Canadian Imperial Bank of Commerce (CM) 2017 Q1 法說會逐字稿

Welcome to the CIBC quarterly financial results conference call. Please be advised 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, John.

Thank you very much. Good morning and thank you everyone for joining us. This morning CIBC senior executives will review CIBC's first-quarter results for 2017 that were released earlier this morning. The documents referenced on this call, including CIBC's news release, investor presentation and financial supplements, can all be found on our website, CIBC.com. An archive of the audio webcast will also be available on our website later today.

This morning's agenda will include opening remarks from Victor Dodig, CIBC's President and Chief Executive Officer. Kevin Glass, our Chief Financial Officer, will follow with the financial review; and Laura Dottori-Attanasio, our Chief Risk Officer, will provide 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 today's press release.

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

Thanks John. Good morning, everyone and thank you for joining us. This morning, CIBC reported very strong first quarter results, with adjusted earnings of CAD1.2 billion, and earnings per share of CAD2.89, up 13% from a year ago.

Each of our business units managed through challenges in our operating environment to deliver robust growth and continued progress against CIBC strategy which is, one, to deepen client relationships; two, to embrace innovation to improve the banking experience for our clients; and three, to simplify our bank. We're pleased with the broad-based strength and quality of our earnings in the first quarter, and the consistency of the quarterly results we continue to deliver for CIBC shareholders.

Revenue growth for the quarter was 9%, driven by exceptional results in Capital Markets and strong top line performance in both Wealth Management and Retail and Business Banking. Our results are also a reflection of the benefits of the investments we have made across our business in support of our client-focused strategy.

Strong revenue growth, combined with continued focus on expenses, improved our mix ratio to just over 56% this quarter. Credit performance is also strong and on the capital front, we managed to grow our Basel III CET ratio to 11.9% from 11.3% last quarter, while delivering adjusted ROE of over 20%.

By consistently growing our earnings over the past couple of years, through both a very low interest rate and low growth environment, we are very confident that our client-focused strategy is working. Reflecting these strong fundamentals, we announced a CAD0.03 dividend increase today, taking our quarterly dividend to common equity shareholders to CAD1.27 per share. This is the ninth time in the past 10 quarters we have raised our common dividend, and it moves us further towards our target payout ratio of 50%.

So now I'd like to talk about our business unit performance. Let me start off with Retail and Business Banking, which reported year-over-year adjusted earnings growth of 3% to CAD709 million. Solid top line growth of 5% from both Personal and Business Banking, combined with [controlled expense of] growth of 3% resulted in positive operating leverage of 2% for the quarter.

Our net interest margin saw some erosion this quarter, but that was due partly to product mix and also deposit promotions that contributed to 4% sequential growth and a 9% increase in deposit balances on a year-over-year basis. Loan losses of CAD205 million were higher than a year ago, but comparable to the prior quarter.

During the first quarter, we launched Digital Cart, an innovative mobile app that allows our clients to apply for mobile banking products easily and securely using their mobile device or online. Our continued focus on leveraging technology to enhance the client experience was also once again recognized by Forrester Research.

For the third consecutive year, CIBC earned the highest score for online banking functionality among the five major retail banks in Canada. We are very proud of our accomplishments and our commitment to adopting technology to enhance our clients' banking experience will remain a constant for the CIBC team. My colleague, David Williamson, is here this morning to answer any questions you may have about Retail and Business Banking as well as on innovation.

Turning to Wealth Management, we delivered record adjusted earnings this quarter of CAD135 million, supported by strong performance across all of our businesses. Earnings growth was driven by higher trading activity and fee income from Wood Gundy, and year-over-year AUM growth of 10%.

During the quarter, our Wealth Management team continued to enhance the client experience, drive asset growth and simplify our business platform. We began co-locating our private banking and CIBC Wood Gundy teams in select locations across Canada and that is meant to deliver a more targeted offer and a deeper relationship with our higher net worth clients.

We also launched new multi-currency brokerage accounts in response to demand from our clients to hold US dollars and other major currencies in our registered accounts. My colleague, Steve Geist, is here this morning to answer questions on our Wealth Management business.

Our Capital Markets business also reported a record quarter, with adjusted earnings of CAD371 million, which is up 50% from a year ago. These earnings are supported by a combination of a well-diversified and client-driven trading revenue business, cost discipline, and strong credit quality.

During the quarter, we expanded our CIBC Global Money Transfer service to China through partnership with China UnionPay International. CIBC clients can now send money to 46 countries around the world with no upfront fees from the convenience of their smartphone or computer.

In our commodities business, we added precious metals and collector coin purchase capabilities to the suite of products we continue to conveniently offer our clients through mobile devices and online banking. Some of these initiatives between our Capital Markets business and Retail and Business Banking are simply our bank working better together to serve our clients on a broad basis. My colleague, Harry Culham, is here this morning to answer questions on the Capital Markets business.

So to conclude, we're off to a very good start in 2017. Our record results this quarter are strong evidence that our strategy of building a strong, innovative and relationship-oriented bank is working. And it positions us well with supported market conditions to deliver EPS growth for 2017 in access of our 5% minimum target.

So with that, I'd like to turn the call over to our CFO, Kevin Glass. Kevin?

Thanks, Victor. For my presentation, we will refer to the slides posted on our website, starting with slide 5. As Victor noted in his remarks, we had a very strong quarter to start the year.

We reported net income of CAD1.4 billion and earnings per share of CAD3.50. Items of note during the quarter contributed a positive CAD0.61 per share to our results, including a gain on the sale and lease back of certain retail properties. And again, as reported in the other business line within Retail and Business Banking.

After adjusting for the items of note, our net income was CAD1.2 billion, EPS of CAD2.89 was up more than 13% from a year ago, our return on equity was over 20% and our Basel III CET1 ratio grew to 11.9%. We also announced another CAD0.03 increase to our quarterly dividend which is now CAD1.27 per share. The strength and consistency of our earnings growth over the past 2.5 years has supported 27% increase in our dividends.

The balance of my presentation will be focused on adjusted results, which exclude the items of note. We have included slides with reported results in the Appendix to this presentation.

Let me now review the performance our business segments and I will start with the results for Retail and Business Banking on slide 6. We recorded another quarter of solid earnings in our Retail business, with good top line growth and a modest increase in expenses.

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, partially offset by narrower spreads. Total asset growth of 10%, led by residential mortgage growth of 12%.

Our personal lending portfolios, including cards, grew 4% as we continue to see improving results in this area. Personal deposits and GIC growth of 8% benefited from the continued success of our Smart account and promotions during the quarter.

Business banking revenue was CAD453 million, up 7% from last year, driven by strong lending and deposit volume growth and higher credit-related fees, partially offset by the narrower deposit spreads. Business lending balances were up 11% and business deposits and GICs were up 10% from the same period last year.

The other segment had revenue of CAD8 million and is down CAD8 million from the same period last year due to the continued run-off of the exited first line mortgage broker business. Provision for credit losses was CAD205 million comparable with the prior quarter. Loan losses were up CAD42 million, or 26% from the same period last year, largely due to higher loss rates and to a lesser extent, portfolio growth in cards and personal lending.

Non-interest expenses were CAD1.1 billion, up 3% 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. Good top line growth contributed to positive operating leverage of 1.9% and a NIX ratio of 49.1%, an improvement of 89 basis points from the prior year.

Net interest margin was down 6 basis points sequentially, reflecting lower deposit spreads due to promotions during the quarter, the continued impact of the low interest rate environment, and also business mix. Retail And Business Banking net income was CAD709 million, up 3% from the same period last year.

Slide 7 reflects the results of our Wealth Management segment. Revenue for the quarter was CAD653 million, up CAD51 million, or 8% from the prior year, driven by strong and broad-based business performance. Retail brokerage revenue of CAD352 million was up CAD44 million, or 14%, largely due to growth in assets under our administration and higher transactional activity, including debt and equity issuance in our full service brokerage business.

Asset management revenue of CAD194 million was up CAD13 million or 7%. This was largely due to higher average AUM resulting from market appreciation and strong net sales of long-term mutual funds. In Q1, long-term mutual fund net sales were CAD1.2 billion, up from the CAD371 million a year ago.

Private Wealth Management revenue of CAD107 million was up CAD9 million, or 9% mainly due to higher annual performance fees and by Atlantic Trust, and growth in Canadian-based loans and deposits. Non-interest expenses of CAD466 million were up CAD30 million, or 7% primarily due to higher performance-based compensation. Net income and Wealth Management was CAD135 million, up CAD13 million, or 11% from the same quarter last year.

Turning to Capital Markets on slide 8, we delivered exceptionally strong client driven results this quarter. Revenue for the quarter was CAD877 million, up CAD191 million, or 28% from the same quarter last year.

Global markets revenue of CAD531 million was up CAD140 million, driven by higher revenue from equity derivatives, interest rates and commodities trading. Corporate and Investment Banking revenue of CAD335 million was up CAD49 million from the prior year, driven by higher equity and debt underwriting and higher corporate lending revenue, partially offset by lower advisory revenue.

Provision for credit losses was CAD2 million in the quarter, down from CAD25 million from the prior year when we had elevated losses in the oil and gas sector. Non-interest expense of CAD382 million were up CAD40 million from the prior year, primarily due to performance-driven compensation. Net income of CAD371 million was up CAD123 million from the prior year.

Slide 9 reflects the results of our Corporate and Other segment, where we had net loss for the quarter of CAD49 million compared with a net loss of CAD27 million in the prior year. This was largely due to lower CIBC First Caribbean and the net impact of our treasury activities.

Turning to slide 10, we further strengthened our capital position over the past quarter. Our CET1 ratio was 11.9% as of January 31, up 60 basis points from the prior quarter, driven by solid organic capital generation and impact of share issuance driven by DRIP investment and employee share based plan. Again, on the sale and lease back of certain retail properties this quarter, contributed 15 basis points.

Today, we announced our intention to seek TSX approval for a normal course issuer bid that will permit us to purchase for cancellation up to a maximum of CAD8 million, or approximately 2% of our outstanding common shares over the next 12 months. Based on capital position provides us flexibility to invest for future growth and to payout a strong dividend while maintaining a prudent buffer for future regulatory changes.

And with that, I will turn the call over to Laura.

Thanks, Kevin. And good morning, everyone. Slide 12 begins with our loan loss performance.

Loan losses were CAD212 million, down CAD10 million, mainly due to lower losses in business banking and a lower collective provision for non-impaired loans. This was partially offset by higher losses in credit cards as we saw write-offs increase from the last quarter. Our loan loss ratio was 26 basis points compared with 27 basis points in the prior quarter.

Turning to slide 13, new formations were CAD399 million, relatively unchanged from the last quarter. Gross impaired loans were CAD1.4 billion, or 44 basis points as a percentage of gross loans and acceptances, this is down CAD240 million or 8 basis points from the fourth quarter, mainly due to a reduction in our European portfolio.

Slide 14 which we introduced last quarter, provides an overview of our Canadian residential mortgage and HELOC portfolios in Canada, the greater Vancouver area, and the greater Toronto area. And here, you will see that our late-stage delinquency rate across these portfolios continue to remain low and stable with the Vancouver and Toronto areas performing significantly better than our Canadian average.

Slide 15 is a new slide, and it shows Beacon at our origination loan-to-value distributions for the CAD12 billion of unsecured mortgages that we originated in the first quarter. Of that amount, approximately 42% were to clients in the GTA and 15% to clients in the GVA. Average Beacon scores of new clients continue to be in line with our existing clients, and average loan to values of new originations also continue to be lower than the national average of 64%, with 56% in the GVA and 62% in the GTA.

Slide 16 shows our Beacon and loan-to-value distribution for our overall Canadian uninsured residential mortgage portfolio. In Canada 8% of our uninsured mortgages have a current Beacon score of 650 or less, and 12% have loan-to-value over 75%. Less than 1% of our uninsured mortgage portfolio falls into both of these categories.

The Vancouver and Toronto markets continue to have better credit profiles than the Canadian average. Beacon score distributions are towards the higher end, and average loan-to-value were 48% in the GVA and 52% in the GTA, both lower than the national average of 56% and with distribution towards the lower end.

Slide 17 shows our Canadian credit card and unsecured personal lending portfolios. On a quarter-over-quarter and year-over-year basis the increase in the late-stage delinquency rate in our Canadian cards portfolio is driven by a combination of higher unemployment in the oil provinces and some credit migration in the rest of the portfolio. The late-stage delinquency rate for our unsecured personal lending portfolio remained stable, with a marginal improvement on a quarter-over-quarter basis that's slightly up year over year in the oil provinces.

Slide 18 shows the distribution of revenue in our trading portfolios as compared with VaR. We had all positive trading days this quarter compared with one negative trading day last quarter. Our average trading VaR was CAD6.1 million, up from CAD5.2 million, mainly driven by increased client flows in currencies and in rates.

And now I will turn things back to John.

Thank you, Laura. So that concludes our prepared remarks. We will now move to questions.

(Operator Instructions)

Meny Grauman, Cormark Securities.

Just wanted to ask a question about the PrivateBancorp deal and just first in terms of details, wondering significant dates from here specifically, the June 29 date. Is that -- is that correct that, that's the day after which you can walk away from this deal or I guess PrivateBancorp can walk away from this deal without any sort of penalties?

Good morning, Meny. I suspected that question might come up. So let me just say a couple of things. One is, our US strategy continues to remain intact, and that is to grow our footprint in the US to be able to better serve our clients as well as to have exposure into a market that we see growth in over the long term. We, therefore, continue our integration work.

We continue with our regulatory approvals. And the June 29 date that you mentioned is the expiry date where everyone can walk away, and in the interim, we await for the Private Bank Board of Directors to announce the next meeting date. I'll say a couple of things. One is that the Private Bank is a good standalone bank.

The Private Bank is a better bank under CIBC's ownership because we will be providing the resources necessary to allow them to grow with the growth plans that I think will deliver the value necessary to our own shareholders over the long term. But I also say this, that we're going to always act in the best interest of our shareholders.

We will be disciplined, we will be patient. We have plenty of organic growth to deliver from our existing footprint as well. So that discipline and patience is something I want to emphasize to all of our shareholders.

Just help us understand the delay in rescheduling a vote. I understand the PrivateBancorp Board, but how we understand this delay? And what is it predicated on or what's happening behind the scenes that is causing that delay and what -- are we waiting for something or are you waiting for something specific to happen before that date gets announced?

No, I think the PrivateBancorp Board is acting in the interest of their shareholders and we're acting in the interest of ours.

Okay. And then just as a follow up, I think you mentioned, but I just wanted to clarify just in terms of strategy. If, for whatever reason, you were to walk away from this deal, how does that change your US strategy and specifically, your capital priority, does that -- that should up a big return -- the odds of a big return of capital to shareholders in that event?

We are focused on the long-term, Meny. We have lots of different avenues to provide returns to our shareholders in the short to medium-term. But in the long term, we believe that we need to have that US exposure. So when it comes to capital, our capital levels at 11.9% today are strong, but that's always been consistent with our strategy.

Our strategy has always been, be a strong bank, have a strong capital position. We do three things. One is to continue to invest in our businesses and you see the results that we are delivering in our footprint that we have today.

The results are strong. They are strong on the top line, and they are strong because we're investing in our businesses. We are investing in our businesses to build a stronger client franchise across CIBC. So organic investment is a priority.

The second thing is to continue to grow our dividends. We have a shareholder base that's income and growth oriented so we want to make sure that we continue to grow those dividends and do so with a good consistent business strategy. We're now continuing to approach a 50% payout ratio, but we're pleased with the fact that we were able to grow our dividends for our clients.

And we've always said that the third avenue for capital deployment is inorganic and/or buybacks. So inorganic is clearly in the wheelhouse of getting the Private transaction, the Private Bank transaction done, but today, we also announced the NCIB because we want to make sure that we have every avenue open to us for our shareholders.

And we may have to, in fact, simply be more active in terms of buying back stock over time if we're not able to consummate that deal in this period of time. So we want to make sure those avenues are open to us.

Thank you very much.

(Operator Instructions)

Ebrahim Poonawala, Bank of America Merrill Lynch.

I had a question on -- if you can just talk about in terms of residential mortgage growth. One, I guess, if you can sort of comment on what has been the impact in how you approach this lending so far based on the government actions that have been over the last six months, and how have you seen competitive behavior change on that front across sort of the regions if you can comment on that first?

Certainly. So our objective is to meet client needs and to do it in a way that's good for our clients and for our shareholders. And within whatever the context would be. So some of the government action, such as the tax change in the West Coast, have impacted volumes in that region. Volumes in other parts of the country have adjusted as well over the same period of time.

So there is some degree of change in the regional element of markets. But irrespective of that, markets continue to be strong and aggregate. I guess our objective, Ebrahim, is to build the business in a sensible kind of way. So with your question really is within the context of the current market, how do we feel about our mortgage growth, let me address that specifically.

We feel quite good about the nature and the size of the growth we are achieving for probably three reasons. One is that we're not using prices a lever to compete in the current market. Our NIMs in the mortgage business quarter over quarter and year over year are stable.

The NIM compression that Kevin referred to and Victor referred to are as a result of promotions in the deposit space, promotions that affected in the short term in this particular quarter, at the current interest rate environment and business mix. So we're not competing on price.

Second, we're not competing on risk so if I look at some of the data that Laura has provided, to cut in a different way, to look at it on a comparative basis, the loan-to-value of our uninsured new originations in Q4 was 64%. Only one of the big five were lower than us, and there's a 63%. In Q1 of 2017, our loan-to-value of new originations is still at 64%.

If we look at British Columbia which is been an area of focus over the last while, our loan-to-value of uninsured new originations was the lowest of all the banks at 60%, and in this quarter, we dropped further to 59%. And if you get more specific and look at the GVA, specifically the Vancouver area, our loan-to-value of new origination is even lower at 56%.

The point for using all that is to make the point we're not competing on risk. We are competing our client experience. So in that area, whether it's our banking centers, where we have introduced products from our portfolio which is the Home Power Plan, the Mortgage HELOC product. We introduced that. We set our adjudication times. We've improved our processes and that's a lot of banking centers to perform well in the current context.

And then mobile advisors, where we have grown that force, has performed very well and it's very consistent with our client experience aspirations of allowing our clients to bank when, where and how they would like the mortgage advisors come to you.

That channel, 30% of the clients are new to the bank, and from that new client base, we're building deeper relationships, something we couldn't do in the broker channel. So we have exited the broker channel and actively building our mobile advisor channel. So we have focused on client experience.

Irrespective of the context from a regulatory perspective, if we are not competing on price, if we're not competing on risk, but we do compete on a better client experience, then we get the business we are getting which is a healthy growth of new clients and building deeper relationships off that mortgage business. Hopefully, I've addressed your question that goes the extra step to look at -- our [client base] that we're building.

That's helpful so I guess it's fair to assume that when we look at the LTVs that you provided for originations, we shouldn't expect that 64% to move higher?

In fact, in the last quarter, it's stable and in the British Columbia area, it's actually lowered a bit, so it will change a bit. But if you look over time, it has actually been pretty stable and more conservative than our peer group.

Got it. Just to tag onto that, when you think about the outlook and I guess it sounds like you feel comfortable around growing that portfolio around the rate you did in 1Q, around 10% to 12% on an annual basis. But from a credit quality perspective, what credit cards and real estate lending, based on where things stand today, how do you think about credit quality for 2017?

Understanding that a lot can change but do you expect any meaningful deterioration in any of the consumer portfolios as the year progressive?

I will hand it over to Laura in just a moment. But as far as the growth rate, its again, we operate within the context that exists, right, so Vancouver is slowing, Toronto is speeding. The actual rate of growth we will have will depend on the context we're getting. Key thing is we're not competing on price and risk and we continue just to build our client base and develop strong relationships in that context. Maybe with respect to our view on credit environment, if I can maybe hand it over to Laura.

Sure. I guess what I would add to that is you saw we did have really good Q1 performance, and that was consistent across all of our credit portfolios. It really depends on the overall economic performance, and unemployment trends.

What we're seeing is that in the oil provinces, unemployment seems to have peaked. It's come down a bit in Canada. Now we have seen our delinquencies, as you saw in our disclosure, increase in the oil provinces over the past year, particularly in the card space.

But that does feel like it's stabilized, and although delinquencies remain somewhat elevated in the card space, in particular, related to oil, we do think that our losses, if you will, on a go forward basis should only be slightly higher, and that's taking into account the seasonality, if you will, of the portfolio. So if economic performance sort of continues to remain and unemployment trends as well, then we should continue to have a good year for 2017.

Understand. Thanks for taking my question.

John Aiken, Barclays.

Good morning, David. I wanted to follow on in terms of the deposit pricing you took -- actions you took this quarter. Was this to just shore up some of your funding or was is actually pre-funding for growth that you're expecting for the remainder of the year?

John, no, it's not really directly related to short-term needs and funding. It's really just our continued objective to build the relationship with clients on both sides of the balance sheet, right, to grow our lending business and to grow our deposit business. And within a context, that is competitive on the deposit side.

So the growth in lending, we are picking up market share. To the point I made earlier, it's not on price or business banking. NIMs are flat quarter over quarter, year over year. Mortgage NIM is flat. And we're picking up market share on deposits and that's just because we want that kind of a relationship with our clients.

So half of the NIM compression is those promotional rates. The trick then is to maintain the balance as they come in during the promotional period, something that worked well last year and we hope works well again this year.

I guess we wouldn't necessarily be able to expect to see the full recovery of the 6 basis points over the next couple of quarters then if that's what the case is, particularly, if you continue to grow your mortgage book faster than where you are with the other loan balances.

Let's just break apart the 6 basis points. So the 6 basis points is half promotional, right. It's during this period of time when we're in the market trying to build those balances. The other half, that's really 1 basis point is mix and 2 basis points is rates.

So the promotional part will become less a factor during the rest of the year. We are still in promo now and we are now in Q2 so it's going to impact Q2 a bit. But that will not be a factor in the latter part of the year, but rates and that basis point and mix likely will be.

Great. Thanks David. I appreciate it.

No problem, John. Thanks.

Steve Theriault, Eight Capital.

Maybe just a quick one to start for David just to follow on. last quarter, I might have been left with the impression the positive impact from the mobile sales force have come and gone now that the number of mobile advisors has peaked. Is that how we should think about it or are there more productivity gains still to come as that sales force gets more seasoned over time? And if that's the case, how long should we expect to see a benefit from those hirings that have happened over the last couple of years?

Good morning. We -- a couple of comments there. Maybe I miscued folks and said that we will come to industry growth rates quicker. We have backed off on the growth in the -- in that mortgage channel just recently, right? So that means that on a year-over-year basis, we still have growth in that side of the channel; quarter over quarter is flat. So we're going to have few quarters of year-over-year growth.

And at your point, I hope for some extended period of time, we have productivity growth because that -- there is new members of the team. We are better at supporting them and what we've learned over time is there is a pretty good growth in productivity. So that could carry for a while.

And obviously we're trying to help them do better on the deposit growth along with mortgages. So we try to give them better tools to onboard clients in the deposit side as easily as they can do the mortgages. So what Victor talked about was Digital Cart, the ability to open up accounts even if you are not a client through your phone and so forth.

We'll facilitate the kind of tools that, that channel will have as well to onboard deposits. So I guess two points, one is what I talked about before is we flatlined that channel, that's recent. So we'll have a while of continued year-over-year growth. And the productivity gains, I hope, will be sustainable for beyond that.

Okay, that's helpful. Thanks for that. And then, for Harry on Capital Markets, obviously, a very solid start to the year. I know we're relatively early on in 2017, but when I think about your business for this year, I think a lot about the drag from the total return swaps in the back half of the year, specifically. So maybe you could just give us an update on how much pressure we should expect in the back half of the year from TRS?

How your efforts are going in terms of replacing some of those revenues and given the strong Q1, very strong Q1, do you feel like you are a in a position to grow earnings this year if conditions don't remain great but remain reasonably constructive the rest of the year?

Okay, the one I just -- good morning. Maybe just a quick comment on the quarter. Obviously, it was a strong quarter. Pleased with the trading revenues, as you point out, across -- actually across all product areas. If you look at equities, commodities, fixed income and rates. So the environment, obviously, is -- the conditions were and continue to be very good for our clients generally and our business.

And our team is providing our growing franchise industry-leading insight, advice and execution. We're pleased with our progress on our plan. At the end of the day, we are focused on repeatability of consistent and sustainable growth of this business.

You point out the environment. Q1 was exceptional, very good market conditions. Strong client activity, and Q2 is off to a good start. The pipeline is strong. With respect to the TRS, I think I mentioned it before, it starts to hit us towards the end of -- in all banks, towards the end of quarter two and the most -- the large impact is the last half of 2017.

And the impact is in and around 5% of our net income after tax after mitigation efforts. Now having said that, the markets are -- the market conditions are very strong; client activity is great. Working with our clients very closely to navigate these interesting markets. So market conditions do play a factor.

So when I think about 5% of after mitigation, that's -- can I just drill that arithmetically to 10% in the back half of the year effectively, relative to what your run rate would be otherwise?

Yes, that's probably a good approximation.

Okay. That's helpful. Thanks for the time.

Gabriel Dechaine, National Bank Financial.

Question for Victor back onto this capital management stuff on the NCIB specifically. So just, if I'm understanding your comments correctly -- or interpreting. You've got the NCIB place in there if PrivateBancorp doesn't happen. So you are there; you've got a capital deployment outlet. And it's also there in case it does happen. When you think about the flowback issue if you're going to be issuing a lot of shares to PrivateBancorp shareholders so I suppose it could be used in either case.

Yes. It has a dual purpose function. How do you like [new shop], Gabriel? Everything going well?

So far, so good.

Glad to hear that.

I get to speak French a lot more which is nice.

Fantastic. (laughter)

Then what you mean on integration efforts? I just want to clarify that. Like you don't own the business yet, so it's not like your cost cutting or anything like that. Is it just planning or what you mean by integration efforts?

It's about planning. It's about planning for the future and how to build a formidable business bank across borders to serve our clients. A big part of this is serving our own Canadian clients who are doing increasing business south of the border. We're able to take bank them today from a lending perspective, but a more robust offering, I think is what they would be looking for, over the long term, from CIBC.

Okay. And then my last question and it's also on this issue, this situation. You said that you're working in the best interest of CIBC's shareholders and that's great to hear. And then you are kind of leaving the door open to the PrivateBancorp may happen or may not happen. But the long-term, you believe being in the US is an important part of your -- the CIBC's future. So let's assume the deal doesn't happen.

How quickly are you looking to deploy capital into the US? There's a big valuation ramp up we've seen over the past year and past few months. Is this a situation where you're going to get hard at work at looking at the next deal or would you be a lot more patient given the valuation landscape?

Well, I just want to reiterate a couple of things. One is, we are building for the long term, not for the six month term, not for the 12 month term, but for the long term, right? The second thing I want to reiterate is the Private Bank is a very good bank. It's a very good standalone bank. It's better under CIBC ownership.

Much stronger, much broader ability to grow across its platform. So we think we bring a lot to the party, and we think that the long-term strategic interest of their shoulders and our shareholders are best served by coming together. Having said all of that, the market is clearly run; our goal is to be rational. Our goal is to be disciplined and our goal is to be patient.

We are acting in the interest of our shareholders. That means building a North American franchise, but that means also doing it in an economically prudent fashion. And that's all I will say today. They are a good bank. We've been working with them for a long, long time. We've got good integration plans underway but we will be disciplined, and we will be patient when it comes to price.

Okay and then just last one. A clarification from Harry. That 5% of after mitigation, that's from your statement, not the total bank; correct?

Apologies. Yes, absolutely. Capital Markets net of after tax.

Okay, great. Thanks.

Sumit Malhotra, Scotia Capital.

And just to be clear on the -- on your filing of the NCIB. Usually when you file for these things, it doesn't take very long for it to be approved. If you were approved, do you anticipate being active on that file prior to having some kind of conclusion with Private or would have to wait until you know what the capital impact is going to be?

Sumit, that's our management prerogative. So obviously, we will wait for TSX approval. Everything that we are doing is consistent with everything we've always said. The buyback is simply another avenue to deploy capital to our shareholders, and we will do that at the time that we think it's in the best interest of our shareholders.

And somewhat related, you gave us the confirmation on the first question on the so-called walk-away date -- there's probably a better term than that. But you postponed the shareholder vote in early December. Is there a timeframe in which you're required to go back to shareholders with the offer, whichever one it is, or does the June 29 date serve as all-encompassing on that front?

The June 29 date is the all-encompassing date and it will be up to the Private Bank Boards -- Bancorp's Board of Directors to establish the next meeting date.

All right. (multiple speakers) Okay, thank you for that. And then I just want to go back to David Williamson and this conversation around net interest margin. I think you told us the factors that are in place that had a larger impact this quarter. But bigger picture, I think just around the banking sector, there's been a lot of excitement on what higher interest rates and bond yields in Canada and US could do to net interest margin.

But at least the way I am hearing it, you're not really communicating to us the fact that Canadian five-year yields are up 50-ish basis points in the last three months is going to have a major positive effect for your net interest margin. Am I hearing you correctly or are there some other factors that need to play out in order for NIM to benefit in Canada for CIBC?

Hi, Sumit. You're right that higher rates are a wind assist. it's just the -- I think Victor referred to in his comments, we are structured on a tractor or a ladder. So it just takes a while for it to come into earnings. So to the extent that rates are high and stay high for a while, it will start to come in.

I think you will hear from us and the rest of the community, rates have just been coming down for such an extended period of time that with a multi-year tractor, there's just continued grind on that front. But there might be signs that, that's about to reverse.

Thanks for your time.

Sohrab Movahedi, BMO Capital Markets.

Victor, you mentioned that the year is off to a good start and you expect you will be able to exceed the 5% EPS target for the year. Can I ask what your starting point for that number is?

The 5%? I --

no, What's the base -- off of what 2016 base are you working off of?

Off of our earnings per share that we delivered in 2016, right?

So what you would call adjusted.

Yes. Adjusted; correct.

Okay. And is there an assumption in that, that the Private deal gets done?

The 5% target is a target that we think we can deliver on an organic basis in terms of growth.

Okay, thank you. And then, very quickly for Laura. Laura, you had noted on one of your presentations -- on one of the slides that high LTV, low Beacon score was less than 1% of the portfolio of the uninsured portfolio. When you think about loss composition, what would you say the expected loss in your stress testing would be on that 1% of the portfolio?

Hey Sohrab. When we run our stress, we look at the whole portfolio, and so I think I've gone through this. We went through the mild and severe scenarios, clearly, that would be the segment of the population that would be hit, if you will, more severely. So are you looking for sort of revived stress numbers for that segment of the portfolio? Because what I can tell you from an overall expectation on loan losses, we are not expecting to see loan losses increase in that particular segment.

But I think -- I guess, what I'm trying to get at is, whatever the stress loss is. Let's say I'm just making up a number. CAD200 million, would it be (multiple speakers) -- would it be concentrated in this part of the portfolio?

No. So if -- when we run our stress across the book, as you can appreciate, the largest segment of losses, if you will, or additional losses we would take in a severely stressed environment, as I speak to retail, would be in the unsecured space. So first, of course, would be cards followed by the rest of the unsecured products that we have.

It continues to be when we run our most severe stress that the smaller amount of the losses, if you will, would continue to be in the mortgage portfolio. And so that number and I did speak to one a few quarters ago, of course, as our mortgage book rose, and economic conditions change, that number will change as well but it continues to be, if you will, the smaller of the numbers.

Okay, so I mean, just the 1% then is an interesting data point but it doesn't factor into your risk appetite or risk management framework in any meaningful way.

Well, it does in that -- when we run our stress, we look at the whole product on a product by product basis and the overall organization. And then we also go in and do deep dive. So we do look at our -- at the margins, if you will, for that segment. And we look at that as well to see under stress, does it make sense and does it all sort of add up. So we look at that closely and it does fall into our risk appetite.

Okay, thank you. Maybe I will follow up afterwards.

Doug Young, Desjardins Capital Markets.

Just questions on regulatory capital and I apologize, I've done some numbers quickly. But I believe that the loans were up sequentially about 2% but your credit risk weighted assets were down 1%. So I'm just trying to get a sense of, are you making some changes to your portfolio in anticipation of the new Basel rule changes or can you talk a bit about of some of the moving parts there?

And then I just noticed on page 8 of the regulatory capital supplement that the other category of credit risk weighted assets was down CAD1.4 billion sequentially. Just trying to get a little bit of sense of what that relates to?

I think on the credit risk weighted as we had a fair amount of movement on the Capital Markets kind of party credit risk changes this quarter. So as a result of declines over there that would have mitigated the increase in RWA growth. As far as the other is concerned, the biggest driver of the day was just time decay and we actually had that last quarter as well. So as we get and that can move on a quarter-by-quarter basis and this particular quarter that worked for us, which shows that reduction.

You said time decay?

Yes.

Okay. And just was -- in the capital market segment, was this more in anticipation of some changes? Is this kind of more proactive work that you've been doing or is this just general part of everyday business?

It's a combination of that. Because mainly it's proactive. But it's also largely market conditions and just the way that our client positions have moved.

Okay, and just on the market risk component of it. I think the full impact from the changes is effective Jan. 1 so that would be in these numbers; is that correct? Because I think there were some calculation changes that came through.

There would be a small impact this quarter.

It wasn't as big. Okay. And there's still operational risk impacts that are coming in June. DO you have any sense of what the implication or what size that could be?

Well, obviously, we have our internal models. We don't give that level of granularity, but certainly, when we look at our forecast moving forward, it would have an impact, but not a very material impact as far as our CET1 overall ratio is concerned.

Okay, great. That's all for me. Thank you very much.

Nick Stogdill, Credit Suisse.

Just a question on business banking or business lending. We've now got a few months within the new US administration behind us. And I'm just wondering if you could give an update on feedback from your commercial and business clients in Canada. Do they feel more optimistic or do you get a sense of putting growth plans on hold, maybe looking to defer investment spend? And just maybe tied up to the context of the 11% growth that you delivered in Canadian banking -- business banking this quarter?

Hi, Nick. The growth that we produced and business banking it's actually pretty consistent with the runway we've had for some period of time. A lot of that is due to the build on the relationship managers, the build on the, as we call it, feet on the street. Now, at this point, I think everyone is still evaluating kind of what the changes south of the border mean as far as trade and as far as opportunity.

Early days yet. So I think from my perspective, I haven't seen any kind of systemic shifts. I think there's a lot of thought, a lot of questions, a lot of uncertainty potentially, but we haven't really seen any systemic change in business activity at this point.

Okay, so the pipeline still looks good and this level of growth feels sustainable?

Yes.

Thank you.

Mario Mendonca, TD Securities.

Could you talk a little bit about the nature of the client activity in the Capital Markets business that would have driven the very strong equity derivatives trading results? It does sound like it's client activity, but if you can offer anything a little more specific?

Sure. I think -- good morning, Mario. Firstly, what I would say is the trading equity derivatives business is a well-diversified business here at CIBC. No doubt there was strong market conditions. You've seen an uptick year over year. But what's interesting is the breakdown of the equity business. As I mentioned, well diversified. We saw a very good amount of client activity in the equity linked business. That business was up significantly year over year and quarter over quarter on the back of redemptions and other offerings.

We saw very good client flow in the business we are building in the US and the US equity derivatives business and we also saw an uptick in North American option activity with core clients this side of the border and south of the border. So it's very well diversified activity with our core clients. And the market conditions are favorable for that activity.

So you wouldn't highlight the total return swaps in any way as the key driver of that?

No. In fact, the TRS-related activities were about flat with previous quarters.

Okay. Quick follow up then and this is more for Victor. I find the capital decisions that have been put in place, they are difficult for me to follow. Clearly, I'm looking at this externally. So I'm not going to have the level of insight that you do, of course. But the -- having the DRIP in place made it feel like the bank was maybe going into a capital conservation mode.

But now I hear of the buyback and the ninth dividend increase in 10 quarters. So I am having a little trouble understanding the capital decisions. Could you help me think this through?

Mario, good morning. I can appreciate the minor complexities that arise when you look at all of that and say how do I make sense of it all? Maybe I can just take you back to our view on the world. Because our view on the world informs our view on capital decisions. I'd probably characterize it as cautiously optimistic.

Let me start with the optimism. David talked about business sentiment when Nick asked the question about how our clients are feeling. I think that business sentiment is improving. I think we have seen some concrete improvement in Toronto and Alberta where our clients have re-engineered their businesses and some confidence is building as the natural resource sector by the better footing at a better price.

I think sentiment is improving because of the pronouncements that are being made south of the border that are generally pro-growth. But I would say general in nature so far. And that kind of leads me to the why do we have cautious optimism? We're cautious because the pronouncements are general and they are going to take time to implement.

And you've got pronouncements that are approaching a problem from two different ends of the spectrum, in some instances like in tax policy. And it's also difficult to reconcile the pro-growth policies with the protectionist rhetoric on some of the trade files as well as how other countries will react to these policies.

So you kind of go into this saying, our goal is always to have a strong capital position for our shareholders. Given the political environment, given the transaction that we are looking at, and given the flexibility that we want to have to return capital to our shareholders, if need be, in the form of a buyback. At the same time, our fundamental belief is to have a strong capital position which is why that DRIP was put in place a while back to deal with any potential downsides that the macro environment might deliver.

People don't see it today, the animal spirits are out there. But they could come, and when they come, they can be ugly. And we just want to make sure that CIBC continues to be the Safe Harbor bank in the next financial crisis.

So the buyback then has a real optionality element to it; is that fair to say?

I think that's fair to say.

Thank you for your time.

Thank you. I would now like to return the meeting over to Victor.

Okay. Thank you, operator. So it's been a pleasure this morning to report on another strong quarter of financial performance for our bank. And to provide you with an update on our progress against our strategic priorities.

So on behalf of the CIBC Executive Committee, on behalf of our Board, I'd like to thank the entire CIBC team for the passion they bring to work every day and their ongoing dedication to provide the very best service to our 11 million clients from our retail clients to our corporate clients. And I also want to thank our shareholders for their continued support. Thank you for joining us. Have a great day.

Thank you. That concludes today's conference call. Please disconnect your lines at this time. And we thank you for your participation.