Canadian Imperial Bank of Commerce (CM) 2016 Q4 法說會逐字稿

Welcome to the CIBC fourth-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.

Good morning. Thank you for joining us today. This morning, CIBC's Senior Executives will review our fourth quarter and FY16 results that were released earlier this morning. The documents referenced on this call including CIBC's news release, investor presentation, financial supplement and our annual report for 2016 can all be found on our website at cibc.com. In addition, an archive of this audio webcast will be available on our website later today.

This morning's agenda will include opening remarks from Victor Dodig, CIBC's President and Chief Executive Officer. Kevin Glass, our Chief Financial Officer, will follow with the financial review. Laura Dottori-Attanasio, our Chief Risk Officer, will close the formal remarks with a risk management update. 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 this morning's press release. With that, let me now turn the meeting over to Victor.

Thank you, John. Good morning, everyone. Thanks for joining us. This morning. CIBC reported record results for both the fourth quarter and FY16, wrapping up a year of tremendous progress for our bank. In the face of weak commodity prices, low economic growth, political uncertainty and regulatory change, we achieved our financial targets, we operated within our risk appetite, and we maintained a consistent focus on our integrated priorities of growing our client relationships, driving relevant banking innovation and simplifying the way we do business. We are transforming CIBC into a strong, innovative and relationship oriented bank. A bank that is very well positioned to meet the evolving needs of our clients and to deliver future growth for our shareholders.

For the fourth quarter, adjusted earnings per share of CAD2.60 were up 10% year-over-year. Our return on equity is 18.8%. While investing in our businesses, we also continued to build capital strength. We grew our industry leading CET1 ratio to 11.3% at year-end and to 11.5% on a pro forma basis, with the announcement today of the sale and leaseback of the sum of our Canadian retail properties. For the eighth time in nine quarters, we announced a CAD0.03 increase to our common share dividend to CAD1.24 per quarter.

For FY16 overall, we reported record net income of CAD4.3 billion and adjusted net income of CAD4.1 billion. Adjusted earnings per share of CAD10.22 were up 8% from 2015, which is near the top end of our target range. Our earnings growth in 2016 was achieved through a combination of delivering strong revenue growth of 5%, while holding our expense growth to just 2%. This positive operating leverage reduced our adjusted mix ratio by 160 basis points to 58% as we made progress towards our goal of reaching 55% by 2019.

In support of our [NIX] objective and initiatives to simplify and transform CIBC, we took a restructuring charge in the fourth quarter of CAD98 million after-tax. Kevin Lewis -- Kevin Glass, our CFO, will review our strong financial results for the fourth quarter and 2016 in a moment. Sorry about that Kevin. (laughter) But first let me comment on some of CIBC's significant achievements over the past year.

Its been an exciting year for our bank as we continue with our transformation. Over the past year, we improved our client experience ratings and we remain focused on our medium-term goal of becoming number one on this very important metric. In 2016, JD Power customer satisfaction survey, CIBC gained 22 points year-over-year, reducing the gap to number one to only 11 points. We also continued to show improvement in our Ipsos CSI net promoter score, where we've outpaced our peers over the past four years.

As part of our client-focused strategy, we are investing in our US platform. Our planned acquisition of The PrivateBank is an important step forward in building a truly North American business. The mid market commercial banking, wealth management and deposit taking capability of The PrivateBank will build on our existing US Capital Markets presence and our 2014 acquisition of Atlantic Trust.

We and our partners at The PrivateBank remain fully committed to the transaction and expect to close the deal by the end of calendar quarter Q1 as scheduled. This acquisition offers significant upside to the shareholders of both companies, as well as to our respective personal, business, corporate, commercial, and Private Banking clients in Canada and the United States.

For The PrivateBank shareholders, it provides the certainty of an immediate 30% cash premium over the pre-offer price plus the opportunity to participate in the future growth of the combined Company. For CIBC, it creates a strong platform to deliver US banking services to our Canadian clients and to provide commercial and Private Banking services to our clients at Atlantic Trust. We are aware of the recommendations from Glass Lewis, Egan-Jones and ISS, and reiterate our position that the transaction offers significant long-term value for both companies that far outweighs recent short-term and potentially short-lived swings in the US banking sector valuations.

On the innovation front, we extended our leadership by introducing new products and services, with security and convenience for our clients always at the forefront of our thinking. Financial innovation is occurring at a rapid pace, driven by tech savvy consumers and FinTech disruptors, some of whom we have partnered with to stay on the leading edge of consumer facing innovations.

To keep ahead of the changing market, CIBC also entered a unique alliance with National Australia Bank and Israel's Bank Leumi. Our arrangement will allow three banks on three different continents to collaborate and share innovation strategies and insights that can improve the banking experience for our clients.

We also continue to lead the market in mobile payments. After the successful launch of Apple Pay earlier this year, we are now the first bank in Canada to allow our clients to use Samsung Pay. Through our CIBC Live Labs' team, we continue to collaborate with the MaRS Discovery District to bring the next wave of banking innovation to our clients. We are proud to be recognized for our collaboration with the FinTech sector by the Digital Finance Institute, which is a Vancouver based innovation advocacy group who named CIBC financial institution innovator of the year at the recent 2016 Canadian FinTech Awards.

Our third strategic pillar is simplification. In 2015, we introduced program clarity, with an enterprise focus on making it easier for our employees to meet the needs of our clients. Our target run rate cost savings for 2016 under this program was approximately CAD100 million. We exceeded that target. We invested the majority of our savings in strategic growth and innovation initiatives for our clients.

So now I'm going to touch on a few highlights from our businesses, each of which performed very well over the past year. Let me start with retail and business banking. We communicated at our Investor Day a year ago our goals of being number one in client experience and profitable revenue growth. In 2016, we made progress in each of these areas.

We completed the first year with our banking centers operating under a single leadership model. Leaders who are visible in the community and focused on our clients. In addition, we continued to transform our physical banking centers, introducing new technology to make every day banking easier and allow us to spend more time providing advice to our clients.

During the year, we also introduced several innovative products and services for the convenience of our clients. I've already mentioned Apple and Samsung Pay. We introduced the CIBC smart account. We introduced the CIBC smart prepay travel Visa card. We introduced the capability for our clients to open an account or apply for a mortgage entirely through a mobile device.

In October, we announced our partnership with FinTech innovator Borrowell to leverage the unique technology and process for one click online lending of up to CAD35,000 for our clients. Our partnership with Borrowell is yet another example of the CIBC team leveraging innovation to deliver the best client experience in the market to drive growth for our bank.

On revenue growth, we've moved from lagging to leading, with strong and balanced growth across lending, deposits, cards, mortgages, business banking, and other product areas. We led the industry in market share growth for mortgages, business deposits, business lending. We're number two in personal deposits. In mortgages, we have made significant progress in growing with our clients. Our portfolio is now predominantly composed of CIBC mortgages sourced from our own salesforce. As a result, we have much deeper relationships with our mortgage clients today than we did four years ago, when one-third of our business was broker based.

On the risk front, our adjudication process and policies remain strong and are adapted regularly for changing market conditions. During 2016, we adjusted lending criteria not just in mortgages but in other areas of our loan book, including credit cards and energy in response to elevating risks in certain areas. As Laura will review in our update shortly, our mortgage portfolio and total loan book have performed very well over the past year. My colleague, David Williamson, is here this morning to answer any questions you may have about retail and business banking as well as innovation.

Our Wealth Management business continued to enhance the client experience to drive asset growth and optimize its platform. In 2016, we aligned our Canadian Private Wealth Management and CIBC Wood Gundy businesses under one leadership structure to elevate our high net worth client experience and better meet their needs. Our latest JD Power results showed improving customer satisfaction among our retail brokerage clients. We've moved from fourth to third in full service and from fourth to second in self directed brokerage.

In our Asset Management business, we grew assets under management by 8%, driven by market appreciation and net sales which were particularly strong in the fourth quarter. We launched new products and programs to meet the needs -- changing needs of our investors. My colleague, Steve Geist, is here this morning to answer questions you might have on Wealth Management.

In Capital Markets, we continued to focus on supporting our clients by delivering integrated advisory, lending, trading and research solutions. We strengthened our coverage and execution capabilities in both Canada and the United States, with new talent to advice our clients in the areas of technology, innovation and private capital. In the fourth quarter, we leveraged our leading edge foreign exchange platform and partnered to introduce the CIBC Air Canada conversion Visa prepaid card, the first of its kind in Canada. This innovative product allows travelers to purchase and store up to 10 currencies on a single card that can be used at retailers around the globe.

We've also enhanced the no fee CIBC global money transfer service introduced in 2015 by including this feature in CIBC's mobile banking app. By adding the US, CIBC clients can now send money to 45 countries in the world from the convenience of their smartphone. We are the only Canadian bank to allow for that capability. My colleague, Harry Culham, is here this morning to answer questions on our Capital Markets business.

So in summary, I am very pleased with our results and the progress the team has made in 2016. I'm going to turn it over to our CFO now, Kevin Glass, for his financial review. Kevin?

Thanks, Victor. My presentation will refer to the slides that are posted on our website starting with slide 5. Let me start with a brief overview of 2016, the year in which we delivered very good results and achieved our financial targets. For the full year, reported net income was CAD4.3 billion and reported EPS was CAD10.70.

Items of note during the year contributed a positive CAD0.48 per share, with the more significant items being the gain on sale of our minority investment in ACI, and the gain on sale of a processing center, offset somewhat by restructuring charges primarily relating to employee severance, increases to our collective allowance, an increase in legal provisions, and higher loan losses in our exited European leveraged finance portfolio.

After adjusting for the items of note, our net income was a record CAD4.1 billion, our EPS of CAD10.22, up 8% from 2015 and well above our goal of at least 5% growth. We delivered a strong return on equity of 19%. We finished the year with a Basel III CET1 ratio of 11.3% while continuing to invest in our business and growing our dividends by 10%. These strong results reflect the success of our client focused strategy and our diversified business model.

Moving on to our results for the fourth quarter. CIBC reported net income of CAD931 million and earnings per share of CAD2.32. Items of note this quarter reduced EPS by CAD0.28 per share and included a restructuring charge of CAD0.25 per share primarily relating to employee severance.

The balance of my presentation will be focused on our adjusted results for the fourth quarter, which exclude these items of note. We have included slides with reported results in the appendix to this presentation.

Adjusted net income for the quarter was just over CAD1 billion. Adjusted EPS was CAD2.60 reflecting solid earnings growth in all of our businesses. For the eighth time in the past nine quarters, we announced an increase to our quarterly dividend, which we moved higher by CAD0.03 to CAD1.24 per share.

Slide 7 shows the positive impact of our mix ratio from our strong operating leverage and savings related to the restructuring charges. The charge of CAD134 million pretax announced today was a result of our ongoing program to simplify our bank and better align our resources to meet the changing needs of our clients. Together with the charges we took in 2015, we have recorded restructuring charges of CAD430 million pretax over the past two years. These are broad based across most of our businesses. We are taking in support of the enterprise wide transformation and simplification of our bank. In 2016, we realized run rate savings from restructuring of approximately CAD200 million, which contributed about 130 basis points to the year-over-year improvement in our mix ratio. We have positive operating leverage this year even without the benefit of restructuring, driven by strong revenue growth.

A majority of the savings are being reinvested in the business in order to drive growth by enhancing the customer experience as well as focus on driving operational efficiencies. Our productivity ratio improved to 58% in 2016 from 59.6% in 2015. We are making good progress towards achieving our run rate goal of 55% by the end of 2019. Looking forward, we expect to generate cumulative savings from charges we have taken to date of approximately CAD500 million by 2019 including savings of another CAD150 million in 2017.

Let me now review the performance of our business segments. I'll start with the results for retail and business banking on slide 8. We recorded another quarter of quality earnings with good top line growth. Revenue for the quarter was CAD2.3 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. Total asset growth was 9% led by residential mortgage growth of 11%. Our personal lending portfolio, including cards, grew 4%, as we continued to see improving results in this area. Personal deposits and GIC growth of 8% benefited from the success of our recently launched smart account as well as growth from other savings and GIC promotions.

Business banking revenue was CAD443 million, up 7% 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%. Business deposits and GICs were up 10% from the same period last year.

The other segment had revenue of CAD22 million, which was up CAD3 million from the same period last year due to a gain on a Real Estate disposition partly offset by the continued run-off of our first-line mortgage broker business. Provision for credit losses was CAD206 million, up CAD43 million or 27% from the same period last year due to higher losses in business lending, personal lending and cards portfolios as a result of credit migration and to a lesser extent portfolio growth in unsecured lending.

Losses were up CAD9 million from the prior quarter, largely due to higher losses in our business lending portfolio. Non-interest expenses were CAD1.1 billion, up 5% 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. Our expense level this quarter was somewhat higher than recent quarters as a result of the timing of our spend on certain strategic growth initiatives.

Good top line growth contributed to positive operating leverage of 70 basis points and a mix ratio of 51%, an improvement of over 30 basis points from the prior year. Net interest margin was down 3 basis points sequentially, reflecting the continued impact of a low interest rate environment and our business mix. Retail and business banking net income was CAD688 million, up 2% from the same period last year.

Slide 9 reflects the results of our Wealth Management segment. Revenue for the quarter was CAD620 million, up CAD10 million or 2% from the prior year driven by strong performances across all businesses, partially offset by the sale of ACI. The other line in our Wealth Management segment includes the results of ACI for the period prior to our announcement of the sale. Excluding ACI, revenue for the quarter was up CAD34 million or 6% from the prior year.

Retail brokerage revenue of CAD332 million was up CAD15 million or 5%. Growth in assets was partly offset by lower commission revenue due to declines in client transaction volumes in our full service brokerage business. Asset Management revenue of CAD190 million was up CAD12 million or 7%, mainly due to higher average AUM, reflecting market appreciation and positive net sales. Net sales of long-term Mutual Funds were particularly strong this quarter compared with the prior year.

Private Wealth Management revenue of CAD98 million was up CAD7 million or 8%, due to higher average assets and strong volume growth in loans and deposits. Non-interest expenses of CAD441 million were well controlled and comparable with the fourth quarter of last year. Net income in Wealth Management was flat from last year, but excluding ACI, the net income was up CAD22 million or 21% with strong operating leverage of 6.3%.

Turning to Capital Markets on slide 10, we continued to deliver strong client driven results. Revenue this quarter was CAD676 million, up CAD106 million or 19% from the same quarter last year. Global Markets revenue of CAD365 million was up CAD94 million from the prior year, driven by higher revenue from interest rates, commodities, and equity derivatives trading.

Corporate and Investment Banking revenue of CAD313 million was up CAD11 million from the prior year, driven by higher equity underwriting and higher corporate lending revenue partially offset by lower debt underwriting and advisory revenue and lower investment portfolio gains. Provision for credit losses for the quarter was nil, compared to CAD22 million in the prior year and CAD7 million in Q3. Non-interest expenses of CAD327 million were up CAD5 million from the prior year primarily due to higher spending on strategic initiatives. Net income of CAD283 million was up CAD100 million or 55% from the prior year.

Slide 11 reflects the results of Corporate and Other segment. Net loss for the quarter was CAD57 million compared with a net loss of CAD32 million in the prior year largely due to the net income -- net impact of our Treasury activities.

Turning to slide 12. We further strengthened our capital position over the past quarter providing us the flexibility to continue to invest in our business, maintain the strong dividend pay-out, and deal with an evolving regulatory environment as we look beyond the expected closing of our acquisition of Private Bancorp. Our CET1 ratio was 11.3% at October 31, up 40 basis points from the prior quarter.

Solid organic capital generation and the impact of issuing Treasury shares to participants in our shareholder investment plan were partly offset by the impact of the restructuring charge we took this quarter. Our CET1 ratio was 11.5% pro forma the sale and leaseback of the Canadian retail properties announced today. With that, I'd like to turn the meeting over to Laura Dottori.

Thanks, Kevin. Good morning, everyone. I'm going to start on slide 14 with our loan loss performance. Compared with adjusted results from last quarter, loan losses were CAD222 million or 27 basis points. That's up CAD19 million mainly due to higher losses in business banking, as Kevin pointed out earlier. On a reported basis, loan losses were also CAD222 million with no items of note. This is down CAD21 million from the prior quarter. Looking at the full year, our loan loss ratio on an adjusted basis was 29 basis points compared with 27 in 2015.

Turning to slide 15, new formations were CAD394 million. That's down CAD180 million from last quarter. Gross impaired loans were CAD1.7 billion or 52 basis points as a percentage of gross loans and acceptances. This is down CAD80 million or 3 basis points quarter-over-quarter.

Now on slides 16 and 17, we're providing you with additional information on our Canadian retail portfolio. Slide 16 is an overview of our residential mortgage and HELOC portfolios in Canada, the Greater Vancouver area, and the Greater Toronto area. You will see that our late stage delinquency rates across the portfolios continue to remain low and stable with the Vancouver and Toronto areas performing significantly better than our Canadian average.

Slide 17 shows current Beacon and loan to value distribution in our Canadian uninsured residential mortgage portfolio. In Canada, 8% of our uninsured mortgages have a current Beacon score of 650 or less and 11% have loan to values over 75%. What is of note is that less than 1% of our uninsured mortgage portfolio falls into both of these categories.

Now looking at the two key markets of Vancouver and Toronto, you'll see they have better credit profiles than the Canadian average. Beacon score distributions are towards the higher end and loan to values are toward the lower end, with average loan to values at 46% in the GVA and 53% in the GTA. That's as compared to our national average of 56%. Now this year, we originated CAD48 billion of uninsured mortgages. Approximately 35% were to clients in the GTA and 21% to clients in the GVA.

With respect to new originations in these two markets, average Beacon scores of new clients were better than existing clients. Average loan to values of new originations were 57% in the GVA and 62% in the GTA, which again are lower than our national average of 64%. So as you can see, we continued to be very pleased with the credit profile and quality of our uninsured mortgage portfolio.

On slide 18, we have our Canadian credit card and unsecured personal lending portfolios. On a quarter-over-quarter and year-over-year basis, the late stage delinquency rate in our Canadian cards portfolio is up. This is driven by a combination of higher unemployment in the oil provinces and credit migration in the rest of the portfolio. The late stage delinquency rate for unsecured personal lending remains relatively stable with some movement in the oil provinces.

Slide 19 shows the distribution of revenue in our trading portfolios as compared with VaR. We had one negative trading day this quarter compared with none last quarter. Our average trading VaR was CAD5.2 million this quarter. That's down from CAD5.7 million last quarter.

So to conclude, I'd say notwithstanding the energy headwinds that we faced this year, we're very pleased with our risk performance. Our loan growth remained aligned with our risk appetite. Our portfolios performed as expected, with our 2016 loan loss ratio coming in at 29 basis points on an adjusted basis. We continue to have sound risk management and solid credit adjudication standards and processes. So all in all, a very good year. I'll now turn things back to John.

Thank you very much, Laura. So that concludes our prepared remarks. We'll now move on to the question-and-answer period. I would just remind everyone if you could please limit yourself to one question and then requeue if you have others, so that everyone has an opportunity to participate. So operator, can we please have the first question on the phone?

(Operator Instructions)

The first question is from Meny Grauman from Cormark Securities.

Hi, good morning. I had a question on the efficiency ratio. If I look at the performance that you're able to deliver in terms of reducing that efficiency ratio this year and extrapolate it, it looks like you'll be able to hit your 2019 target early. So I'm wondering what your perspective is? Are you just being conservative here? Or is there reason to believe that the pace of improvement that we saw this year needs to slowdown as we move into 2017 and 2018?

Meny, it's Kevin, so I'll take that. I think what we should bear in mind is that 2016 was a particularly strong year. We saw significant movement in 2016. I think we would stick to our original target of getting to the 55% run rate towards the end of 2019. As we make more changes, it obviously becomes more and more challenging because it's just that you're at the margin. So we are very happy with our progress. We'll continue to work in that direction, but we think 55% by the year -- by the end of 2019 is the appropriate target to shoot for.

Thank you.

Thank you. The next question is from John Aiken from Barclays.

Good morning, David. Wanted to revisit the mortgage loan growth that you're able to generate in the quarter. Was any of this driven by, I guess, the impact from the changes that the federal government has put in place in terms of the housing marketplace? Or if it hasn't, what impact does that have on your outlook going forward for 2017?

Good morning, John. No. The growth we've achieved this year in resi[may], I think it was more a function of the changes that we telegraphed some time ago. That's really been the building of our proprietary salesforce. We made three changes awhile ago and decided to come out of the first-line broker channel, which Victor referred to in his remarks, where it wasn't our brand, it wasn't our client base and we couldn't drive deep relationships. So we said we would exit that business.

We said we would hopefully transition 25% of those clients over to CIBC. We would build up our own proprietary salesforce. So that's gone particularly well. We actually transitioned about 50% of first-line into CIBC. Our proprietary salesforce has -- it's our people, our brand, our clients and they've been very effective in driving deep relationships. So that's really been the big driver of the improvement in growth.

Now looking forward, I would anticipate the growth to ebb for a couple of reasons, one of which you mentioned, the regulatory changes I think will result in price changes and an ebbing in growth rates. Secondly, that proprietary salesforce I referred to is very effective. It's doing all the things we hoped it would do, but it now is at the desired level. So we're going to maintain the level of the size of that salesforce. You're not going to see the year-over-year bump from a bigger salesforce in the market.

So David, are you comfortable with the aspect that you expect to continue to take market share even if the overall growth rate for the industry slows? Overall for your entire book, are you comfortable with seeding some of the margins with this business mix on a go-forward basis in order to achieve that growth?

So not comfortable with seeding margin. So we're fourth in the marketplace, so we're a price taker. So we will not and are not competing on price, but I am comfortable with relatively stronger growth rates. Let me explain why. As Victor said, strategically we've said we want to lead in profitable revenue growth and client experience, so by definition we need to be on the higher side of relative growth.

Why I'm comfortable with that is when you look at the comments that Laura made as far as the quality of the business, whether it's delinquency rates, Beacon score or loan to value, we look good. But in the regions of greater focus, Toronto and Vancouver, we look particularly good. Then if you look at the loan to value for uninsured mortgages, originated in BC over the last 12 months, of the four banks that have reported so far, ours is the lowest.

If you look at the loan to value of uninsured mortgages originated across all of Canada in the last 12 months, you'll again see us comparing very well. So I'm quite comfortable with the -- in fact, very pleased with the quality of the growth of the business we're putting on our books. I'd be happy to continue with that business.

Then from a strategic perspective, we said we would like deep relationships. Mortgages are all about deep relationships, it's an anchor product. Deeper relationships, and more sustainable relationships if you have that mortgage. So we're going to continue to look to have mortgage growth. As Victor said, our revenue growth is very broad in nature.

If you look at it from a market share perspective, we're number one or number two in market share growth across pretty much every product. So it's not just mortgages. If we look at revenue in absolute dollars growth year-over-year, mortgages is less than 20% of that roughly CAD500 million of growth. In fact, it's about 20% for everything, cards is 18%, revenue from deposits 16%. So the revenue is very broad in nature, which speaks to getting those deep both sides of the balance sheet relationships. So I'm very happy with that growth. I'll be thrilled if we can maintain it. Both the strength of the growth and quality of that growth is something I think we're all pleased with.

Great, thanks, David. I'll requeue.

Thanks, John.

Thank you. Your next question is from Ebrahim Poonawala from Banc of America-Merrill Lynch.

Good morning. I was wondering if you could just provide some color, in terms of you had pretty good build up on the capital ratio on the CET1. If you can talk about, one, just in terms of how you're thinking about deployment of capital? What organic and inorganic forms? Also in terms of if you can remind us about the next steps as we get closer to closing the Private Bank deal? What approvals are needed from the regulators and the shareholders? Thank you.

Ebrahim, welcome to the call. I think this is your first call.

It is, thank you.

Let me just say that our capital deployment priorities remain unchanged. They're consistent with what we communicated to our investors over the last couple of years. The first point is to maintain strong capital ratios. In the face of macroeconomic uncertainty, regulatory fluidity and business flexibility, our strategic priority is to maintain strong capital ratios. At the close of this quarter, that's 11.3%. That's industry leading.

We also on a pro forma basis sold 89 of our retail properties, which boosted our capital to 11.5%, something candidly that we've had in the works for a long, long time as the leadership team focuses on focusing on banking and making sure that we can deploy our capital and growing banking in the new modern age of banking. The second thing I'll say is that, it's important to have capital to invest. That is both for organic and inorganic investment.

The short-term objective is to have that capital for the Private Bank acquisition, which we plan to close at the end of the first quarter and importantly, for the organic investments that we plan to make over the next couple of years in banking as we transform CIBC. The third piece of it is effectively our dividend payout ratio. We've committed to our investors to be at the higher end.

The last eight out of nine quarters, we've increased our dividend. That should be seen as a sign of confidence in our business. We did that again this quarter. We are at 46.4% in terms of our target payout range. So that's really our capital story, Ebrahim. It hasn't changed. It's very consistent and it will be going forward.

I guess just as a follow-up, in terms of what is the next step in terms of Private in terms of shareholder approval from their shareholders and regulatory approval?

We have a December 8 vote scheduled with the Private Bank shareholders. We have regulatory approvals that are in flight. We have integration teams working on integrating our businesses. So all is moving along.

Got it. Thanks for taking my questions. I'll get back in queue.

Thank you.

(Operator Instructions)

The next question is from Mario Mendonca from TD Securities.

Good morning. Just real quickly first, are there any implications for the bank from an earnings perspective related to this sale leaseback?

Mario, it's Kevin. Yes, we'll have some lease costs. It won't be that material, be certainly less than CAD20 million odd a year. So that will be the earnings drag coming out of the transaction.

Okay, because that was so quick let me just (laughter) sorry about that. Victor, you sounded -- like it was interesting listening to you describe the PVTB deal and the shareholder vote. Could you handicap this for us, like what is your concern here? Because that was unusual to hear a CEO discuss that.

I was answering a question. So someone asked me the question, I just answered the question. Ebrahim asked me two questions just like you're asking two questions. I try to answer them as best as I can and transparently as I can.

No, I'm talking about your opening comments, Victor.

My opening comments. Oh? Nothing. Just yes, I was basically telegraphing the fact that we're in the midst of closing a transaction and highlighting for our investors why we think it's a good thing for our shareholders.

But are you concerned that you're going to get a no vote?

No. I'm actually very confident in the investments that we're making. I'm confident that our shareholders will, yes. Private Bank will be a much stronger bank being part of the CIBC family. They are a bank that doesn't have a credit rating today. With CIBC, they will be having better depth and strength in terms of deposit taking capabilities. They will have better strength and depth in terms of their ability to grow. We will be able to importantly, Mario, be able to offer our Canadian clients a banking platform in the US marketplace. We know that there are two yes recommendations with Glass Lewis and Egan-Jones. ISS has said no. I think shareholders of the Private Bank and the Private Bank Management team feel very good about the transaction that we've put forward.

Good luck, thank you.

Thank you.

Thank you. The next question is from Steve Theriault from Dundee Capital Markets.

Thanks very much. Good morning, everyone. So a question on capital, probably for Kevin, at the time of the Private Bank corporate announcement, the guidance was for CET1 above 10%. You've had some good accretion, another 15 basis points from the sale leaseback, one or maybe two more quarters of internal capital generation, maybe some tailwind from higher rates in Q1 on your pension obligation. So by my math maybe you're closer to 11% or at least 10.5% at the time of close versus 10%, is that reasonable? Can you maybe be a bit more specific where you think you'll be capital wise post Private Bancorp?

Steve, I think we have a lot of moving pieces when you look at capital. In this particular quarter, as you have seen in the graph that we put up, there was very little movement on RWAs, part of that had to do with we had some credit upgrades. The other issue is just time to decay working our favor this quarter, so I think our guidance is just shooting to be above 10%. It's still a way to go, we're confident of doing that. We still continue to grow the bank strongly. So obviously that absorbs capital. So I think we will stick with our guidance. If we've got some extra capital we'll take it because having strong capital ratios is certainly a focus of ours.

If the yield curve holds where we are today, should we see a capital bump in Q1 from the pensions?

I think it will certainly help, but what I would say is we measure that in basis points. So it will help but it's not going to take us from 10% to 11% for example.

No it won't.

But it will certainly help us.

Okay, I'll leave it there and requeue, thanks.

Thanks.

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

Okay, thanks. Kevin, do you think to get to the 55% mix ratio by 2019 you will have to take more restructuring charges?

Sohrab, I think that in terms of running our bank, we are going to have to continue looking at continuing to simplify, continue to get more effective. But what I would say is in terms of significant charges that we've highlighted as items of note, we wouldn't plan on doing that. I think that this particular charge is in line with what we signaled a year ago. To make the changes that we are making clearly would require restructuring charges. But moving forward, while we'll continue to simplify the bank, we don't anticipate any significant items of note.

In other words, you will do it with, call it, resources on hand without having to get it adjusted?

That's correct. It will be an ongoing process.

Okay. Laura, if David wants to continue to grow at these rates, number one lead in a variety of market share growth rates, you're comfortable that for that to continue you don't have to adjust your risk appetite?

That's right.

Thank you.

Thank you. The next question is from Peter Routledge from National Bank.

Hi, thanks. Just to complement you guys on your disclosure on 2016 and 2017, I hope your peers follow your fine example. Question on page 16. The thing that really strikes me is just very fast growth in your mortgage balances in Greater Vancouver and GTA, looks like about 23% by my calculation. That just seems very fast. I'm wondering if you're also worried about the pace of that growth? The follow-up question would be, are your non-real Estate secured exposures at default, so drawn and undrawn, growing as quickly in those areas?

I can start, Peter, and Laura can jump in as she would like. As far as what we're doing in that growth, it is strong growth in the GVA area. We have a really quite strong team that we've built there. I'd just highlight a couple of factors. One is the loan to value of the mortgages that were originating in the GVA is -- shows a tremendous amount of buffer. So we're not reaching in that market. Then although we're achieving that growth, again I'd highlight our loan to value of the business that we're booking is more conservative than when you compare against our peers.

So we're not getting it through price. We're not getting it through reaching more as far as the balance to which we will lend on, which I think takes us back again to the folks we have in that region. The other thing I'd point out is that when you look at the nature of the business that we're booking, it's very balanced. You're not just seeing jumbo mortgages with no other relationship.

You're seeing whether it's coming through our mobile channel or whether it's just the business specifically in Vancouver, deep relationships that are coming with deposits. So the foreign investor and the new immigrant is not just taking a mortgage, they're showing up with funds, at least the ones that we're booking. So they are the kind of clients, the kind of relationships we are looking to achieve. We're achieving it, not reaching on price and not reaching on how much we will provide as far as the loan against the value of the home.

Peter, I guess what I'd add to that, so we continue to be very comfortable. As you know, BC has a well diversified economy. So we still see better than average unemployment than the Canadian average there. As I said, our risk profiles and our loan performance continues to offer superior performance. To the question you had, we do see delinquency rates are better. That's not just and I think this is part of your question-- that's not just due to the growth that you're seeing in the book. But when we look back at the various vintages over time, it's a consistent story of better overall performance.

Okay. Just the question that was asked was not about delinquencies, it was, are your non-real Estate secured exposures at default growing in Vancouver and Toronto growing as quickly?

No. Yes, no, they're not.

No, they're not. Okay, thank you very much.

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

Thanks, good morning. Just a clarification on capital and then my actual question, please. First off, on the sale and leaseback that you've announced, the 89 branches for a solid gain, do you have transactions in the works for the rest of the 1,000 branch network you have in Canada? The other part of that capital question, which is for Kevin, is 120 basis points a good estimate for the PVTB impact right now?

In terms of additional transactions, we don't have the whole bunch lined up but we're going to click on a quarter-by-quarter basis but as we've stressed, we look at capital every day. It's very important and we look to optimize our capital on an ongoing basis. This just proved to be a particularly attractive transaction for us. Then with respect to the PVTB impact, that's I think you're in the ballpark.

All right. Then my actual question is related to your synthetic equity total return swap business. I know this is one we talked about a lot in 2015 after the government announcement. think it's coming up in the Spring. When I look at your tax equivalent benefit line, I kind of thought of that as being a way we can measure the trend in this business as far as running off that operation.

It was down decently this quarter about CAD50 million although there does seem to be some seasonality for CIBC in that line. Is that the best way to measure how you're progressing in running off that business? More specifically, relative to the impact or the estimated impact you gave us last year, where do we stand now?

Hi, Sumit, it's Harry Culham speaking. So you're seeing a seasonality factor I think in those numbers you mentioned there. The TRS impact will be filled from the latter half of 2017 and going into 2018. I'm optimistic that we will be able to continue to build our business as we have over the last little while to mitigate the effects of TRS over time. So you'll see that in the latter half of 2017 and into 2018.

Kevin, I'll leave it here, that TEB line I think this quarter is about CAD97 million for CIBC. Is the bulk of that related to TRS and should that trend to zero in the second half, as Harry mentioned?

I think, Sumit, a large part of it is related to the TRS but certainly not all of it. As Harry said, that would fluctuate so we can do private sale agreements that would have an impact as well so that would run-off over time but certainly not all of our TEB impacted by the new legislation but that is a good proxy line to see how to run-off.

All right. Thank you for your time.

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

Good morning. My first fake question is about the recent rise in rates. How is that affecting your funding strategy in the near term? Is it impacting your trading business in the positive way? Then my real question is on mortgages. The growth has been very high, everybody's noted that and I appreciate the disclosure.

It's helpful, very helpful, but I'm just wondering -- David alluded to the ebbing of the growth in future quarters. How much do you expect your mortgage growth to pull back? Then how much of an impact has the growth we've seen over the past year had on your earnings growth? I have my own number, I'm just wondering has this mortgage growth decelerates is it a big or an insignificant headwind to your earnings per share growth?

That certainly was a multi-facetted question.

Got to join the club here.

I mean, I'll take just the first part for (inaudible) funding and then maybe Harry can talk about trading. What I'll tell you is our funding costs impacted more by credit spreads than absolute levels of interest rates. We've got a very diversified funding base, so it will flow and it'll have an impact over time. Certainly rising rates would help us overall from a bank perspective. But, we effectively moved those costs through to the businesses. They are effectively absorbing it. So from a funding perspective, I think we will from a borrowing point of view, we will place to absorb the increases. Harry?

Hi there. From a trading perspective, I wouldn't say the absolute level of rates has impacted the business significantly. What I would say is that we're seeing high quality well diversified earnings often in challenging markets, as you'll recall, after November 8. We're really striving for prudent growth across the various asset classes by industry and by geography. That's what we are seeing in quarter four once again.

So has client activity picked up?

Yes, client activity was quite strong. I would say the outlook is looking pretty good as well as we start into November.

Thanks.

Picking up on Part B of your question, Gabriel, so on the mortgage growth. So the regulatory change has kind of an industry wide impact that could cause growth to ebb. Then more CIBC centric is that our proprietary salesforce has been growing quite robustly over the last while, that's now going to level off. So that's where we have a greater impact in our growth relative to the industry.

Having said that, I still anticipate that we will show strong on a relative basis to our peers. The quality of our growth is strong. The depth of the relationships we're getting is good, so two green lights on the dashboard. As long as that's the case, we will continue on. As far as the relevance or impact of mortgages to our overall revenue growth, I mean it's a thinner margin product obviously.

So therefore, if it comes off it has that lesser relative impact. But I think, probably the best way to look at it, when you look at the CAD495 million of incremental revenue that we booked this year, less than 20% of it came from mortgages even though mortgages were growing so much stronger than the overall market. Cards was in there. Deposits was in there. Business banking in there. Everything roughly at about 20%.

So if one of the cylinders of the engine slowed down a bit, what seems evident is the engine's running strong right across the base and the other cylinders should continue strongly. So mortgages, big headline number as far as growth, as far as the impact on our bottom line. It's very much balanced out by strength in other businesses.

So you'd expect maybe what, high single-digit growth next year or something like that?

We'll have to see how the industry performs. I'd say that our job really is to perform well on a relative basis irrespective of the macro market. So I can't control for the macro market, you're probably as well if not better a place to have a view on that. But whatever it is, we hope to be on the right side of it.

Thank you for the thorough answers. (multiple speakers)

Thank you. The next question is from Doug Young from Desjardins Capital.

Thank you, I'll keep it to one question. So you've said strong capital ratio a number of times and you've said that in the past. You've got a number of changes that are potentially coming from Basel and some changes coming from OSVI. You've got an acquisition that closes before March that pro forma takes you to roughly 10.3%. So I'm just wondering in your thought process, can you talk and maybe quantify what is strong capital from a CET1 ratio perspective? Is it 10.5%? Is it 11%, given again all the changes that are coming down the pipe on the regulatory side? Thank you.

Doug, Victor here. Really quickly, we've always said strong capital. The whole global industry is elevated in terms of CET1 where relative to where we were in the immediate post financial crisis world. Our view is that over the medium term if we're in the 10.5% range that's a good range to be in. That provides us sufficient flexibility. It may float up above 10.5% every once in awhile, it may float below but that's the kind of -- maybe the pivot point that we should be thinking about.

How did this factor in -- sorry, I'll come in with a B part of my question. But how did this factor in, you reduced your ROE outlook, I don't think that's a big shock. What was the biggest driver behind reducing that medium-term outlook on the ROE side? Was it the regulatory capital changes or is there other items that factored in?

It's always a combination of a number of things including regulatory change that we envision, including growth and growth in the US where we recognize that ROE is lower than it is in Canada, but it's still a sufficient ROE to create shareholder value above our cost to capital.

Okay, thank you.

Thank you. The next question is from Darko Mihelic from RBC Capital Markets.

Hi, thank you. Good morning. Maybe I'll just stick to one question, but it's an obscure one. Ever since one of your competitors had a bit of a problem with capital, I've been looking at the floors that are in place. If I were to look at your disclosures, where would I find if indeed there is an addition to your RWA from the Basel I floor?

Darko, I don't think there's a specific disclosure that would indicate where the Basel I floor is, but what I would say is it's something that we watch very carefully. We have enough room as far as the floor is concerned. Right now, it's not a major concern for us. But to the extent that there's an impact, then we would take it into account. But perhaps I can hand it over to Laura to give just a bit more detail.

Well, I'm not much help. So I believe we do not actually have a line item that shows that. So I think that's a take-away for us to see if it's something that we would look to add in our future disclosure.

Okay. Thank you very much.

Thank you. That was all the time we had for questions this morning. I would now like to turn the meeting back to Victor.

Thank you, operator. CIBC begins FY17 with strong momentum, which we look to sustain through a challenging business environment. We expect interest rates and GDP growth to remain low and disruption from traditional and non-traditional competitors to remain high. Additional regulatory changes, as we said during the call, could also put pressure on bank capital levels globally. So what does that mean to our earnings growth and returns?

What does that mean for our shareholders? In terms of earnings, we will continue to target EPS growth of at least 5% annually. I think it will be harder to achieve in 2017 given the environmental headwinds and the integration of our acquisition of the Private Bank, though we will try to work toward that 5%. We are resetting our ROE target, as Doug Young noted, to the 15% plus range through the cycle. That I think reflects regulatory and market pressures on bank capital levels globally as well as an increasing mix of US growth in our strategy.

Strategically, as we look out over the longer term, we are very confident with the business growth plans we have in place. We will continue to focus on our clients. We are going to continue to simplify our business. We are going to continue to introduce relevant innovation to modernize our banking platform. By integrating and executing on these priorities, I'm confident CIBC will become the North American Bank of choice for our clients. I'm confident we will be able to generate long-term value for our shareholders.

In closing and on behalf of CIBC's Executive Committee and our Board, I'd like to thank CIBC's 43,000 team members for their ongoing dedication to serving our 11 million clients. I'd also like to thank our shareholders, for their continued support and trust in our plans to build the bank of the future. I'd like to thank the Analyst community for their two question approach. (laughter) So thank you everyone. Have a safe, relaxing and enjoyable holiday.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.