, up 7% from the same period last year.

Slide 7 reflects the results of our wealth management segment. Last quarter, we announced the sale of ACI, our investment was reclassified to held for sale and we no longer recognize our proportionate share of ACI's income. As announced last week, the sale closed on May 19 and the gain on sale will be recognized in our third-quarter results. The other line in our wealth management segment includes the results of ACI for periods prior to our announcement of the sale.

Revenue for the quarter was CAD583 million, down CAD33 million or 5% from the prior year, primarily due to the sale of ACI. Excluding ACI, revenue for the quarter CAD582 million, down CAD5 million or 1% from the prior year. Retail brokerage revenue of CAD312 million was down CAD12 million, or 4%, mainly due to lower commission revenue as uncertain market conditions drove a decline in client transaction volumes.

Asset management revenue of CAD179 million was up CAD2 million, or 1%, from the prior year. This was largely due to higher assets under management driven by positive net sales of long-term mutual funds over the course of the year, partially offset by market depreciation. Long-term sales of our retail mutual funds were CAD1.1 billion and while this was below the CAD2.5 billion recorded in the prior-year quarter, it was an encouraging rebound over Q1.

Private wealth management revenue of CAD91 million was up CAD5 million, or 6%, driven mainly by volume growth in Canadian-based loans and deposits. Other revenue was down CAD28 million, due to the sale of ACI.

Non-interest expenses of CAD429 million were down CAD14 million, or 3%, primarily due to lower performance-based compensation on lower revenue. Adjusted net income in wealth management was down CAD18 million, or 14%, from the second quarter of last year. Excluding ACI, earnings were up CAD8 million or 8%.

Turning to capital markets on slide 8, we continued to deliver strong client-driven results. Revenue this quarter was CAD756 million, up CAD92 million, or 14%, from the same quarter last year. Global markets revenue of CAD469 million was up CAD110 million from the prior year, driven by higher revenue from interest rate, foreign exchange, and equity derivatives trading businesses and all of these businesses benefited from strong market conditions.

Corporate and investment banking revenue of CAD296 million was down CAD19 million from the prior year, driven by lower CMBS revenue from our US real estate finance business, lower investment portfolio gains, and lower debt underwriting and advisory activity. The provision for credit losses was CAD81 million in the quarter, up from CAD8 million in the prior year. This was due to provisions against a small number of accounts in the oil and gas sector.

Non-interest expenses of CAD346 million were up CAD9 million from the prior year, primarily due to higher employee-related costs and the impact of a weaker Canadian dollar. Net income of CAD260 million was up CAD15 million from the prior year.

Slide 9 reflects the results of the corporate and other segment. The net loss for the quarter was CAD36 million, compared with a net loss of CAD39 million in the prior year, due primarily to higher earnings in CIBC FirstCaribbean as a result of favorable foreign exchange and better credit performance. Going forward, we expect losses in this segment to be in line with the current quarter. Having said that, revenue in the segment, including treasury and the [teb] revenue offset can be volatile and are impacted by a number of market variables.

CIBC's capital position remains strong and we continue to remain well positioned for the evolving regulatory and capital environment. Our CET ratio was 10.4%, 20 basis points lower than the prior quarter. Solid organic capital generation was more than offset by the impact of higher risk weighted assets. Our business growth was up CAD2.8 billion over the quarter, largely as a result of strong growth in our corporate lending portfolios, and to a lesser extent, portfolio downgrades.

Pro forma the closing of the ACI sale last week, our CET1 ratio is 10.9%. Our Basel III leverage ratio remains strong at 3.8%.

In summary, we are very pleased with our performance this quarter and feel confident about our businesses heading into the second half of the year. With that, I'd like to turn the meeting over to Laura Dottori.

Thanks, Kevin. Good morning, everyone. So lets' begin with our loan loss performance on slide 12. On an adjusted basis, our loan loss ratio was 38 basis points or CAD284 million. This represents a CAD91 million increase from the prior quarter. This increase was mainly driven by higher losses from the oil and gas sector, with one borrower representing the majority of the losses.

We also experienced higher write-offs and bankruptcies in our cards and personal lending portfolios. On a reported basis, loan losses were CAD324 million. This includes a CAD40 million collective provision for non-impaired loans and it was primarily driven by the continued deterioration of accounts in the oil and gas sector.

Losses were in line with our expectations and, as I mentioned on our last analyst call, we did expect to see higher losses start this quarter. Based on our current outlook, we do foresee further losses from this sector, but we would expect the quarterly run rate for the balance of 2016 to be lower than this quarter.

I'd like to talk about Fort McMurray. As you know, this has been a very difficult time for our clients and employees in that area and we have taken a number of steps to try to help them through this period. As it relates to our exposure in Fort McMurray, we have about CAD1.6 billion of drawn exposure, with mortgages representing CAD1.4 billion of the total. At this point, we do not anticipate any significant losses from this portfolio.

On slide 13, you'll see that new formations were CAD1 billion. This is up CAD696 million from last quarter. Gross impaired loans were CAD1.9 billion, or 62 basis points, as a percentage of gross loans and acceptances, and this is up CAD404 million from the previous quarter.

You may recall that last quarter, I mentioned that we added nine names to our oil and gas watch list. Well, this quarter the majority of those names moved to impaired status, which is represented in our new formations and gross impaired loan numbers.

To review our oil and gas portfolio, slide 14 shows our corporate and business banking exposures. Our direct exposure is down from CAD18.7 billion last quarter to CAD16.5 billion this quarter and this is attributable to a combination of decreased authorizations as well as the impact of the stronger Canadian dollar. Our loans outstanding declined 5% quarter-over-quarter to CAD6.4 billion and that's mostly due to foreign exchange impact.

63% of our exposure is investment grade and that's down from 74%. From a sub-sector perspective, 58% is to exploration and production companies, with only 4% in the services space. This quarter, only one name was added to our oil and gas watch list. As you know, we continue to work very closely with our clients through this continued period of low oil and gas prices.

Slide 15 shows our retail exposure to the oil provinces of Alberta, Saskatchewan and Newfoundland. Our exposure was flat quarter-over-quarter at CAD39 billion. Excluding insured mortgages, our exposure was also flat quarter-over-quarter at CAD18 billion. And as discussed last quarter, we are seeing some delinquency increases across various of our retail products, particularly credit cards and unsecured lending. We are actively monitoring our portfolios, which continue to perform as expected.

Now turning to cards on slide 16, our net credit losses were CAD108 million this quarter. That's up CAD16 million from last quarter and CAD9 million on a year-over-year basis. The oil provinces had higher losses this quarter, primarily due to deteriorating economic conditions. Outside of these areas, losses this quarter returned to more normal levels from all-time lows previously.

Our Canadian residential mortgage portfolio is highlighted on slide 17. It shows that 61% of our portfolio is insured, with 79% of the insurance being provided by the CMHC. The weighted average loan to value of our uninsured portfolio is 59% and it has remained stable over the last year. Condo mortgages account for roughly 11% of our portfolio and the loan to value on the uninsured portion is 61%.

Slide 18 shows the distribution of revenue in our trading portfolios as compared with VaR. You'll see that we have positive trading days every day this quarter. Our average trading VaR was CAD8.1 million, that's up from CAD4.1 million last quarter. And the majority of the increase was driven by a methodology change that we made at the end of last quarter to reflect more volatile market conditions.

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

Thanks, Laura. So that concludes our prepared remarks. We'll now move to questions on the phone. I would just ask everyone to please limit yourself to one question and then requeue, so we have an opportunity for everyone to participate. So, operator, can we please have the first question?

Certainly. We will now take questions from the telephone lines.

(Operator Instructions)

The first question is from John Aiken of Barclays. Please go ahead.

Good morning. Dave, I wanted to address the Apple Pay. I guess on the positive side, can you let us know what the adoption rate and usage rate is like in the early days? But secondly, going forward, what level of compression can we expect to see on the card-fee lines going forward?

Good morning, John. Yes, so the adoption rate on Apple Pay has been quite strong. Not only just the download of the app and, more importantly, the upload of our credit cards and debit cards into that app, the take-up there has been strong. The usage thereafter -- because sometimes people will download just to investigate, but the usage thereafter is very strong and a lot of multiple-time users.

The big opportunity here is to meet the needs of our clients, and [Canadians] are something they're going to want to use. That seems to be very much the case. Another example of adoption is just the commentary in the social scene, tweets and otherwise. The support for us having introduced it has just been very well received by Canadians broadly and our clients. So strong adoption. I think we've introduced something that will be well received.

As far as the impact on financials, I think there's moderating impacts, which is transactions that were small in nature or might have been cash, will now, to a certain extent, go into credit. Therefore, there would be a pickup there. But this is not an economic move. This is a client move. This is something that Canadians and our clients are going to want to have. It's all very much consistent with our objective of being number one in client experience and, frankly, living the concept of banking that fits the lives of our clients. So this is all about meeting client needs.

David, is it fair to paraphrase you in saying that we do expect to see some pressure on the card-fee lines, but we're hoping that some of that will be moderated by increased usage in terms of, like you said, credit for cash?

I think it's a -- you're not going to see it really in our earnings. This is something that's big as far as a development in how you pay. It's big as far as the changing way that payments will be affected over time. It's not really big as far as an economic driver in our results. So it's more client impact, change in how people transact and pay for events. It's big from that perspective. It's not big economically at all.

Understood. Thanks, David.

You're very welcome.

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

Hello, good morning. Didn't expect to be on this early. But anyway, just want to ask you about the changes coming on the capital front, regulatory capital front, the higher floors on the internal models and some restrictions on uses of internal models. As the bank that probably uses the -- or has the highest proportion of risk-weighted assets calculated using internal models, how do you see this shift affecting you? If you can maybe quantify it in terms of how you may or may not have changed your expectations for internal capital generation in the future? That would be great.

Good morning, Gabriel. It's Laura. I'll take that one and invite Kevin to add on if I missed anything.

So we do have a lot of regulatory changes headed our way. As you know, a lot of them are in the form of consultative documents today, and so not yet finalized. There will be impacts to all of the banks over the next few years.

More importantly, I would say in the short term -- so if we're thinking just the next few quarters, we don't expect to see any big change as it relates to floors. Probably the one coming up in the shortest term really relates to some of the OSFI mortgage proposals. And as it relates to that where there will be some, if the you will, increases, I'd say that our mortgages already have a loss-given default that's higher than what the proposed OSFI floor is. So we're not expecting a lot of impact and I'd say that when we look at how we think risk-weighted assets will increase, our expectation, at this time, is it would be below the CAD500 million mark.

And as for other potential regulatory floor changes, those are farther out on the horizon and I don't think we can comment on them at this point.

Do you have any guidance on -- it's usually between 15 and 25 basis points a quarter of CET1 capital generation. Is that still a reasonable range for of CIBC, and do you see that going down or just staying flat in the future? I mean, we've already seen a lot of volatility in capital ratios from credit downgrades, from spreads widening, a whole host of factors. It seems like internal capital generation just isn't as strong as it used to be for the banks.

So Gabriel, it's Kevin. I think our internal base capital generation remains extremely strong. Even if you look at this particular quarter, we continued to generate strong internal capital. I think you're right, there is volatility because of the, very much the issues that you've just raised. In the current quarter for us, we had particularly strong business growth and so that actually largely offset our internal capital generation.

But then we're also going through a credit cycle right now that's having a negative impact on our CET1 and portfolio down grades in this particular quarter had a negative impact on us. So, items like that are going to continue to be headwinds every now and again. As things turn, I think they could well turn out to be tailwinds. I think the important thing is we still have very strong internal capital generation and we continue seeing that, we'd anticipate seeing that continue and grow as we continue to strengthen the bank.

And just sneak last one in there on capital as well. Victor, you're still eager to do a US acquisition? Any update there?

Is that your third question, Gabriel?

Something like that.

Good one. So let me just kind of follow on from Laura's and Kevin's comments on capital. I mean, we went into this as a leadership team, recognizing fully that there's regulatory change coming, recognizing fully that we're entering a new economic cycle, given what's happened to commodities. And I think we've positioned ourselves very well that way from a capital perspective.

We've always said that we have several priorities when it comes to serving our shareholders on the capital front. That is to distribute up to half of our earnings in dividends. I think we've reached that point and we've been consistent on that point. The second thing is to spur organic growth, and again, I think you're seeing in our top-line numbers across our businesses growth that you haven't seen before that is at or above market levels and that is a function of investment in our businesses and we're using our capital for that.

Having the cushion for regulatory change and then having the flexibility to deploy capital for inorganic growth, that's all been very consistent. It's all been very well telegraphed to our investors and that's the approach we're going to continue to take going forward.

Okay. Thanks.

Thank you. The following question is from Doug Young of Desjardins Capital Markets. Please go ahead.

Hi. Just to Laura, the oil and gas, you mentioned the CAD91 million sequential increase in oil and gas PCLs -- or was related to oil and gas PCLs and all related to -- I just want to make sure my numbers are right. All of that CAD91 million was related to one borrower. Is that correct?

And I guess the second part of my question is, in your prepared remarks, you mentioned that you see this quarter as a bit of an anomaly and you do expect losses to head lower in the second half of this year and, given the deterioration that we've seen in oil reliant provinces, I'm just curious as to what gives you the confidence around that and are we thinking on the consolidated PCL level in the second half of this year more in the 30 to 35 basis point range? Is that fair?

Sorry. The CAD91 million increase relates both to the commercial corporate book as well as the retail book. However, one borrower represented a large part of that, just a little over 50% of that amount was one name. So if that clarifies.

Yes.

And then as it relates to your, I guess your question around loss expectations, yes, I would say that, that feels right. This quarter does feel like a high water mark as it relates to our loan losses and my expectation would be, for the balance of this quarter, that loan losses would come in somewhat.

And then just curious to why, given the deterioration, why are you comfortable that losses will come down from this level and not expand a little bit? If you can elaborate on that.

Again, difficult to predict the future, although I do believe we have a very good handle on our book. So that helps. And as I mentioned, some of the moves we saw this quarter relate to a few names. And so we do have more visibility on those names.

As I mentioned, when one name represents a little over 50% of the amount of loan losses we've taken and it represents a good chunk of our impaired loans, barring any event risk, that does give you the ability to have some foresight if you will as to what could happen in the next quarter or two.

And there's nothing else that's on the cusp of -- you've added one to the watch list this quarter. There's nothing else that's really concerning you or on the cusp of being added or a group of names being added, it would appear. Is that fair to assume?

Yes, that's fair. We had, as I mentioned, the nine names last quarter and most of those moved to impaired. Only one this quarter. So that would indicate that we would have less impaireds as well on a go-forward basis. And I just saw the late-breaking news that oil has just broken above $50, so if we could get gas to get above $2.75 and $3 on a sustained basis, this could all turn into a better news story on the go-forward basis.

Great. Thank you very much.

Thank you.

(Operator Instructions)

The following question is from Meny Grauman of Cormark Securities. Please go ahead.

Hi. Good morning. Laura, I just wanted to follow up on the discussion of oil prices, and as they start to head up, what that means for the outlook. There's definitely some experts that have been quoted as talking about even at $60 a barrel that there's going to be retrenchment and bankruptcies across the board on the corporate side.

I'm wondering from your perspective what kind of number oil price do we have to see before the picture starts to improve and is there a different number before we start to see an improvement on the consumer side? Are those two books tied to different oil price numbers before they start to turn around here?

Well, Meny, this is, again, my view. And again, no definite answer. But directionally, I'd say that oil would have to be over $55. I think gas would probably have to be, as I said, over $2.75, maybe $3. And I think it would have to stay there for a sustained period of time, so call it 9 to 12 months, before we start to see our companies reinvesting in this space and things looking better. Does that answer your question?

Yes, that's helpful. Maybe just on a different note, sort of bigger picture. You talked about Apple Pay and we saw all the banks kind of move in and make the deal with Apple.

And I'm wondering, to me it raises a question of is there a way in which technology, especially customer-facing technology, is sort of the competitive advantage or is it really -- are we just seeing sort of all the banks move into using this new technology sort of in the same way, at the same time? From your perspective, is there any differentiation there that's possible?

Hi, Meny. It's David Williamson. I think you're on the right track. And as Victor said in his comments, the fintechs can be a way for us to accelerate our move to be a leader in client experience.

The offerings they have, to the extent that they're client friendly, based maybe on non-legacy systems, or something that we can partner with, in some cases we can maybe buy. We've got examples where we've done a little bit of both in the past and I think if you approach it with a spirit of opportunity and optimism, the willingness to evolve and adapt how we meet our client needs and then see fintechs as a potential accelerant, then I think that's frankly how we have positioned ourselves.

Apple Pay is an example. But also what we did as far as global money transfer, a move we made a while ago, which resulted in wire transfers to a number of countries now being free at CIBC. That was as a result of partnering with a fintech. Accelerated loans for small businesses, our partnership with Thinking Capital, they're all -- again, our objective is to lead in client experience. We think that's going to be done through being a convenient bank, but from a modern perspective.

That means allowing people to bank when, where and how they would like and to the extent that fintechs are putting forward ideas that accelerate our ability to do that for clients, then we're going to be positively disposed to exploring those opportunities. So I think you're absolutely right. Technology's changing banking. CIBC is open to adapting and evolving using those as tools and levers, all with the objective of leading in client experience.

Okay. Thank you very much.

Thanks, Meny.

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

David, just to follow up on Apple Pay. And I know you guys have worked on this hard and I don't mean to put you on the defensive with the question. It just feels like you've let the most, not just CIBC, but the Canadian banks, have let one of the most powerful, if not the most powerful, consumer brand between them and their customers in terms of letting Apple Pay come in and facilitate payments. So the long-term strategic implications seem problematic to me and I'm just wondering, what have I got wrong in that view?

Hi Peter, you'd never put me on the defensive. I know you're pursuing a line of thought that's worth exploring. Retail and business banking is evolving. It's evolving as a result of the impact of technology. And I'd refer to global money transfer, it's resulted in fees that I think used to be roughly $50 to send a wire, now being free. So that's disrupted that channel.

But our profitability in that space has not been changed because of our change in how the cost of that transaction has occurred as a result of working with a fintech. So you refer to Apple and they are a massive firm, but the whole focus here is where's banking going? What are the banks going to play as a role in the evolution of banking? And to be successful, I think one needs to evolve and adapt as opposed to try to put up walls and barriers.

The interesting part in the evolution of fintechs and banking is that fintechs do tend to have client-friendly front end. They do tend to be built on non-legacy, lower cost systems. But the banks still retain the trust and reliability. They also retain the distribution, the client base. So there's no doubt, there's competition. There's opportunity.

But I think the objective here for our bank to be a strong bank and to meet the needs of our clients and be relevant in the future that banking will become is to not put up walls but to adapt in the interest of our clients to the changing environment.

All right. Thanks.

And as long as we meet those needs most effectively, I think we'll continue to be a strong bank and relevant for our clients.

Thanks for a straight answer. Quick credit question for Laura. I noticed on page 24 of your press release, your investment grade, the percent of oil and gas exposure that's investment grade went from 74% last quarter to 63% this quarter. And yet overall exposures dropped. I'm kind of wondering what's up there.

Yes, that's right, our investment-grade mix did decrease. That was really a result of the continued downgrades that we've had as we are going through our borrowing base redeterminations. And we've also had some notable reductions and cancellations in some of our larger credit lines that were rated investment grade.

Okay. And then you also sort of classify investment grade as, based on your internal risk rating, incorporating security pledged. I'm wondering if you could unpack that a little. What are you doing there?

If you refer to our ratings, so we have borrower ratings in terms of their probability of default that determine, if you will, whether they're investment grade or not investment grade. When we get into including the collateral, then we're taking facility ratings and that impacts our loss given default but not our actually borrower rating in terms of probability of default. So the information that I'm providing you with is the probability of default rating, like it's the borrower rating.

So the 63% is based only on probability of default of the borrowers, has nothing to do with the collateral pledged?

Sorry. We have all of it. I think you're referring to our WAFR, so the weighted average of our facility rating.

Right.

So just to be clear, you're trying to get to does our rating include everything or not? Am I --?

Yes. Do you upgrade certain exposures because the collateral is high quality?

So that would play a role in our rating, yes.

Okay. All right. Thanks.

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

Good morning. Laura, could we go back to that one account you were referring to in oil and gas and would it be helpful to understand is why the normal safeguards like a very senior position having layers of junior below you, why that didn't play a feature in limiting your exposure.

Well, I don't want to get into the specifics of one name. But I would say that, that actually did play a role in that we could have provisioned more had we not had better, if you will, had we not had the structure that we have. So it did help. But as you can appreciate, each name is different, each situation is somewhat different.

Are there other loans that are different in the way that this one was different?

Of course. Same way people are different. Our borrowers are all somewhat different with varying profiles.

Laura, I'm referring specifically to the level of subordination below you. I guess what I'm getting at is are we going to see something like, are there other loans like this one where you just didn't have that level of subordination necessary to limit the losses?

Well, I guess what I would tell you on this one, we did have a level of subordination. Just some companies are more levered, if you will, than others, which implies if they go into default or bankruptcy that we could lose more. We have others that will and have gone into bankruptcy where we expect to lose nothing. And so it really has to do with the amount of total debt, if you will, a company has when it does get into difficulty relative to the valuation of the underlying assets.

Okay. So then the coverage on that particular loan then, where would you be now that you've taken that large provision?

On this particular one, we are around the 25% level.

And why would that not be like a lot higher, considering the level of subordination maybe wasn't as high as some of your other exposures?

Well, again, when we look at the various loans, we have a team that looks at what is the amount we expect to lose, given the total amount of debt in a transaction and the valuation of the assets, and in this particular name, that is the actual amount of the provision that was deemed to be the right amount that we would lose.

Okay. Then finally, you refer to gas and gas is certainly something, I mean, you referred to the $2.75 to $3 as being a good level and we're well, well below that right now. So what would be helpful to understand is the extent to which your exposure, your drawn exposure, is leveraged to gas only names.

So in the information that we provide, it includes both. We do have quite a lot of our borrowers that are both in oil and gas and so it would be hard for me to give you the actual breakdown of those that are specifically sort of gas or specifically oil. We can certainly go through the portfolio to look at that, but the information I've been providing is oil and gas.

But would you say the majority of the exposure is actually gas?

Yes, a large part of it.

Thank you.

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

Thank you. Victor, the last two quarters anyway, business growth has consumed about 50, 51 basis points of your internal capital generation. If I take that, I'm excited about David's business, revenue growth continues to be a pleasant surprise. But then you're also adding to your collectives. I'm just trying to understand if this business growth is coming with you maybe stretching a bit on the credit quality.

Sohrab, I would say we're not stretching on credit quality. We're just seeing good quality volume growth across all of our businesses. That is the straightforward answer. Nothing's really changed here other than a much more client-facing organization that is getting business across all of our platforms. That's what's simply driving it.

It's happening in our retail bank. It's happening in our business bank. It's happening on our capital markets platform. It's happening in wealth, if you carve out the American Century divestiture. We are just a much more client-focused bank than we were before and that's why you're getting the volume growth. You're not seeing stretch on sort of riskiness.

Thank you.

Thanks.

Thank you. The following question is from Sumit Malhotra of Scotiabank. Please go ahead.

Thanks, good morning. My questions are around trading revenue for Harry Culham. First of all, on page 13 of the supplement, Harry, we get a look at trading revenue by product for the bank. And specifically, the numbers have come up across the board, but specifically on the interest rate line.

This quarter is, by a wide margin, the strongest interest rate number that you've posted over the last couple of years. Let me ask this: I'm sure all banks will tell us that increased client activity, improved market conditions, but more specifically, with credit spreads tightening as much as they did in the quarter, was there something unusual here in terms of a mark-to-market or inventory gain that made these numbers look better than we can expect as a run-rate contributor?

Hi, Sumit. No, actually, the market conditions are partially resulting in better numbers in the interest rates. But you see, as you know, we've made foundational investments in our technology and our systems and our people over the last number of years and we continue to invest including in the interest-rate space. This is enabling us to serve our clients across the capital markets platform, including the rate space in a more meaningful way.

And so it's a well diversified business and we're seeing good business come through in interest rate derivative space, in the fixed income space in general. There's been more activity obviously in the past couple of months, given the markets, as you point out, spreads have come in and have been more receptive for client activity. So we've got very good momentum across the trading spectrum and coming out of quarter two, we're seeing he very good momentum in the markets. So I think that probably answers your question.

Well, this is related to your business so let me end with this. A year ago at this time, following the budget in March, we had a lot of questions regarding the synthetic equity derivatives business. At that time, I think Kevin told us that the estimate that the bank had was that proposed changes would remove 2% to 3% of your, or that would be the impact on EPS. Now a year later, it doesn't really seem like much has changed.

I know there was a grandfathering that has given you a little bit more time. But I was hoping you could give us an update as to whether that 2% to 3% estimate you gave us a year ago still stands. And more specifically, when I look at your business, and this may be simplistic, but it doesn't look like the TEB adjustment benefit that you have in trading has changed in any material way, so what's really the best way for us to measure how that proposed change is impacting trading revenue at CIBC?

Sure. The 2% to 3% still stands. We are working very closely with our clients on alternative strategies to redeploy resources that will be and are being freed up by the book wind down as you point out. This has started since new legislation has announced. The majority of the impact will be in 2017.

But some of the results you're seeing across the trading platform are because of our reinvestment in some of our other business areas and redeploying resources. In particular, the rate space would be an example of where we would redeploy resources a as a result of the TRS book being wound down.

Just lastly, will we see this in lower trading revenue, higher taxes or both for your segment?

I'll let Kevin talk about the taxes. With respect to trading revenue, as I pointed out, the redeployment's going well. The momentum is strong coming out of quarter two and I expect that, as long as markets continue to cooperate, we should have strong momentum going forward.

And just following up, Sohrab, certainly, it would have an impact on the tax rate as we move forward and as this gets implemented. It will have a negative impact.

Thanks for your time.

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

Thanks again, everyone, for joining us this morning. That concludes our call. If you do have any follow-up questions, please do contact the Investor Relations department and we'd be happy to help you. Thanks again for joining us and we'll see you next quarter.