Q1 2021 Canadian Imperial Bank of Commerce Earnings Call
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This conference is being recorded so it goes to the homes that don't have as you see.
Please standby your meeting is about to begin good morning, and welcome to the CIBC quarterly financial results call. Please be advised that this call is being recorded.
I'd like to turn the meeting over to Geoff Weiss Senior Vice President Investor Relations. Please go ahead Jeff.
Thank you and good morning, we will begin this morning's presentation with opening remarks from Victor <unk>, Our President and Chief Executive Officer, Following Victor <unk>, Our Chief Financial Officer will review, our operating results Shawn Beber, our chief risk Officer will close out the prepared remarks with a risk management update.
We are joined in the room by Cibc's business leaders, including Harry Culham, Laura Detore Attanasio and John on towers as well as my appetite is who is joining us remotely from the U S.
They're all available to take questions. Following the prepared remarks, when we get to the Q&A to ensure we allow enough time for everyone to participate I ask that you. Please limit your questions and re queue.
As noted on slide two of our Investor presentation. Our comments may contain forward looking statements, which involve assumptions that have inherent risks and uncertainties.
Actual results may differ materially with that I will now turn the meeting over to Victor.
Thank you, Jeff and good morning, everyone. Thanks for joining us and we hope you're all keeping well.
In an environment, where pandemic related challenges continue to impact the economy. Our diverse there is a diversified business model delivered a record adjusted net income of $1 $6 billion, which is up 11% from last year.
We also continued to build on our capital strength closing the quarter with a CET one ratio of 12, 3%.
Since the onset of the pandemic, we've clearly demonstrated our preparedness and our ability to manage the crisis at hand, while investing for the future.
Now, we know that the economic recovery won't be a straight line, but we will emerge from the pandemic and the CIBC team is well positioned to deliver growth as the recovery takes hold.
As we execute on our strategy, we remain very connected to how the pandemic is affecting the lives of our clients and our team.
Their wellbeing remains our top priority.
Our strong performance is being driven by the execution of our client focused strategy, which has three key priorities.
First over the past year, we've made significant enhancements to our Canadian consumer franchise.
We accelerate growth.
This includes adding new leaders and investing in our people as well as continuing to innovate and enhance our products and our platforms.
During the quarter, we made further investments to our market, leading CIBC dividend card expanding the number of categories eligible for cash back rewards and increasing the flexibility to redeem those rewards. This further strengthens our offer for clients in the important and growing every day rewards market.
Another area, that's driving the improvement of our results. This quarter is our continued momentum in our mortgage business.
The improved volumes, we delivered at the end of last year has continued into this quarter with year over year spot balance growth of 8%.
And sequential growth of 3%.
These results reflect enhancements to the end to end client experience as well as strong results from our focus on retention.
In addition, our efforts to improve mutual fund sales were awarded this quarter with record net flows.
Overall, we've made significant progress this quarter to reinvigorate our Canadian consumer franchise, which is very much in line with our strategy. We're confident that the strategic technology and talent investments. We've made will continue to support growth into the future.
Now, let me turn to our second priority, which is to accelerate the transformation of our bank.
Over the past five years, we are focused on streamlining our operations and eliminating inefficiencies to reduce our cost base.
Through these efforts, we've achieved cumulative cost savings of more than $800 million.
Importantly, these savings have been reinvested in the growth of our business as well as strengthening the foundation of our bank.
We've added resources to our revenue generating workforce in strategic areas identified as high growth opportunities.
Our technology transformation is embraced cloud services.
And machine learning as we build a leading edge data management and analytics function to support strategic decision, making across our bank.
And we've also launched client facing platforms, such as CIBC go planar, which has been performing very well since its launch in November.
And another example of how we're investing in technology to enhance the client experience is the recent launch of CIBC insights. This new feature uses AI and machine learning to provide our mobile banking clients with tailored information and insights into their spending to help them make more informed every day financial decisions.
We're also continuing to focus on risk mitigation activities, such as cyber security and anti money laundering, which are fundamentally important to protecting our clients and to protecting our bank.
In fiscal 2021, we expect to realize over $260 million of incremental run rate cost savings and we will strategically reinvest most of it back into the business in support of furthering our strategy.
Our third strategic priority is maintaining and growing our resilient north American commercial banking and wealth management businesses and our capital markets franchise.
On both sides of the border or commercial banking and wealth management businesses continued to benefit from deep client relationships and a strong culture, we've built around referrals, which is driving high quality loan and deposit growth.
As well our award winning investment performance Coffee Cup.
Coupled with our emphasis on advice is supporting strong fund flows in both Canada and the United States.
And our capital markets franchise continued to deliver record results driven by robust client activity on the key markets, where we operate.
Equally corridor business strategy is our bank's commitment to.
To sustainable economic growth.
This is fundamental to our long term strategy and to our purpose and it guides everything we do.
Over the past few years, we've made considerable advances in our ESG strategy and our efforts were recognized by three third party organizations this quarter.
First CIBC was named to the Dow Jones Sustainability Index in North America for the 16th consecutive year.
Second we've been included in Bloomberg's gender equality index for the sixth consecutive year.
And thirdly, we ranked among the top tier of global banks for climate change actions by CDP, which is formerly known as the carbon disclosure project.
We're pleased to be recognized for our commitment towards building a more sustainable future and we will continue to strengthen our commitment to sustainability as well as further our support for our corporate clients in this area going forward.
In closing February as Black history month, and I'm pleased to share with you that we are doubling our annual investment in the next generation of leaders and change makers from the black community working in consultation with the CIBC Black employee network.
And our external partners, including the Black North initiative. This increased investment will be earmarked for education.
Skills training and Mentorship initiatives as.
As well, we've launched a new banking program for black on businesses in Canada designed to remove barriers for entrepreneurs from the black community.
These efforts are all part of our commitment to an inclusive economy, which is key to our long term growth now with adding on to turn the call over to Raj for a detailed view review overview of our financial results over to you Roger.
Thank you Victor and good morning, everyone. Starting on slide six this morning, we reported diluted earnings per share of $3.55 for the first quarter of 2021, excluding the amortization of acquisition related intangibles adjusted EPS was $3.58.
The quarters results highlight our progress against the key objectives, we set out at the onset of the COVID-19 pandemic, we've demonstrated the resilience of our balance sheet and continued to build our capital and liquidity positions over the last year.
Our Q1 CET one ratio of 12, 3%, an LCR of 142% remained significantly above regulatory requirements. This quarter helped by constructive markets and strong execution of our strategy. We achieved record results in an adjusted ROE of 17, 2% we are on track to deliver pre.
The pandemic levels of profitability as the environment normalizes and.
And finally as Victor mentioned, our financial results are starting to reflect the improvements we've made to our competitive position across our businesses through the focused strategic investments.
Turning to slide seven the balance of my presentation will refer to adjusted results, which exclude items of note.
Record pre provision pretax earnings of $2 3 billion and net income of $1 6 billion were up 5% and 11% respectively from the prior year or 14% and 28% from the prior quarter. These.
These results reflect the positive momentum in our business as well as tailwind related to strong markets and lower credit losses.
Revenue of 5 billion was up 8% sequentially or 2% year over year benefiting from robust capital markets and wealth management flows continued strength in our commercial businesses and accelerating growth in Canadian personal banking. These factors were partially offset by reduced client activity due to continued economic restrictions in some of our key markets.
And the impact of lower interest rates.
Fences were comparable to the prior year as the benefits of recent efficiency initiatives offset ongoing strategic investments and higher revenue driven variable expenses. We remain committed to the continued transformation of our cost base to find long term investments against our strategic priorities consistent with prior guidance. We expect this to result in.
Net expense growth in the low single digit range in fiscal 2021.
Before I review the results of our business segments I will touch on some of our key revenue drivers slide eight highlights the drivers of net interest income, which accounted for over 50% of revenues in Q1.
Excluding stronger trading activity NII continued to improve sequentially and was comparable to the prior year, a solid volume growth on both sides of the balance sheet offset the continued impact of lower rates deposit growth remained robust across our business. We saw improved growth in personal on mortgages in Canadian commercial lending.
And we maintained the momentum in other credit portfolios.
Total bank NIM declined two basis points sequentially due to changes in both individual business margins and mix.
Canadian personal and commercial NIM declined five basis points from the prior quarter due to changes in asset mix and the impact of lower interest rates, partially offset by strong deposit flows.
Going forward, we expect continued pressure on P&C nims as we absorb the full impact of recent changes in interest rates and further changes in asset mix.
NIM in our U S segment was up 23 basis points relative to last quarter benefiting significantly from loan prepayments, including P. P. P forgiveness as well as growth in client deposits consistent with prior guidance, we anticipate core margin in this business to be relatively stable and expect incremental benefit from ongoing prepayment activity.
An elevated deposit levels to normalize later in 2021.
Assuming we see the economy open back up in the back half of 2021, we anticipate positive momentum in non trading NII as volume growth offsets ongoing margin compression from lower interest rates.
Turning to slide nine noninterest income of $2 1 billion was up 17% from the prior quarter and 1% from the prior year. The strong sequential performance was driven by robust transactional and market related fees across all of our business segments.
Wrong market related revenues reflect robust client activity in capital markets as well as market appreciation and strong flows in our wealth management, while we continue to see improvement in some transactional fee categories from last year's levels activity in cards and payments continues to be below pre pandemic levels as economic restrictions are lifted we.
By client activity and transaction fees to continue recovering.
Turning to slide 10, our capital position continued to strengthen ending the quarter with a CET one ratio of 12, 3% or 12, 1%, excluding the ECL transitional benefit strong internal capital generation at a 37 basis points. This quarter and was partially offset by higher R. W. As from organic growth.
Average LCR of 142% was relatively stable from the prior quarter and well above the 100% regulatory minimum.
We remain well positioned to deploy our balance sheet resources in support of our strategic growth initiatives with over $8 billion of capital in excess of the regulatory requirement.
Slide 11 reflects our personal and business banking results, where we continued to see positive trends as we revitalize the business net income for the quarter was $652 million up 13% from last year helped by sequential improvement in pre provision earnings as well as lower provisions for credit losses, while down three per.
Sent from the prior year revenues of $2 billion improved 1% sequentially.
Solid volume growth on both sides of the balance sheet and the ongoing recovery on noninterest income begins to offset the economic impact of the pandemic.
Expenses of $1 1 billion were comparable to the prior year and up 1% from the prior quarter, we anticipate expense growth to accelerate as we continue to invest in our frontline digital capabilities and client offerings in this business.
Moving on to Slide 12, net income in Canadian commercial banking and wealth management was $354 million up 5% from a year ago, driven by accelerating client activity across both commercial banking and wealth management commercial banking revenue was up 1% from a year ago, driven by higher fees and strong deposit volume.
Both of 26%, which more than offset the impact of lower rates.
This quarter also marked the return to sequential growth in commercial loan balances, which were 2% higher than the prior year.
Wealth management revenue was up 4% from the prior year, primarily driven by higher fee based assets as a result of both market appreciation and robust client flow increased noninterest expenses were impacted by the higher revenue performance.
Slide 13 shows the U S commercial banking and wealth management results in U S dollars net.
Net income of $155 million was up 12% from the prior year as we continue to grow market share through increased breadth and depth in our client franchise.
Revenues were up 15% due to strong client origination activity, which drove growth in client balances assets under management and fees.
Spite moderating in recent quarters, partly due to P. P. P. Forgiveness average loans grew 10% from a year ago, while deposit growth of 42% continues to outpace loans.
In our wealth business solid AUM growth of 20% benefited from both client flows and market appreciation non.
Noninterest expenses were down 2%, reflecting the results of our efficiency initiatives and the continued impact of pandemic restrictions on business development activity.
Slide 14 covers capital markets, where we continued the recent momentum delivering record results with solid contributions from across the business net income of 493 million was up 30% from the prior year, largely driven by pre provision pretax earnings, which increased 37% sequentially and 27 person.
Since year over year.
Revenues of $1 2 billion were up 17% from the prior year, driven primarily by growth across most global markets businesses as well as increased activity in corporate and investment banking and our direct financial services business non.
Non interest expenses were up 6% compared to the same quarter last year, largely due to higher performance based expenses.
Slide 15 reflects the results of the corporate and other business unit net loss of $59 million in the quarter compared to net income of $11 million in the same quarter last year. The segment's revenues continued to be impacted by pandemic related headwinds in our Caribbean business as well as elevated cost of liquidity reserves in Treasury. We expect these factors to persist.
True 'twenty 'twenty, one and moderate when the recovery period takes hold.
Expenses in this segment are impacted by the timing of enterprise strategic initiatives and we anticipate an increase later in 'twenty and 'twenty one as we continue investments across our bank and.
In conclusion I'd like to reiterate three key messages one the strength of our balance sheet continues to provide us with significant flexibility to support our clients grow our business and return capital to our shareholders, while maintaining the resilience to absorb any future headwinds.
We remain well positioned to continue creating value for our shareholders in the immediate term and to return to pre pandemic levels as the environment normalizes and three while we are pleased with the early results from our improved competitive position, we will continue to invest in our bank to build on this momentum.
With that I will turn the call over to Sean.
Thank you for ACH and good morning.
And our first fiscal quarter of 'twenty and 'twenty, one we've seen positive signs that point to an improving economic outlook and economic recovery in the second half of this year and into 2022.
Credit performance this quarter was strong and better than we expected due in part to continued low insolvencies and ongoing government support programs.
That said and consistent with our views last quarter, we expect to see impaired losses increase from here and peak in the middle of this year before reducing again over subsequent quarters as economic performance improves.
Overall government support programs continue to help blunt the economic impacts of the pandemic and our clients continue to exhibit disciplined behavior in view of the economic uncertainty.
Turning to slide 18 provision for credit losses was $147 million in Q1 down from 291 million in the prior quarter with lower provisions on performing loans, partially offset by an increase in impaired loans.
Provisions on impaired loans of $236 million was up $58 million from last quarter, largely due to higher provisions in both retail and business and government loans.
In Canadian personal and business banking this quarter saw a sequentially higher provision and personal lending from the unusually low levels in Q4, partially offset by lower write offs experienced in credit cards.
In our business and government portfolio, we experienced higher provisions in the utilities sector of our capital markets business and in CIBC first Caribbean, partially offset by a small decrease in both U S and Canadian commercial.
This quarter, we have a provision reversal of $89 million in our performing portfolio.
Approximately one third of this reflects the net transfer of performing provision to impaired provision for loans that became impaired this quarter.
And the balance of the reversal reflects our improved outlook and portfolio movement.
While credit outperformed our expectations. This quarter, we continue to expect additional negative credit risk migration across the portfolio over the next few quarters and for impaired losses to peak mid year.
Earnings impact from these losses are expected to be somewhat offset through the transfer of performing provisions to impaired losses.
Turning to slide 19, we provide the details of our allowance coverage by line of business, our allowance coverage ratio remained relatively flat quarter over quarter.
We continue to feel comfortable with the current level of coverage and remain focused on monitoring the credit quality of our portfolios for potential future adjustments.
On slide 20, we show our credit portfolio mix, which remains well diversified and consistent with last quarter.
Nearly two thirds of our outstanding loans are to consumers. The majority of which are mortgages in the balance of our portfolio is in business and government lending with an average risk rating for the portfolio equivalent to a triple b.
Again this quarter. We've included in the appendix the additional details on specifically affected industries, which are performing in line with our prior outlook and expectations at this time.
Slide 21 provides an overview of our gross impaired loans gross impaired dollars were up mainly driven by business and government loans. The increase was mainly in the real estate on construction sector in the U S.
While new formations trended higher this quarter. This increase was expected and we've seen some accounts affected by COVID-19 moving to impairment.
Slide 22 shows the net write offs and 90 plus day delinquency rates of our Canadian consumer portfolios.
Over the past two quarters, we experienced lower insolvencies and flow write offs as a result of government support programs and bank relief offerings.
Flow write offs continue to remain low in Q1, while in solvent insolvencies showed a slight increase off the lows in Q4. Both of these movements are in line with the Canadian National trend.
Delinquencies in both credit cards and personal lending increase this quarter in line with our expectations.
As we've discussed on prior calls in fiscal 2020, we proactively enabled payment deferrals for a portion of our credit card clients, who were already showing vulnerability at the onset of the pandemic.
The increase from the 90 plus day delinquencies. We saw this quarter is driven largely by clients who have exited the bank relief program and continue to have financial difficulties.
Those that remain delinquent well write off at 180 days, which will occur in Q2 and will result in higher losses, and we've reflected those expected higher losses in our performing provision.
In closing, we had strong performance across our credit portfolios in Q1 and better than we had expected at the start of the fiscal year.
Subject to usual caveats around the uncertain environment based on what we've seen in our current outlook, we expect impaired provisions to trend higher in peak in the middle of 'twenty 'twenty, one, but expect to outperform our guidance from last quarter and.
And finally, we remain comfortable with the quality of our portfolios and we will continue to be both prudent and responsive to the performance of our portfolios as we determine our allowance levels in coming quarters I'll now turn the call back to the operator for questions.
Thank you.
Press Star one at this time, if you have a question.
And your first question is from John Aiken from Barclays. Please go ahead.
Good morning crashed the expense performance in the quarter was so it was quite good from a from my perspective I was wondering given the fact that you gave us some indications that you expected expenses to increase particularly the domestic P&C I think you said you expect to accelerate what it what it look on what are you budgeting for in terms of operating.
Leverage through the remainder of the year.
Sure good morning.
I'd be happy to cover that and so a part of the color. We wanted to give a was that this quarter was a particularly good quarter.
The expenses being flat and there's a number of reasons for that that we don't think we'll we'll continue in that way. So one we had some timing differences as we mentioned so this is related to the acceleration of investments against our strategic priorities and as we've planned those initiatives out some of those activities are increasing and the P&L impact from that.
It will be increasing through the year. The second is Q1 itself has a is acute on a year over year basis over last year as a benchmark that's pre pandemic and so on that basis. Once we get to Q2 and later in the year. We didn't have those decreased expenses due to decreased travel business development advertising as the restriction set in.
So on a year over year basis, those are tougher comps and so those are the things that I would watch out for and when you put all that together what we're reiterating here is that that low single digit range for core expense growth. We think is the right level, we're committed to continuing to find investment opportunities and we're committed to find initiatives on efficiency.
He used to fund that and at the same time, we were seeing some pretty good revenue performance. So I'd say that core we think is low single digits and that can get pushed up our if the revenue linked expenses end up higher if we continue performing beyond our expectations. So that's the guidance I would give on expenses and on the operating leverage.
Year for operating leverage we're working towards a positive operating leverage that are that we can sustain I think this quarter's operating leverage as I spoke about if you go through that dynamic on expenses I wouldn't look for that to sustain through the rest of the year, but as we come out of the end of this year and accelerate on the revenue side as the economy opens up.
We're looking for that positive operating leverage.
And just as a quick follow on when you talk about the strategic initiatives spending as we drill down into technology spend.
Would you say that your technology spend is accelerating maintaining the same or decelerating.
So we are accelerating on the technology front and Theres a number of things in that its defensive investments for the bank its offensive and digital capabilities on the sales and service side its across the board, but we do see when we talk about that transformation of the bank, we see technology, playing a big role in not so there's investments on the technology side.
And that will help us take out non technology side and on.
On the technology side expenses and get more efficient in that way.
Thanks, Rich I'll requeue.
Yeah.
Thank you. The next question is from many common from Scotiabank. Please go ahead.
Hi, good morning, Sean it it sounds like you're talking about impairments, increasing but at a slower pace than what you thought when you talk to us from Q4, I'm wondering if you could just translate that into the.
The guidance you gave on the PCL ratio the PCL ratio on unemployment I think you've talked about 40 basis points.
It was 22 this quarter. So I'm just wondering what the outlook is are you still hold to that 40 or is it lower in your minds.
Sure Good morning Manny.
So our credit outperform this quarter as I mentioned, particularly in the retail side.
It's a combination of government support.
On the bank relief programs that we had instituted last year prudent client behavior and also our activity in terms of proactively reaching out to clients who have shown.
As shown early signs of stress. So we still expect to see the peak in the middle of the year, but subject to the uncertainty a caveat it's difficult. We're now looking at our our impaired loss ratio coming in towards the mid thirties, so that would be down from where we were in Q4 and that's really driven.
And by a number of elements the benefit of another quarter of data what we've seen in the portfolios and our updated outlook.
Thanks for that.
Thank you <unk>.
Question is from JP on the Shane from National Bank Financial. Please go ahead.
A question on excuse me the.
The mortgage business has been on fire for everybody and I C 17 billion of origination.
I think that's the highest ever for your bank.
And a lot of that from the pent up demand phenomenon buying second homes and stuff like that I'm. Just wondering is there a.
Because we were missing the the demand from Canada, the immigration trends over the past few years. So is there a maybe a big drop off in <unk>.
On the mortgage business that you could see next year, if immigration levels don't return on all of their pre.
Pre COVID-19 level.
And this isn't just CIBC specific obviously.
Our bone sure Gabriel.
I'll take that question. So yes, the market remains hot I like to believe that the good performance you're seeing from CIBC also has a lot to do with on a lot on.
Our team members have been putting into turning our performance around.
I would tell you from our side from an outlook perspective.
We're continuing to expect high single digit mortgage growth.
So we would expect that for the remainder of 'twenty 'twenty. One we do expect immigration at some point is going to open back up too, which will help our we're mostly focused on 'twenty 'twenty, one and I'd say that the rest of the year is looking good.
That answer your question, yes, so I.
I guess.
On the this year.
I think we feel pretty good but.
So from immigration doesn't come back in in the next year or two.
Gabriel it's Victor here.
I don't know, where it's going but I'm pretty certain that the government's announced a policy to increase immigration to well above 400000 people.
I think that that will continue to provide a tailwind for us are.
The important thing to note about our mortgage growth is we've closed the gap from where we were a year ago. Just like we said we would do if we did that through investments in technology investments in our mobile advisor force and continuing to be competitive in the marketplace and we've won back share on a relative basis over this past year.
Year and I fully accept expect that our team will continue to leave that that trend and as Morgan is immigration opens up we will continue to capture more than our fair share.
Certainly it's been a good turnaround good performance on that business. Thanks.
Yeah.
Thank you Phoenix question is from Ebrahim I'm, putting them on that from Bank of America Securities. Please go ahead.
Okay.
Good morning.
I guess, just moving mainly on the commercial side.
P S that'd be a demand probably slower in the first half of the year, both in Canada and the U S.
Can you just talk to us in terms of your view of your.
Our competitive position on both markets on the commercial lending side.
So in the U S that would be southern retirement of fly does that change anything in terms of strategically.
There may not do in the U S.
Good morning, Ebrahim. So couple of things there are commercial businesses are performing well.
In terms of both deposits and loan growth. The U S business is performing particularly well because the economy is more opened up than it is in Canada with the Canadian economy opening up we would expect our performance to continue to capture again more than our fair share on that growth in terms of.
Personnel changes Larry became share last year might capitate, he's just been running the business for a year.
It's all well and handle area decided to retire he's a good friend of the bank and you can read the press release, you'll be helping us from the shadows in his retirement as we continue to grow the business, but to give you more color on our commercial banking businesses. Let me start to start off with John who tell us for Canada, and then we'll hand, it off to Mike appetite in the U S.
So good morning, and thank you Victor.
I'd start with saying that our clients I'm, probably more optimistic than I've been in a few quarters, because our clients are more optimistic and talking to them I think the speed of the U S recovery has surprised over the last few months and most of Canada is kind of mid market and even smaller businesses DAU growth was coming from the U S. So entrepreneurs are off.
They see the U S opening they're ready to go.
Couple that with a private company M&A is pretty reasonable.
Good real estate clients are active.
We're prudently following them.
Utilization rates have started to kind of bottom out and they've been on a drop for probably four quarters for sure. So you combine all that with the investments we've made over the last year in people and technology.
We're ready we're ready to support our clients through difficulties in March and April were ready when they are ready to grow and we're looking forward to getting back and calling on our prospects. It feels it feels better than it did a few months ago.
Mike can I pass it over to you.
Thank you John well on the U S. We continue to see healthy loan growth from our clients, which is moderate.
Again this process on the first round on the Triple P loans.
On a significantly over half our loan generation came from our new offices or new products or new initiatives that reflect the investments of the past several years and we added 210, new strategic clients in the past quarter alone in fact, we could do more.
Well, we're not compromising on our margins or are on our credit.
Also wanted to add that.
You know the buildout of our wealth and private bank.
Banking platform.
<unk> has a very healthy will fall.
Referral numbers between our commercial bank is also starting to come on line and helping fuel growth and in all these areas. So you know looking forward we have a strong.
Pipeline.
Again moderated by Triple P. A forgiveness, but we do expect our growth and our performance to continue into the second half of this year.
Our clients continue to come on line.
On a private equity starts to accelerate the deployment of the large amounts of cash.
They have available for for transactions.
Thank you.
Yeah.
Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead.
Good morning, a quick question on small business lending I know, it's a small portion of your overall lending, but we are seeing what the skies and surprisingly at least a pretty good spike in small business lending and also.
Sorry, perhaps connected an increase in credit fees.
Could you just talk to what's happening in small business lending at the bank and if it in fact it is connected to the increase youre seeing in credit fees.
Okay.
Hi, Mario its Laura it's a bit hard to hear the last part of your question I believe it had to do with what we're seeing in.
Our small business banking, yes, so I'd tell you, we're not seeing a lot of lending or requests from.
Our client acquisition or a deposit growth perspective, though that is actually looking positive no a lot of that has to do with the various government funding programs that are in place and so deposit growth has actually been strong for us its been up about 25%.
Year over year, what's interesting is we're seeing or accounts open activity is actually up quite a bit at about 50%. So we see I would say small business are managing very prudently holding on to their boilers and monies they receive from the <unk>.
Government as many wait for the economy to reopen and so we think theres a measured opportunity on the business lending side.
As things start to to open up again.
Okay, I would just observe that it was up sequentially, but again from a small base, maybe if you could just turn to credit fees, then if anyone could speak to.
What has happened on the last couple of quarters of credit fees, they've moved materially higher and.
With loan growth only now showing some momentum I was a little surprised to see them moving credit piece back to well above pre pandemic levels.
Hey, good morning, Mario Troche, Oh, I'll I'll take that on the credit fee side and there is a number of things in that credit fee line that are driving it one of the things I would point out is is that there are the b a related activity and so when you see clients in the commercial bank, particularly in Canada as.
They grow out there or they draw their facilities via D. A's and that does tend to skew by industry. So on the real estate side tend to be utilized more.
It shows up there rather than showing up into NII. So that's a big that's a big part of it when you look at the credit fees. The other side of it is syndication fees and so in our U S business. We continue to have very strong syndication activity that is driving that as well and so when you look at that quarter over quarter for.
So it was 22 a year over year of 33 million a large part of that is coming from those two items right. The b as in commercial banking about half of the year over year number U S commercial about a quarter of it on the rest of it is sort of on the corporate banking side with fees on on some of the lending and standby facilities that had been.
Put in place.
Thank you that's helpful. Yes.
Yes. Thanks.
Thank you. The next question is from Doug Young from day Sheldon Securities. Please go ahead.
Okay.
Hi, Good morning, just maybe starting on credit just a decent bump in the commercial non gross impaired loan formations I think you mentioned real estate, but it looked like there was some on oil and gas and education utilities, maybe you can just unpack a little bit more about what youre seeing.
Thank you.
Sure. Good morning, Doug. So we did see a handful of accounts go impaired this quarter nothing out of our out of our.
Our expectations in terms of how things have been progressing there where I am.
Couple in the real estate sector. There were a couple in the utilities sector, they're a bit chunky. So they they would have moved the gross impaired loan number up this quarter you've seen it.
Reflected now in our impaired or impaired provision number and oh, they didn't they don't kick off, particularly large losses are impaired losses are continuing to perform well quarter over quarter and by historical so.
I would say normal portfolio activity, a handful of names that are contributing to that and not outside of our expectations.
Okay, and then if I can just sneak a quick one on just on U S. Nims.
They were much higher than what we expected it seems like that and this is across the group not just for yourselves, but.
Pete Triple P repayment activities, having quite a big impact on Nims can you quantify what that would be.
For the quarter.
And how you see that evolving over the next year.
Yeah, It's certainly a good morning, it's Raj.
I would say the core dynamic in the U S. NIM continues to be on what we expected and are and what we had guided to and so just quickly to cover that and I'll get specifically to your question on the second so on the core dynamic we as you know have in the high 90% of our assets there are LIBOR linked.
And so our LIBOR didnt move much this quarter it was down about a basis point. So the loan yields are pretty stable on the spreads on the loans are pretty stable. If you look at the deposit side. We've continued to see growth and we've continued to see the repricing activity. So we had said that we expect the core dynamic as we replace deposits to be slightly up but net of those two things.
Pretty stable to slightly up and so we saw that so you see on the slide we had the deposits nine basis point help that we had two basis points roughly of that nine was that repricing and the rest is the growth in and we've continued to see that good growth on deposits on the prepayment side, you're right that contributed we had on the slide 14 basis points.
Right and that's not just the PPP program. So we had the start of prepayment of PPP. This quarter and that was a just a little bit over half of that 14 basis points number.
I'm from the PPP prepayments this quarter.
So going forward, what do we expect as I said in my remarks, we still think that core dynamic is the same stable to slightly up we think deposit levels will stay elevated for a while here and may continue to go a bit further but are those are going to decline later in the year as deposits start getting deployed for growth in our client's balance sheets.
And then on the prepayment side, there's going to be some noise right. So we expect a P. P P prepayments or forgiveness to really accelerate here going into the next quarter or so and then we're gonna have the second wave of the PPP that has already started coming in so in the short term I expect some continued activity there that will help the NIM, but the way I would think about it is.
If you strip that away that core dynamic is stable to up as deposits growth.
Helpful. Thank you.
Thank you. The next question is from Sohrab <unk> from BMO capital markets. Please go ahead.
Okay. Thank you.
Victor maybe a bit of a fad.
Higher level management question, it looks like cash.
I mean, you obviously have an investment schedule you've got some plans to make the investments this year, probably next year. It looks like it's hard it's obviously hard to make the call but.
Feels like it's going to be.
An abnormally low for the industry.
And here if you will is there an opportunity is there any discretion.
That you can around the timing of future period expenses.
Should he be loaded into this year.
To allow for a better growth trajectory into 2022.
Sorry, that's a great question you always ask the big quick picture questions, which I. Appreciate I think it's important to note where we've come from.
I look at the bank over the last several years and what we've been able to do with our Nix ratio, what we've been able to do to transform our businesses from a technology standpoint, what we've been able to do from deploying capital and create a diversified durable bank that's prepared for growth irrespective of the environment. That's ahead of us and better.
Relative.
Competitive performance than we've delivered over the last year, let's just say as.
As we look at the year ahead. The plans that we have the investments that we're making we're very comfortable that that will continue to deliver superior performance and all of our core business lines. If we see the economy pick up at a more rapid clip than prognostic prognosticators are projecting we would have.
The ability to continue to invest at maybe a more rapid clip, but I'm very comfortable with the investments that we're making today in the backbone of our technology and the client user experience of our technology and on our product portfolio and I believe that what we have today, Sarah will deliver that superior performance you saw.
Seeing that across every single business line at CIBC.
We said that we're going to grow at market or above market and youre seeing it everywhere, it's not only emerging this past quarter. It's emerged in the last couple of quarters, and I think youre going to be able to see that in the quarters ahead.
Okay. Thank you I'll requeue.
Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead.
Good morning, perhaps you talked about our overall expenses and an.
And increases on a on the Canadian side, but on the U S side.
<unk> expenses were down 2% year over year and revenue growth was up 15. So how do you kind of view expenses on the U S side.
Specialty calling up reduced business development spend but I.
I think John commented that you actually added 210, new clients in the quarter. So maybe kind of talk about that comment as well.
Sure. Good morning, Scott happy to take that and I can also pass on afterwards to Mike if he wants to add anything on what.
What happening in the business, but at the core dynamic in the U S is still that we are growing the business. So we are hiring on the front lines. We are developing client relationships and we are serving our clients. Some of what has happened though is the way you do that has changed since the pandemic restrictions have come in and so that's what you're seeing there.
There is some of the client development activities net travel.
The entertainment and so forth the advertising sponsorship events all of those things have taken a bit of a back seat and so the way client development is done now is different we haven't stopped we continue to cover our clients and we continue to invest in the business as well. So the net of those at this point is providing a benefit but we do see expense growth.
So overall growing this year, particularly as we see the economy opening up and that client development going back to being done and the way. It was always done and you know it's going to be in the back half of the year hopefully at the U S continues on the trajectory it is yeah.
On a year over year basis, youre going to be comparing a period of restrictions on travel and so forth to period with no restrictions and so we do expect that to accelerate and on a net basis like I said expenses being up year over year, but maybe Mike can give you a bit more color on client development.
Yes, Thank you rach.
Just to go back to.
Our basic approach in the U S. We are we are a relationship oriented bank and bought the commercial banking area and in the in the wealth area as well and the team has done a fantastic job over the course of the past year.
Bringing in new strategic relationships in large part through referrals from other parts of the of the of the U S. SBU on our Canadian capital markets, our colleagues and so we have done a good job we have expanded on those on those are significant.
Client relationships, but at the end of the day, because we're a relationship oriented bank and we have to get back out and see our clients. So that's what we're talking about in the back half of the year.
And again sitting down with our clients talking about new business, new business opportunities and also going out and prospecting for new clients again I'll go back to the build out of our private banking network in the U S, which has had a spectacular.
<unk> success, and we can see hope to continue to build on on that and all of that is going to.
Entail us going out and visiting with our clients. So that's that's why we talk about increase.
Increase in those types of expenses in the back half of the year.
Alright that makes more sense to me now thank you very much.
Thank you.
Next question is from them on a per shocks from Cormack Securities. Please go ahead.
Thanks can you comment on what Youre seeing in terms of narrowing the performance GAAP on a domestic mortgage renewals. It looks like to me this quarter a lot of it could have just been due to strong originations, but I'm just looking for an update on I think other performance gaps on the resin side that could cause your mortgage growth actually outperformed.
<unk>.
Hi, good morning Lamar.
I'll take that one.
As I said earlier I think a lot of the you know the changes that we've made Victor talked about the investments that we made to our mortgage platform.
We've also put new people in roles. We've made a number of process improvements a lot of things that have helped to increase our advisor productivity and our turnaround times. So not only are we seeing an increase in new originations that are up just under 100% on a year over year base.
We're seeing that we're doing better on the client retention front. So we're being more proactive with our reach out she's got increased points of contact all aimed at better anchoring our clients. So we're doing better on client retention.
Say a year ago, our retention numbers, we're sort of in the 80 plus percent mm area and now we're at retention.
We're just at 90%. So we are making I would say really good progress. We've got some strong performance indicators that we track weekly to ensure that we're headed in the right direction. So.
So yes, the fact that the market is up and the market is hot is certainly helping its it's what we're seeing in the industry, but.
But we are making changes to how we do things in such a way that I believe that we're going to be able to deliver I'm gonna stay more consistent and sustainable performance over the long term.
Does that answer your question. It does it does thanks I'll re queue. Thanks.
Thank you. The next question is from Darko <unk> from RBC capital markets. Please go ahead.
Hi, Thank you good morning, and I apologize, if you'd kind of gone over this my phone kicked out.
While you were doing your opening remarks Victor so.
Again, I apologize if you've already covered this but my question is theres two questions. The first one.
And they're both related.
The first question is what happens with first Caribbean now.
Is it still for sale would you consider IP only it again.
And if not do you have to make some investments there.
And what's your expectation there leads into the next part of the question, which is with corporate.
But I'll leave that second question.
For as a follow up after I hear your answer to this first one okay. So let me let me take the first one sorry about your phone service Darko.
[laughter] first Caribbean as you know we highlighted the complexity of the regulatory review process earlier to all of you and.
You all know that the regulator made the decision to turn down the change in control transaction. There was a you know and I think it's on <unk>.
Affected by the Covid pandemic, and the particularly acute impact on the economy and the Caribbean region.
Our plan was to sell it to them.
Regional investor to transform the bank and to get more regional scale.
Our alternate plans today, which was always there was always a plan b for US is to continue to transform our bank. It's a good franchise, we've been in there for 100 years.
We have a plan to improve performance improve profitability and make it the durable franchise for the long term that I know it is I'm going to pass it onto hurry because he oversees that business with our team down there and he can shed some additional light and then I'll take your second question.
Thank you Victor Yes, Hi, Darko good morning.
As Victor said, we have a long history in the Caribbean, we have a strong team.
That's leading our business in the region.
Great client franchise I might add and so now the focus is truly on optimization of our business and really positioning CIBC for a post COVID-19 world successfully and I believe that we have the path forward now in execution to make that happen. So I'm rather optimistic on this team and on the client franchise and Thats the plan.
As Victor said upon on the path forward.
Okay, great. Thank you for that and my second question you know it takes first Caribbean and really what went on.
As trash about as agreed with the corporate segment. There's a couple of things in there that I'm curious about one is you do mentioned theres going to be higher expenses because of strategic enterprise, but can you give me. An example, I mean why would corporate.
How is a lot of the strategic spend why wouldn't the strategic spend be pushed out into the segments that are actually.
Doing the spend and then secondarily, so on Mike and Mike can take I mean, I've always maybe erroneously thought that you've tried to work hard on the path to get corporate and other down too.
Minimal sort of loss, but it sounds like what youre, saying is the loss in corporate will be larger from here and maybe you can give me a hand with the model.
If it's if it if we're not getting more revenue from Treasury and first Caribbean is it purely just higher expenses from here on in and is the loss going to be similar to last year's on a quarterly run rate of losses in the corporate segment.
Sure Good morning, Darko happy to take that and Okay. You you're right on the philosophy, we've historically guided to the segment is a small loss, but I would break that down and say there was a number of different components to it that happened to come up to that so number one is the first Caribbean business and in that.
The business so overall.
That's a profitable business the profitability of that business was in the segment Treasury, we manage treasury not as a profit center. So we managed treasury as a utility and so we aim overall for net around zero profitability for Treasury.
And the reason for fluctuations, it's really always just noise noise because of market factors and transfer pricing not catching up with the speed of movement in rates and so forth things like that but I would say noise that normalizes over time, that's why treasury has ran historically on the plus or minus range and so what ends up happening is you've got the expense side. Then last is the third.
Ponant and historically, what we had is the profitability of our first Caribbean actually offsetting almost entirely the expense side of what's not allocated and stays in corporate and other and that's why you had the result that you had but the dynamics of each of those components is changing right. So if we look at the expense side. It is accelerating and just to give you some of the examples of the types of things.
You're right most of the things that are directly attributed to businesses, we allocate out there as some of the other corporate and other expenses that are related to enterprise kind of head office and and overhead type costs that stay there that aren't allocated in the normal course and when it comes to project. There is enterprise wide initiatives, whether it's through a defense type technologies.
And so forth that cut across the entire enterprise. Some of those types of things are kept in a center or anything else that we deem as not directly sort of drew.
Driving business results those kinds of things would be staying in a in a center to some extent. So that's that's what's driving that and Anadarko and so when we look forward I see that accelerating a little bit as we go through this you're not nothing drastic, but accelerating a little day and then they decline.
And those treasury and F CIB that has happened.
It's going to be with us for a little island. So net net that's going to drive the loss in this segment a little bit higher than where it's been again I think you had you had last quarter at 110 this quarter at 68 somewhere between those two is where I would guide you as a range. So this isn't a big shift we're talking about.
But it's driven by those two items on the revenue side being a bit more unusual than they will normalize over time.
That's great. Thanks, Greg Yes, that's very helpful. Thank you very much.
Thank you. The next question is from Nigel D'souza from Veritas. Please go ahead.
Thank you good morning, I wanted to touch on deposits and it sounds like you expect.
Deposits to normalize and to give back some of the benefit youre seeing on margins but to.
Offset that with loan growth, so I'm trying to get a sense of timing do you expect the bulk of that loan growth sales.
Lag deposit normalization or do you think or do you expect loans to.
I'll pick up and grow at the same time deposits normalize.
Okay.
Let me take a crack at that Nigel good morning.
I expect that as the economy opens up.
E deposits.
Okay.
And I would expect that our personal and business bank, we will see a uptick in.
On credit card balances as consumers begin to spend while continuing to maintain and grow market share in the mortgage segment.
I expect that the notable changes in our commercial bank, particularly in Canada.
Economy opens up we'll see an uptick in loans.
And the corporate Bank I think we will continue to behave as its behaving today corporate clients are tapping the debt capital markets and we're participating meaningfully there.
There are banks that kind of it.
I think at the same level that they that you've seen over the past year. So I would see the most notable impact in the credit card balances and I would see that also on the Canadian commercial bank as the economy begins to open up.
Got it I appreciate the color.
Thank you. The next question is from Mike Chris Van Wyk from Credit Suisse. Please go ahead.
Hi, Good morning, a question probably for lower on maybe Raj I wanted to talk about the Canadian P&C NIM and thanks for the added color. It's on slide eight of your presentation and I guess when I look at the chart on the bottom left what surprises me is the magnitude of the impact from business mix and I'm guessing that's the mortgage growth that we're seeing that's coming back and so.
Going back to maybe Laura's comment earlier, where you do continue to expect to see that gravitate toward industry levels.
You're still about 200 basis points below your peers in terms of year over year growth and so if I was to normalized rates and maybe maybe assumed the rate impact of five beeps goes to zero and deposits growth maybe doesn't provide the boost that you had this quarter sequentially.
Is it sort of indicates.
Correct me, if I'm thinking about this.
The wrong way, but you could see some pretty.
Sizable margin compression just on business mix alone at the other two factors sort of wash each other out.
Could you could you may be see like a 10 basis point decline over the course of the rest of this year, maybe on an aggregate basis and that is that too high or like what would mitigate that business mix impact that you continue to see this book growth.
Yeah sure. Thank you.
Raj I'll start and then Laura maybe provide color on the business. Afterwards, so you've touched on some of the key elements. When you look at the margin and we had it right. There on the slide it's impacted by business mix and it's impacted by rates and it gets helped by deposits because as deposits grow you get the NII, but you don't have an increase in your interest earning assets. So some deposits.
You have quite a bit of leverage on NIM because of that dynamic.
If I go through each of those components number one rates you touched on it. So we knew rates, we're going to be a headwind on this business. We had said in the past that rates alone is in the low single digit range. If you will on a quarter over quarter basis, as we continue to track through the repricing over the longer term part of the balance sheet.
And that dynamic is largely the same it's a little bit better now I mean, you've seen quite a bit of steepness you look at the three to five year swap rates either materially up I mean, they're up even more than 10 basis points since quarter end to now so that helps so that takes a bit of a staying off but that's a few basis points that maybe it's a little bit lower now than what we expected the other element of races.
The short term rate repricing and that happens fairly quickly. So after Q2 Q3, when we did see those rates drop there is I'd say about half of the rate impact that that business is feeling now is that short term repricing. So that impacted the margin year over year, but that goes away once we get past Q2, and Q3, so the rate impact.
Covid is getting to about half of what it is now and continuing unless rates continue to improve.
And then the asset mix component again has two pieces to it. So one is the mortgage is growing but the other one is really the decline in card balances and so when you look at the card balance side, you had a significant decline again from Q2 levels last year, but it has stabilized we're not seeing growth again in card outstanding balances, but it stabilized. So once again once you get.
Through Q2, and your comp on a year over year basis becomes a margin with the current call. It and then may be similar margin.
Balances of cards, then that impact will be smaller too. So net net of all of that I expect a few basis points a quarter for the remainder of the year, but as you get to the tail end of the year.
S cards accelerates you could see it be even better than that.
Okay. So a couple of basis points per quarter through the rest of the year and then some.
Some stability I think they got her into what youre seeing in terms of occur into a bit more than a couple is probably the next couple of quarters here and then maybe after that yes. Okay.
Okay perfect. That's very helpful. Thanks very much.
Thank you.
We'll conclude the question and answer session I would like to turn the meeting back over to Victor.
Yeah.
Thank you operator, guys put my mic on.
Our results this quarter demonstrate the strength of our core franchise and the benefits from our diversified business mix and our client focused growth strategy.
We're delivering for our stakeholders and we're delivering by executing against our strategy I hope that came through and the questions that you asked and the answers that we provided.
Our balance sheet position remains strong.
It provides us with significant flexibility to continue to support our clients to continue to grow our business in.
And fundamentally to drive shareholder value and returning capital to our shareholders, which is what we've been doing.
For the last bit and you'll see that in our numbers, you'll see that on our share price.
This conference is no longer being recorded set Kofi homelessness Blue zone Hershey's Te.
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