Canadian Imperial Bank of Commerce (CM) 2016 Q3 法說會逐字稿

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

I would now like to turn the meeting over to John Ferren, Senior Vice President, Corporate CFO, and Investor Relations. Please go ahead, Mr. Ferren.

Thank you very much. Good morning, and thank you everyone for joining us today. This morning, CIBC's Senior Executives will review the Bank's third-quarter results that were released earlier this morning. The documents referenced on this call, including CIBC's third-quarter News Release, Investor Presentation, and Financial Supplement, can all be found on our website at CIBC.com. In addition, an archive of this audio webcast will be available on our website later today.

This morning's agenda will include opening remarks from: Victor Dodig, CIBC's President and Chief Executive Officer; Kevin Glass, our Chief Financial Officer, will follow with 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 9 o'clock 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 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.

Thank you, John. Good morning, everyone, and thanks for joining us. This morning, CIBC reported adjusted net income of CAD1.1 billion, or CAD2.67 per share, an increase of 9% from the same period last year. Key drivers of our results this quarter were year-over-year revenue growth of 4.3%, supported by continued volume growth and higher fee income and retail and business banking, and another strong quarter in capital markets.

As well, we continued to effectively manage our expenses, resulting in operating leverage of 2.6% this quarter. Our adjusted efficiency ratio of 57.8% was 150 basis points better than a year ago. Loan losses were also well down from levels in our second quarter.

We're very pleased with our performance this quarter, which was achieved against a backdrop of an economic environment that remains challenging, and the volatile market conditions coming out of the Brexit vote. Through this difficult period, we supported our clients, we effectively managed risk, and we generated value for our shareholders.

Although we can't control the economy or the interest rate environment, what our team at CIBC can do is control our strategy to remain profitable and to continue to grow under these conditions. We've been very clear and transparent on how we will build a strong, innovative, and relationship-oriented Bank that will better serve our clients, and enhance shareholder value.

As you know, we have three strategic growth priorities, and that's to simplify our Bank, embrace innovation, and deepen client relationships. We've committed to simplifying our Bank to make it easier and more convenient for our clients to carry out transactions or get financial advice any time, anywhere, and on multiple platforms. We will also continue to be the leader in innovation, and adopt new technologies that are secure, reliable, and support growth for our Bank.

Our goal is to become the number one in client satisfaction over the medium term. In the past three years we have closed the gap significantly between ourselves and our competition. Our positive momentum was reflected in the 2016 J.D. Power customer satisfaction survey, where CIBC gained 22 points year over year, and continued to close the gap to our peer group. Our team remains focused on improving client service, and has the full energetic support of our entire Bank behind this goal.

The acquisition of PrivateBancorp that we announced in June supports our goal of becoming a truly North American Bank for our clients. This transaction will allow CIBCC to extend our US wealth management footprint into new markets where we currently do not have a presence, and will expand our US commercial and private banking business with the deposit-taking capability we need south of the border. We anticipate completing the transaction in the first calendar quarter of 2017, subject to satisfaction of customary closing conditions, including approval by PrivateBancorp shareholders, and receipt of regulatory approvals.

Now let me turn to our business results. In the retail business, banking reported another strong quarter, with adjusted earnings growth of 6% year over year, driven by volume growth across all products, higher fee income, and expense discipline. Operating leverage was 2.9% this quarter, well up from 1.2% a year ago.

On the innovation front, we delivered our best quarter for new transaction accounts in over 10 years, driven by our recently launched CIBC Smart Account. Transaction accounts are foundational to banking relationships, and our momentum here speaks to the impact our client-focused, innovative approach is having in the market place.

During this quarter, we were also recognized once again for our leadership in mobile banking. We shared the top overall score among the five largest Canadian banks, and we were ranked third globally in Forrester's 2016 benchmark study of mobile banking functionality. We're very proud of the innovative products and services our team has introduced to better serve our clients, and we will continue to make investments in this area. My colleague David Williamson is here this morning to answer any questions you might have on our progress in retail and business banking, as well as innovation.

Turning to wealth management, adjusted earnings were down 12% year over year. If we normalize for our American Century divestiture, earnings were up 10%, as revenue growth in asset management and lower expenses contributed to strong operating leverage of 2.4%.

During the quarter we continued to enhance wealth management products and services for our clients. To meet the growing needs of our clients who are in the retirement corridor, we expanded our CIBC Personal Portfolio Services, or PPS offer, with three new income-generation portfolios. We also continued to improve the client experience for our PPS and mutual fund accounts with the launch of new electronic statements this quarter. My colleague Steve Geist is here with me this morning to answer any questions you might have on wealth management.

Our capital markets business reported another strong quarter. Adjusted revenue of CAD778 million was up 12% from a year ago, and adjusted earnings of CAD313 million was up 16%. Our revenue growth was broad-based, with global markets in corporate and investment banking posting strong growth from a year ago. During the quarter, our capital markets team helped our clients navigate market movements related to the Brexit vote. Weeks of advanced planning ensured that critical advice and trading solutions were delivered seamlessly and successfully to our clients.

We were also involved as advisors and underwriters in bringing several large deals to market, including the Lowe's acquisition of RONA, Suncor's common share offering, and Stantec's acquisition of MWH Global. Our innovative, client-focused derivatives capabilities were recognized as the best in Canada for a third straight year by Global Capital, a leading capital markets research group. My colleague Harry Culham is here this morning to answer any questions you may have on our capital markets business.

In summary, we continue to operate prudently in an environment that remains challenging for financial institutions. I'm confident that we have the right strategy and the right team in place to manage through these uncertain times. Our focus will be to support our clients with innovative banking solutions and strong advice, while continuing to deliver value to our shareholders.

Before I turn it over to Kevin, as I like to do every quarter, I'd like to thank our team, our team who works for our clients and our shareholders to build a better Bank, a modern and convenient Bank that fits your life. With that, let me turn it over to Kevin Glass, our CFO.

Thanks, Victory. My presentation will refer to the slides that are posted on our website, starting with slide 5. The CIBC reported record earnings in the third quarter. Our results reflect strong revenue growth across all of our business segments, improved credit quality, and disciplined cost management. We delivered reported net income of CAD1.4 billion, and reported earnings per share of CAD3.61 this quarter.

We had a few items of note, which resulted in a positive impact of CAD0.94 per share, the more significant ones being a CAD383 million after-tax gain, net of related transaction costs, on the sale of our minority investment in ACI. In our reported results, this is reflected in the wealth management segment.

[There was] a CAD30 million after-tax loan loss in our exited European leveraged finance portfolio, and a CAD21 million after-tax gain from the structured credit run-off business, both of which are reflected in the capital markets segment. The balance of my presentation will be focused on adjusted results, which exclude these items of note. We've included slides with the reported results in the appendix to this presentation.

Adjusted net income was CAD1.1 billion, and adjusted EPS was CAD2.67. Our expense growth was well controlled, and we achieved positive operating leverage of 2.6%. Our return on equity was strong at 19.8%, and our CET1 ratio improved to 10.9%.

Let me now review the performance of our business segments. I'll start with the results for retail and business banking on slide 6. We recorded another quarter of quality earnings, with good top-line growth, and a modest increase in expenses. Revenue for the quarter was CAD2.2 billion, up 5% from last year, driven by growth in both personal and business banking.

Personal banking revenue of CAD1.8 billion was up 5% from the same period last year. Performance benefited from strong volume growth across all products, as well as higher fee income. Total asset growth was 8%, led by strong residential mortgage growth of 9%. Our personal lending and cards portfolios each grew 3%, representing a solid improvement over recent periods. Strong personal deposit growth of 7% benefited from the success of our recently launched Smart Checking account, as well as growth in our savings and GIC offerings.

Business banking revenue was CAD435 million, up 6% from last year, driven by strong core lending and deposit volume growth, and higher credit-related fees, partly offset by narrower spreads. Business lending balances were up 14%, and business deposits were up 9% from the same period last year. The other segment had revenue of CAD11 million, which was down CAD11 million from the same period last year, due to the continued run-off of first-line mortgage balances, which now represent approximately 4% of total mortgage balances.

Provision for credit losses was CAD197 million, up CAD32 million, or 19% from the same period last year, due primarily to higher losses in our cards and personal lending portfolios. Credit losses were down CAD2 million from the last quarter. Non-interest expenses were CAD1.1 billion, up 2% from the prior year. We continue 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 2.9%. This resulted in a NIX ratio of 50.2%, an improvement of over 140 basis points from the prior year. Net interest margin was down 2 basis points sequentially, reflecting the lower interest rate environment, as well as changing business mix. Retail and business banking net income was CAD667 million, up 6% from the same period last year.

Slide 7 reflects the results of our wealth management segment. Revenue for the quarter was CAD607 million, down CAD23 million, or 4% from the prior year, primarily due to the sale of ACI. The other line in our wealth management segment includes the gain on the sale of ACI, which has been identified as an item of note, and it also reflects the results of ACI for periods prior to the announcement of the sale. Excluding ACI, revenue for the quarter was CAD607 million, up CAD8 million, or 1% from the prior year.

Retail brokerage revenue of CAD317 million was down CAD9 million, or 3%, mainly due to lower commission revenue, driven by a decline in client transaction volumes in our full-service brokerage business. Asset management revenue of CAD196 million was up CAD16 million, or 9% from the prior year. This was largely due to higher average assets under management, driven by positive net sales over the course of the year, as well as seed capital gains in recently launched mutual funds and institutional [pools].

[Five-year] wealth management revenue of CAD94 million was comparable with the same quarter of last year. Non-interest expenses of CAD434 million were down CAD6 million, or 1%, primarily due to lower performance-based compensation on the lower revenue from retail brokerage. Net income in wealth management was down CAD17 million, or 12% from the third quarter of last year. Excluding ACI, net income was up CAD12 million, or 10%.

Turning to capital markets on slide 8. We continue to deliver strong client-driven results. Revenues this quarter were CAD778 million, up CAD85 million, or 12% from the same quarter last year. Global markets revenue of CAD415 million was up CAD52 million from the prior year, largely driven by higher revenue from interest rate and equity derivatives trading.

Corporate and investment banking revenue of CAD364 million was up CAD40 million from the prior year, driven by higher equity and debt underwriting, corporate lending, and advisory revenue, partially offset by lower CMBS revenue from our US real estate finance business. Provision for credit losses was CAD7 million in the quarter, down from CAD10 million in the prior year, and CAD81 million in the prior quarter. This was due to a decrease in specific reserves in the oil and gas sector.

Non-interest expenses of CAD367 million were up CAD32 million from the prior year, primarily due to higher performance-related compensation. Net income of CAD313 million was up CAD43 million, or 16% from the prior year.

Slide 9 reflects the results of the corporate and other segment, where we had a net loss for the quarter of CAD34 million, compared with a net loss of CAD55 million in the prior year, due primarily to higher earnings in CIBC FirstCaribbean, largely as a result of greater credit performance.

CIBC's capital position remains strong, and we continue to remain well positioned for the evolving regulatory and capital environment, and also for the acquisition of PrivateBancorp. Our CET1 ratio was 10.9%, 50 basis points higher than the prior quarter, reflecting the ACI divestiture.

Solid organic capital generation was largely offset by strong portfolio growth, particularly in personal and business banking. The impact of standardized flow is applied to our operational risk models, and also by lower interest rates, which increased the discounted value of pension obligations. Our Basel III leverage ratio remains strong at 3.9%.

This morning we announced we have elected to issue treasury shares to participants in our shareholder investment plan, rather than purchase shares in the market. This will begin with our fourth-quarter dividend payable in October. The shares will be issued at a 2% discount to market value.

In summary, we are very pleased with our results this quarter. Given the strength of our diversified business model, we feel confident that we are well positioned to continue delivering long-term value to our shareholders.

With that, I'd like to turn the meeting over to Laura Dottori.

Thanks, Kevin, and good morning everyone. Beginning with our loan-loss performance on slide 12, on a reported basis, loan losses were CAD243 million in the third quarter. This includes one CAD40 million item of note, which relates to a loss from the only remaining account in our exited European leveraged finance business. Excluding this item, loan losses were CAD203 million on an adjusted basis, or 26 basis points. This represents an CAD81 million decrease from the prior quarter, and it's mainly driven by lower losses in our oil and gas portfolio. Loan losses in retail and business banking, and CIBC FirstCaribbean, remained stable on a quarter-over-quarter basis.

Slide 13, we see that new formations were CAD574 million. That's down from CAD1 billion last quarter. Gross impaired loans were CAD1.7 billion, or 55 basis points as a percentage of growth loans and acceptances. This is down CAD143 million quarter over quarter, largely due to an improvement in our oil and gas portfolio. This decrease was partially offset by the new impairment related to the file that I referenced earlier from our exited European leveraged finance portfolio.

To review our oil and gas portfolio, slide 14 shows our corporate and business banking exposure. Our direct exposure is up, from CAD16.5 billion last quarter to CAD17.2 billion this quarter. This is attributable to a combination of increased authorizations, as well as the impact of the stronger US dollar. Our loans outstanding increased 8% quarter over quarter to CAD6.9 billion, up partly related to acquisition activity in the industry. 68% of our exposure is investment grade. That's up from 63% last quarter.

From a sub-sector perspective, 51% is to exploration and production companies, and that's down from 58% last quarter, with only 4% in the services space. This quarter, two names were added to our oil and gas watch list.

Slide 15 shows our retail exposure to the oil provinces. Our exposure was up CAD387 million to CAD39.7 billion. Excluding insured mortgages, our exposure was CAD18.8 billion. As discussed in previous quarters, we are continuing to see year-over-year delinquency increases in credit cards and unsecured lending.

Slide 16 is a new slide, showing loss and delinquency rates for our Canadian credit cards, and unsecured personal lending portfolios. The loss rates of both portfolios are up on a year-over-year basis, and this is mainly driven by the oil provinces.

Our Canadian residential mortgage portfolio is highlighted on slide 17. It shows that 57% of our portfolio was insured, with 78% of the insurance being provided by the CMHC. Slide 18 is also a new slide on our Canadian uninsured mortgage and HELOC portfolios. You'll see here that loss rates of these portfolios continue to remain low and stable.

Lastly, on slide 19 we show the distribution of revenue in our trading portfolios as compared with VaR. We had positive trading days every day this quarter. Our average trading VaR was CAD5.7 million, down from CAD8.1 million last quarter, primarily driven by a reduction in our credit spread exposure.

I'll now turn things back to John.

Thank you very much, Laura. Operator, we're ready for questions from the phone line.

Thank you.

(Operator Instructions)

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

Good morning. I was wondering if you could expand upon the domestic loan growth that we saw in the quarter in context of the economic outlook that we have. In your commentary in the MD&A, it wasn't terribly rosy, but we've seen some very strong growth on the mortgage portfolio, as well as the commercial side, which I think was driven by real estate construction. I was wondering if David or Laura could give us some color on that?

Good morning, John. I'll start off, and then we'll hand over to Laura if she'd like to add a point or two. Why don't we start with the business book. We're seeing strong growth in that book. We've been double-digits for a few quarters now, and this quarter's strong as well, with 14% growth.

I'd highlight also good, strong growth on the other side of the balance sheet, too, with about 10% growth in the deposit GIC front. It's balanced growth. A couple of factors driving that, because it has been not just this quarter, but a few quarters. It goes to some of the efforts we made over the last few years, not the least of which is more feet on the street, like more relationship managers.

In order to achieve that, we started up an associate training program a few years ago. Those people are now out of that program and joining the force. The productivity, when you look at the year-over-year productivity of that larger sales force, it's showing an improvement each and every year -- more sales force and more productivity from the sales force.

Risk in the business, we're working together really quite effectively to get a faster response to clients. We've been spending a fair amount on technological support for clients, like our digital services for cash management online and so forth, much improved from the past. We've taken steps that we believe in any kind of market context would allow us to perform relatively well, but in the current context the market is strong and we're benefiting from it.

On the personal side, again, strong growth, good balanced growth in the total retail and business banking side, again balanced. The deposit and GIC, 8% growth; on the lending side, 9% growth. Again, trying to achieve a balanced book. Those factors again go to things we've been working on for some period of time, building on deeper sustainable relationships.

I think probably the key thing is the sales force and sales productivity. We've really added to our sales force over the last few years. Since we put growth as one of our two objectives, we've increased the sales force by 1,800 strong. Then importantly, even though that sales force is new and fresh, the productivity of that sales force has gone up substantively each year.

Then again, support on technology. Our digital sales are growing at twice the rate of traditional sales channels. As Victor said, we're doing it in a way that clients like. Our JD Power annual survey is up 22 points this year, and we're only 11 points away from first now. John, the market's strong, for sure, but we've been doing things for a while now that should facilitate that, or explain that relative growth. Hopefully that helps.

Yes, David. Just in context, we keep on seeing headlines on a daily basis about mortgages, real estate, everything else like that. In context, do you believe that within a risk-adjusted basis, the growth in mortgages, as well as on the real estate side of the book on commercial, CIBC is being prudent, or am I over-blowing concerns?

Yes, I think we are being prudent. For example, on the business side some time ago we pulled back on commercial mortgages. We're pretty much letting that book grow at a very moderate rate. We could really be growing that book if we wanted to be. I think we're showing -- that's a sign of prudence, in a sense that we've elected not to grow at a rate that we could.

You're right about the headlines on the housing market and Canadian indebtedness. There are a string of headlines. Our mission is to grow not based on price. As we said before, when we lag when prices are going down and we -- we're not doing it on price, let's put it in that way. We're certainly not doing it based on risk. I can hand over to Laura in a moment. She can reinforce that.

The way we're doing it, take the Vancouver market. That's the one that's, John, in the headlines more than the other markets. We feel really quite good about our growth in that market.

Why is that? First, it's being done the right way, through a much larger sales force. Secondly, the productivity of that sales force is up. Third, and this is important, it's based on client relationships. Our team out there is very much embedded in the local community.

What we're seeing, especially with those big mortgages, is a very balanced book. The loan-to-deposit ratio on those mortgages is a lot better than the average in the rest of our country. It's a relationship-based, balanced book. It's not done on price, certainly not done on the basis of risk. It's I think strong underlying factors. But there are those headlines. Maybe I can hand over to Laura, and she could speak to the risk side of that equation.

Sure. Thanks, David. I do want to point out that the reason behind our growth, as David said, it really relates to our large and effective CIBC sales force. We have not changed our risk appetite or our risk strategies.

In reality, from a lender's perspective, the real estate market, particularly in the greater Vancouver area, continues to be robust. I think that Vancouver's become a real international destination city, so it is a different market, and we need to keep that in mind. It's a strong and diversified economy. When we look at that market, the delinquency rates are actually lower than our national average. We have not changed our underwriting standards. They continue to be quite strong. We're quite comfortable with our position here.

If I can give you more comfort, when we look at our greater Toronto and Vancouver area markets, we have better scores, as I said, than the national average -- lower at origination loan to values. Our serious arrear rates are much lower than our overall portfolio. The credit quality is very high in these particular segments.

As you can appreciate, like everything in risk management, we run stress tests on everything, including this segment of the portfolio. When we look at this portfolio, if we run a severe stress where we drop house prices down by -- call it 30%, and we assume the unemployment rate goes up to 11%, when we look at additional losses in that year, we're looking at less than CAD100 million.

The residential mortgage book is actually a very good product. In fact, as we get worried about where the economy might be headed and the leveraged Canadian consumer, I think the area that you want to look at more closely is in the unsecured product area.

Great, thanks. Before John Ferren gets too upset with me, David, just one point of clarification. In terms of this new advanced sales force or increased sales force, do you believe that you actually are taking market share on a national basis, and in BC in particular?

Hi, John. Yes, I think we are -- it is across the country. It is the productivity of that force, as we've given them more tools, improved processes, more training. Yes, the evidence is that we are picking up share broadly, right across the country.

Great, thanks. I'll re-queue.

Thanks, John.

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

Hi, good morning. I just wanted to ask a question about the credit card book in particular, and just ask how much of what's going on there speaks to commentary you made about being more cautious on the unsecured side of the book? I'll have a follow-up, but let's start there.

Thanks, Meny. It's Laura. We are, as I said, from mortgages and unsecured lending, we tend to look at our delinquencies really in that later-stage bucket. Those are stable. Again, we look at year over year versus quarter over quarter, as it tends to be more of an indication of things to come. We are seeing an up-tick in delinquencies in our cards portfolio.

Just wondering more about from a growth perspective, the kind of growth that you're putting up in the credit card business. I think it's 3% year over year. Just wondering how much of that is you throttling back, or are there other issues in the credit card book that you can comment on?

I can speak to that, Meny. A bit of an update on the overall cards book. As we've done in the past, we'll cut it between travel and non-travel, because it's been given on two different trajectories. On the travel side we've seen strong growth for a while. In fact, this quarter's interesting. It's the first quarter that our Aventura book has exceeded the Aero plan book, as far as number of clients.

I say we're getting there the right way, in the sense that the Aero plan books have been quite strong, a good, stable book. But our proprietary card has really been well accepted by Canadians, and is growing remarkably well since the beginning of 2014. The trajectory's carried it over the Aero plan book, as far as the client base. Travel cards, good growth.

As we talked about, the non-travel wasn't an area of as much focus. As a result, that book was declining for a while. We've reversed the decline. Again, one of the big players in that is our proprietary refreshed cash back card, which is catching on with Canadians quite well. That, as you've identified, our 3% year-over-year growth, is the best we've had for a long time.

But if you look on a quarterly basis, it's been a pretty consistent trend line of improvement. Quite honestly, we're still not at market growth rates. But that's the non-travel book. It's coming on, and we hope to be up to market growth rates, and hopefully better, at some point in the not-too-distant future.

Thanks for that. If I could just ask just a follow-up question on the mortgage side. If you could speak to the growth in the uninsured mortgage book in particular, I think it's up 36% year over year. I appreciate you talked about it in the call. When you see that kind of growth, specifically in the uninsured side, what gives you comfort there that you're within your risk parameters, and just stands out as in particular that area being particularly large? I'm wondering about that.

Meny, I think a couple of factors. One, as Laura talked about -- and I'll hand over to Laura in a moment -- we haven't adjusted our risk policy. What we have seen is our government stepping out of that business a bit. I think it's not so much that we're going to let's do more uninsured mortgages. I think you'll see a more systemic industry-wide move to a lower level of insured mortgages. Again, I think it's a function of Ottawa saying they'd like to be less in that business.

Second point is -- although our -- a couple of factors. You'll see our uninsured book changing. You'll also see the loan to value of the uninsured book improving, as well. It's down to I think 57% loan to value. It's strengthening at the same time there's that -- I'd say systemic trend line to a smaller degree of insured mortgage book. With that, maybe Laura, anything to add?

No.

Hopefully that's --

Thanks for that.

Thanks.

It's John Ferren here. If I could remind everyone to please stick to one question. We do have a lot of analysts in the queue, and we would like to get to everybody if we can. Thanks.

The following question is from Gabriel Dechaine from Canaccord Genuity.

I'll help you out then, John. Formations were down. You mentioned the -- I think formations of DILs, because you sold some large exposure -- I guess an impaired loan loss, impaired loan that you sold. Was that -- how big was that, and did you get a gain on that sale?

Gabriel, it's Laura. I will attempt to take that question. Are you referring to the one provision that I referred to in our exited European (multiple speakers) last quarter?

I'm slide 13, gross impaired loans down. You attribute that to an improvement in the oil and gas sector, and you sold a large exposure.

Yes, that's right. We did sell a large exposure that went impaired last quarter. That's why you've seen the large decrease in our gross impaired loans.

You sold it this quarter. How big was it, and was there a gain?

No, as you might recall, we took a provision on it last quarter.

Right.

So we did not make a gain on it.

Okay.

We were good in that we did not have to take any additional provisions.

Okay. But was it a big loan? You said large exposure.

Yes it was. You might recall, last quarter I had said that it felt like it was the peak from a loan loss perspective, because there was one large exposure in there for which we had taken a large provision, and a large amount had gone to impaired.

Okay. Maybe I'll follow up. It's just the number I want, that's all. But if you don't want to disclose, that's fine. Thanks.

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

I'm going to turn it over to Victor quickly. Victor, this bank bought back some stock in Q1. You've introduced a DRIP. You've got the acquisition coming. I'm just curious if you could maybe provide some color around the capital planning exercise that you see over the next -- call it four to six quarters.

Sure, Sohrab. One of the fundamental tenets we have as a leadership team is to maintain strong capital ratios at CIBC. With this quarter we're at 10.9%, which so far would put us at the top end of our peer group. I think that going forward, maintaining strong capital ratios will continue to be an imperative in banking, as the whole global banking landscape starts to shift.

At 10.9% we're in good shape. We've elected to introduce a shareholder investment plan that will commence with our fourth-quarter dividend in October. We have a number of ongoing optimization initiatives to continue to free up capital, where we think that our shareholders aren't getting the right level of return for the resources that are being placed against it.

Our goal, as we said at the outset, is to be over 10% when our PrivateBancorp acquisition closes. Our goal is to continue to grow our dividends and be at the top end of that 50% range over time. Our goal is to continue to be prudent as a bank in a macro-economic environment that continues to present uncertainties.

In terms of the buy-back that we did earlier this year, we saw it as a very good window to buy back our stock for our shareholders at a very good price, and that's proven to be a good investment. If those opportunities present themselves, as long as we have the right amount of capital, we will continue to do that when they present themselves.

Thank you. I'll re-queue.

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

Thanks. Just one point of clarification, and then my question. Laura, to go back to a question that was being asked, your oil and gas gross impaired loans are down CAD300 million quarter over quarter. Is that exclusively due to that one divestiture, or was there improvement in another part of the portfolio?

There were a few names in there. The largest one was the one I referred to. The numbers for that one is about the CAD200 million range out of that. Then of course this quarter with the exited European name, that would have seen an increase into our impaired, by close to the same amount. That you'll see -- sorry, I'm looking now at our --

Total.

Disclosure you'll see under manufacturing.

Yes, so the European is not an energy exposure.

That's correct.

Yes, I'm just talking about the oil and gas, which was down 300.

That's right.

The bulk of that is due to the one divestiture?

That's correct. The balance of that, so call it 50% of that, is due to one name. The rest of it is a handful of names.

I've got that. My actual question is for Kevin Glass on the capital ratio. You give us the waterfall slide and we see the moving parts, but essentially ex of the American Century stake, capital was -- of that divestiture, capital was flat in the quarter. That continues a trend that you had in the first half of the year in which the ratio moved lower.

I wanted to ask you, when we look at the operational risk, RWA increase, and then this ongoing issue of pension, when we think about these factors, is the capital generation of the bank at a lower level than we would have previously believed? For something like pension, with rates having dropped as much as they did in a quarter, does this become an ongoing drag, or is it really the quarter-to-quarter movements in bond yields that determine how that trends?

First of all, I'd just say we continue to generate strong excess capital each quarter. In fact, that's allowed us to absorb a number of head winds that you've just alluded to. Previously, we offset some credit downgrades. We've absorbed that, the operational risk RWA floor and the value of the pension.

As far as the operational risk floor is concerned, that's more of a one-off item. We did introduce a new AMA model as that was approved. A floor was introduced. That's a one-time issue that we won't have to deal with again.

As far as the pension is concerned, that is an issue more of volatility than ongoing. In this particular quarter there was a big drop in rates. That increased our pension liability, and therefore negatively impacted our CET1 ratio.

In prior quarters, if you go back to early 2015 you will remember there was a big drop in our CET1 as a result of that. A lot of it came back over the next couple of quarters. This particular quarter we happen to be down 9 basis points. The previous quarter I think it was more or less flat. Before that, 2 basis points. You will see a bit of volatility on that as rates stabilize. If they stabilize, it's not going to move at all. If they improve a bit, then we'll see a pick up.

I think that our capital generation it's very strong. We've had a couple of one-off items. The good news is we've managed to deal with it effectively, and continue to improve our capital.

I think I've got that. It's really the movements in bond yields that are going to affect that tension factor on a sequential -- or on a quarterly basis on the marked-to-market? I think the one thing we can look forward to, from what Victor said, is that there are some balance sheet optimization or re-purposing measures that you're considering that should help this number, as well?

We continue do that as a Management team on an ongoing basis. Capital is something we talk about actually every single day. The other thing is to point out that could introduce a bit a volatility in the ratio is as markets move, that could also have an impact on our pension asset situation, which could also impact this. But by and large, I think you've got it right there.

Thanks for your time.

Thanks.

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

Hi. Hopefully this will be relatively quick. I just wanted to go back to the European provision on the leveraged finance portfolio. My understanding is you had a loan, you impaired it, you provisioned for it. My question more is why would you have included that in a notable item, and excluded that from cash? I would have figured that would have just been normal course of business. Has this issue been dealt with, or in terms of -- I think you mentioned I believe the last loan in that portfolio? Just some clarification around that, that would be helpful. Thank you.

Let me take the disclosure part of that, and if you've got any follow-up you can address it with Laura. This is a line in our European leveraged finance portfolio. I think as Laura discussed earlier, it was a business that we were in and entered into before the financial crisis. We exited it at that point.

We've consistently treated that as a run-off portfolio. We have had a couple of losses in that portfolio over the last few years, and gains. In both cases, we've consistently treated those as items of note. This is the last loan in the European portfolio. You'll see in our disclosure it's about CAD165 million left, and this would represent the end of that business.

Okay, thank you.

Thank you. The following question is from Peter Routledge of NBS. Please go ahead.

Hi, a follow-up from some of Laura's -- I guess and David's -- comments, you pointed out, Laura, that delinquencies for cards and personal lending products are rising. Then I look at the drawn part of your qualifying revolving retail portfolio, which looks like it's up a little bit -- more than it's been for the past several quarters. What's happening in oil producing provinces? Are people starting to draw on their unsecured lines? Then maybe talk about how they're drawing on their HELOCs?

Yes. In the oil provinces, we are seeing on a year-over-year basis, all of delinquencies trending up. It seems to have -- or at least on a quarter-over-quarter basis plateaued, if you will, somewhat. Again, all very expected, given the increase in the unemployment rate that we've seen. I'd say that we expect our delinquencies to remain elevated, and losses probably remain around the current level for the balance of 2016.

Specifically we have seen, if you will, our outstanding exposures increase somewhat. I don't have the actual detail per product when we get into HELOCs, but I would say for all of our products, pretty much we've seen draws increase -- which again would be expected, given the increase in the unemployment rate that we're seeing.

Have you given any thought to -- in oil producing regions where you start to see folks drawing perhaps to fulfill liquidity shortage -- of cutting those lines? Because they're revocable, and you can do it, I believe. To what extent have you thought about doing that?

Well, we employ ongoing what we call risk mitigation strategies or actions in all of our of portfolios. We don't typically just revoke credit. We do care about our clients and our relationships, and we really do work with our clients to try to get to the most positive outcome.

We have strategies that focus around things -- for example, where we might go out and do new offers to try to bring in new clients, we might slow that down; or where we might have been more proactive in terms of offering increases in lines of credit, we might slow that down.

We'll also be a bit more proactive from a collection treatment perspective, where we might be calling our clients sooner when we see the first sign of a missed payment or decreased payment, to have a conversation to see how we can work with the client. There's various what we call mitigation strategies available to us. That's -- that would be what we do.

Okay, thanks.

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

I have a couple quick follow-up questions. I'll try to go quickly through this. Is there any reason to believe that the impact of the PrivateBancorp acquisition will have a greater than, say, 90- or 100-basis-point impact on your CET1 ratio?

I think what we've said as far as the PrivateBancorp acquisition is concerned, I think maybe slightly higher than that. But we have targeted to be at 10% and we continue to target that level, Mario.

The impact will be a little bit above 100 basis points, that's what you're suggesting?

Yes.

Okay. Laura, real quickly. You referred to a CAD100 million loss if -- this is on the mortgages -- if housing were down 30% and unemployment got to 11%. Were you referring to BC, or were you referring to the country?

I was referring to the country.

Okay. The question I really have is, if that's what's happening to the insured -- sorry, the uninsured mortgages, what's happening to the insured mortgages? Would it be multiples of that, multiples of the CAD100 million?

Well, the stress that I provide in terms of that number for call it the first year, that includes the uninsured segment. But in that we also assume that for our insured mortgages, a much larger proportion of them we will not get the insurance coverage that we were expecting. In that stress, we assume that there are a segment of insured mortgages that will become, if you will, uninsured.

Why would they become uninsured?

We again, as a stress, we look at the things everyone likes to think won't happen; but we imagine that there are lots and lots of requests coming in to our insurance provider, so many that they start to get much tighter in terms of whether or not they want to grant us our insurance coverage, and they start a full protracted debate around no, we're not sure you actually did that. We just assume that in times like that, we will have less insurance coverage than we actually do have. It's really being conservative.

You're going to the heart of the question, then, for me. Because the issue for me is not the CAD100 million that CIBC or the banks would have to bear, but the extent to which losses would become so significant for the insurers that the banks themselves have to contemplate materially higher losses. The nature of the question is when you run through this stress test and CAD100 million falls to CIBC, how much do you think falls to the insurers? What I'm getting at is could it be multiples of the CAD100 million?

Given the insurers do insure a lot more mortgages than each individual bank has, I think that assumption would hold true.

But I'm referring specifically to CIBC's mortgages, no one else's, just CIBC's. Would it be multiples of the CAD100 million?

I don't believe it would be. As I said, I think we're quite conservative in terms of the percentage of our insured mortgages that we assume will not have insurance coverage.

Right, but that's not what I'm getting at. I'm not talking about CIBC's losses. I'm talking about the losses borne by the insurers related to CIBC's mortgages. Would it be multiples of the CAD100 million?

It could be, but I don't want to speak for them.

But they're your mortgages. They're not CEMC's mortgages.

I hear what you're saying, but when we do our stress analysis here, we do our stress analysis based upon the impact that we at CIBC are going to have, and not on the one that our insurer might have.

Okay. Thanks very much.

Thank you. I will now turn the conference back over to Mr. Ferren.

Okay, thanks everyone for joining us this morning. Have a great day. If you have any follow-up questions, just follow up with the Investor Relations department. Thank you very much.

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