Q2 2021 Canadian Imperial Bank of Commerce Earnings Call
[music], it's again.
All participants please standby your conference is ready to begin good morning.
And to the CIBC quarterly financial results call. Please be advised that this call is being recorded.
I would now 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, who 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 by Cibc's business leaders, including Mike appetite is Harry Culham, Laura Detore at the nausea, and John on Palace Theyre all available to take questions. Following the prepared remarks, when we get to the Q&A given we have a hard stop before 830 to allow you to get to another call. Please limit to 1 question. This should provide everyone.
With an opportunity to participate we are pleased to follow up after the call with any additional questions and lastly, as noted on slide 2 of our Investor presentation. Our comments may contain forward looking statements, which involve assumptions and 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.
I'd like to start off our call by extending my deep appreciation to our entire CIBC team.
Thank you for your continued professionalism and dedication in serving our clients.
Play a critical role not only in helping our clients navigate Pat Pat endemic related challenges, but also identifying new opportunities as we look for brighter days ahead.
And I know Youre listening on this call this quarter I'm proud to share that we received our highest net promoter scores ever in the second quarter Ipsos customer satisfaction index and this is a good leading indicator of our performance trajectory going forward.
This achievement is a testament to the unwavering commitment of our CIBC team displays and serving our clients each and every day every day and thank you team.
Today I'll briefly review the state of our economy discussed our fiscal second quarter performance highlights and provide an update on execution against our strategic priorities.
So it's been well over a year since COVID-19, first became part of our lexicon and while we're not on the other side of this pandemic yet Theres every reason to believe it to be optimistic as the vaccine rollout builds momentum in North America and around the world.
Assuming effectiveness vaccination programs continue over the spring and summer, we expect a stronger global recovery in the latter half of this year with 2021 real GDP forecast of 5.7% domestically.
And 6.6% in the United States.
Our neighbors to the south are slightly ahead of us on their vaccine rollout and are enjoying an economic boost that we have yet to fully experience here in Canada. That's a tailwind we can look forward to in the second half of this year.
This quarter CIBC delivered record earnings per share of $3.59, a return on equity of 17, 3% and a common equity tier 1 ratio of 12, 4%.
We achieved these results despite the challenging backdrop, including a spike in COVID-19 cases, which resulted in restrictions across several of our major markets.
These results underscore the tangible value, we're delivering from our long term client focused approach to growing our CIBC franchise as well as the resilience of our diversified business model and the discipline in our risk management approach supporting.
Supporting these results we continue to drive great traction against 3 strategic priorities, which we've been very clear on 1 the reinvigoration of our Canadian consumer franchise to maintaining and growing our wood resilient North American commercial banking wealth management and capital markets businesses and 3 importantly transfer.
Forming our bank to re enable investment for future growth.
Volume growth and I need to stress this across all business units contributed to our record results this quarter.
Our focus on reinvigorating, our Canadian consumer franchise is paying off on.
On a year to date basis CIBC was ranked number 1 among the big 6 Canadian banks, and both secured and unsecured lending growth.
We also delivered record mutual fund net flows over the same period.
Our focused efforts on acquiring new clients deepening relationships with existing clients, adding mobile mortgage advisers in key markets and enhancing our cards value proposition with a focus on the increasingly important non travel rewards segment have all been effective in capturing market share.
And while we are encouraged by recent results, we remain laser focused on consistent execution in capturing profitable growth going forward.
Our capital markets business unit had a record quarter supported by strong underwriting activity solid client related trading and higher direct brokerage bulk brokerage volumes.
The results are also supported by improvements to our league table rankings across most of our businesses.
Our differentiated capital markets business model generates both traditional and recurring revenue streams through value added solutions for clients across our bank.
Our commercial banking and wealth management franchise on <unk>.
<unk> sides of the border delivered a strong quarter.
We reported record investment fund flows across all of our platform.
And this was driven in large part by our solid investment performance and engaged client relationships.
And as expected commercial banking deposit activity remains strong on both sides of the border wall momentum continues to build on loan growth or client progress focused strategy has been a driving force as we remain focused on helping our existing clients.
And adding new clients.
The consistent and positive momentum we have built is being fueled fueled by the ongoing transformation of CIBC and our reinvestments in growth.
As I mentioned on our last analyst call, we've reinvested over $800 million into growth initiatives over the last 5 years and those reinvestments are a key element in the results youre seeing today.
Good example is our CIBC gold plant or a platform that we launched last quarter, our proprietary financial planning tool leverages insights to help our clients achieve their long term ambitions and all on a digital format. The.
Quality advice and convenience is resonating with our clients.
For those who completed a plan net.
Net promoter scores improved over 20 points and funds managed were up on average 8%.
Another. Good example of how we are reinvesting in our North America is our North American innovation banking business.
Since its launch 3 years ago, we've opened new offices and hired strong talent to serve clients in the high growth Tech and innovation ecosystem. We now have 11 offices across Canada, the United States more than doubling the number of bankers in this space.
Loan and deposit balances have grown multiple fold and the business is self funding and.
And we continue to see opportunities for growth within the innovation economy going forward.
As we enter the second half of fiscal 2021, we're going to build on our foundational work to date and accelerate our ongoing transformation efforts as we reinvest in initiatives to drive sustainable and profitable growth.
I'd like to now turn to environmental social and governance considerations, which continue to play an important role on our long term strategy as we remain steadfast in our commitment to sustainable future during.
During the quarter, we signed on to the partnership for carbon accounting financials initiatives and joined Rmi Center for climate Alliance lineup.
Demonstrating our commitment to helping our clients develop practical practical and scalable solutions to reach their own GHT emission reduction goals and addiction. In addition, we're taking a leadership role on the sustainability with the creation of our energy infrastructure and transition group within our capital markets business. This is <unk>.
Price of 100 investment banking professionals globally for providing targeted advice and solutions to help our clients navigate to a lower carbon future.
From a diversity equity and inclusion perspective, we're proud to have chi of achieved gender parity on our board this year and the for the first time in our company's 154 year history. Our board is chaired by a talented women Kate Stevenson our.
Our focus on inclusion has also has also earned a spot in Canada's top 100, best diversity employers for the 11th consecutive year.
At CIBC ESG matters are increasingly important on we're committed to playing a key role in creating a more inclusive and sustainable future going forward.
So in closing our CIBC leadership team has never been more energized and excited about the future.
We remain focused on executing our strategy investing strategically to accelerate our growth and consistently delivering strong results for all our stakeholders and with that I'll turn the call over to <unk> for a detailed review of our second quarter financial results for each over to you.
Thank you Victor and good morning, everyone.
Starting on slide 9 this morning, we reported diluted earnings per share $3.55 for the second quarter of 2021 exclude.
Excluding the amortization of acquisition related intangibles, adjusted EPS was $3.59.
Reflecting positive momentum across our business and continued tailwind from strong capital markets and credit performance.
Before we review our results I'd like to highlight 3 key drivers underlying our financials.
1 our strong balance sheet continues to provide us with significant flexibility to deploy capital in support of our clients' fuel organic growth and enhance shareholder returns.
2 recent investments have improved our competitive position across all business units, while advancing differentiated capabilities and key focus area.
And 3 we remain committed to continued investments to further transform our bank and drive top line growth as the recovery takes hold.
The balance of my presentation will refer to adjusted results, which exclude items of note.
Our team delivered a strong second quarter as highlighted on slide 10, we generated net income of $1.7 billion and our return on equity of 17, 3% helped in part by strong credit performance.
Pre provision pretax earnings of $2.2 billion were up 14% from a year ago.
Revenue of $4.9 billion was up 8% year over year as continued strength in the capital markets and growth in client on across our businesses overcame the impact of lower interest rates and renewed economic restrictions in Canada.
Expenses were up 3% from the prior year due to higher performance based compensation and ongoing strategic investments.
I'll now provide some color on our pre provision earnings and Sean will speak to credit provisions later in the presentation.
Slide 11 highlights the drivers of net interest income, which accounted for 56% of revenue this quarter, excluding the impact of fewer days and a weaker U S. Dollar non trading NII continued to recover from last year's loans driven by strong growth on both sides of the balance sheet, which offset the ongoing impact of lower rates.
As economic activity picks up we anticipate building further momentum and non trading NII.
Total bank NIM increased 1 basis point sequentially, primarily due to actions taken to reduce the liquidity on our balance sheet offset partly by lower P&C net.
Personal and commercial NIM in Canada declined 4 basis points from the prior quarter due to a shifting assets.
On the impact of lower interest rates, partly offset by strong deposit growth and favorable pricing across our commercial book.
<unk> forward, we expect continued but moderating pressure on P&C NIM, driven primarily by changes in balance sheet mix.
NIM in the U S segment was down 2 basis points relative to last quarter, driven by lower prepayment fees net of tailwind from deposit growth and improving loan yields.
We expect the transient benefit from prepayment activity on elevated deposit levels to subside over a number of quarter.
Turning to slide 12, noninterest income of $2.2 billion was up 3% from the prior quarter and 20% from the prior year.
Related fees were particularly strong this quarter, reflecting robust client activity and capital market as well as strong flows and market appreciation in our Canadian and U S wealth management business.
On the transactional fees improved over the prior year the sequential decline in certain categories reflects seasonality and headwinds related to the latest pandemic response measures in Canada as economic restrictions are lifted we expect to see an increase in client transaction activity.
Slide 13 speaks to the drivers behind our expenses.
As we've laid out in the past, we manage our cost base of 3 distinct components are operating baseline our investment and performance based compensation.
Higher performance compensation due to stronger results was the most significant driver of the year over year increase this quarter offset in part by the impact of a weaker U S. Dollar outside of these factors recent efficiency initiatives provided a substantial offset the increased investment against our strategic priorities helping contain net.
Fence growth.
Going forward, we intend to accelerate investment in our business to build on the recent momentum but remain committed to further productivity improvements to provide an offset.
Consistent with our prior guidance. We expect this to result in low single digit expense growth in fiscal 2021, excluding performance based compensation.
We anticipate our strong performance to continue through the back half of the year, that's driving total fiscal 'twenty 1 expense growth to the mid single digit range.
Turning to slide 14.
Our balance sheet remains strong and we continue to have significant resources to invest in business growth through the recovery period, we ended the quarter with a CET 1 ratio of 12, 4% or 12, 2%, excluding the ECL transitional benefit.
Strong internal capital generation of 37 basis points was partially offset by higher <unk> from accelerating organic growth net of continued credit improvement in our retail portfolio.
We anticipate deploying capital towards organic growth at an accelerated pace as the recovery takes hold and client borrowing activity picks up.
Average LCR declined to 134% as we manage down excess liquidity reserve, but remains well above 100% regulatory minimum.
Slide 15 reflects our personal and business banking results, where we are starting to see our revenues benefit from the positive market share momentum across the business.
Net income for the quarter was $603 million up $439 million from the prior year, mainly due to lower provisions on credit losses.
Pre provision pretax earnings of $883 million were up 2% from the prior year, driven by robust volume growth and lower expenses.
Revenue of $1.9 billion was comparable to the prior year as strong mortgage and deposit growth offset the impact of lower interest rates on credit card balance it.
Expenses, which were down 1% from the same quarter last year benefited from a nonrecurring item, we anticipate the expense base to grow off of last quarter's run rate as we continue investing in this business.
Moving on to slide 16 net income.
In Canadian commercial banking and wealth management with $399 million pre provision pre tax earnings of $527 million were up 13% from a year ago benefiting from improved sales momentum and stronger market.
Commercial banking revenue was up 5% from a year ago, driven by higher credit fees and strong deposit growth of 19% offset in part by the impact of lower rates.
Commercial loan growth continued to accelerate this quarter growing 3% sequentially and we expect the pipeline to strengthen through the economic recovery.
Wealth management revenue was up 15% from the prior year, primarily driven by higher fee based assets, resulting from market appreciation and strong client flows.
Slide 17 shows U S commercial banking and wealth management results in U S dollar, where we delivered net income of $184 million and double digit Roe.
In part by a lower provision for credit losses.
While we expect credit provisions to normalized returns on marginal growth continue to be well into double digits, and we will drive further ROE improvement as we scale the business.
Pre provision pretax earnings of $223 million were up 27% from the prior year fueled by a 15% increase in revenue as we continue to grow funds managed with new and existing client.
Average loan growth of 4% over last year was driven by new PPP loans.
<unk> loans net of lower utilization rates.
This quarter, we originated over U S $900 million in loans to new clients the highest level in the past 5 years and our pipeline remains strong.
Money and momentum remains robust with year over year growth of 34% on average deposits and 44% and <unk>, which benefited from strong client flows and market appreciation.
Slide 18 covers capital markets, where we continue to see strong client activity across the business and delivered net income of $495 million compared with $177 million in the prior year.
Pre provision pretax earnings of $656 million were up 38% from the prior year on the back of strong topline growth.
Revenues of $1.2 billion were up 23% year over year benefiting from growth across trading corporate and investment banking and DFS while.
While at the same quarter last year included negative credit and funding valuation adjustments.
Non interest expenses of $538 million were up 9% compared to last year, largely due to the higher performance.
Slide 19 reflects the results of corporate and other business unit net loss of $60 million in the quarter compared to a net loss of $138 million on the same quarter last year revenue was down 6% from the prior year, but improved 13% sequentially benefiting in part from the reduction in excess liquidity.
As I mentioned last quarter expenses in this segment are impacted by enterprise strategic initiatives and are expected to increase through 2021. This quarter, they were up 6% sequentially and 9% from the prior year.
In conclusion, we're pleased with this quarter's results and believe they position us well for the future.
We have significant balance sheet capacity to deploy for the benefit of our stakeholders. The profitability of our diversified franchise is substantially recovered and we are in a stronger competitive position to generate sustainable earnings growth going forward.
And we remain committed to the continued transformation of our bank by increasing the pace of investments in the coming quarters to strengthen our growth trajectory over the next business cycle.
With that I'll turn the call over to Sean.
Thanks for etch and good morning in the second fiscal quarter of 2021, we saw a continuation of the trend of increasing vaccine distribution in both Canada and the U S and further economic reopening in the U S market.
While much of Canada remains under various restrictions to help control case counts and provide more time to administer vaccines. We're hopeful that we will see a similar reopening in Canada over the next several months.
With that context, I'd like to share 3 key messages first our credit performance. This quarter was strong and continues to exceed our expectation.
We're mindful of the continued challenges that COVID-19 presents that said our base case expectation is for an accelerating economic recovery in the latter half of calendar 2021 and into 2022 and finally, while we are optimistic that a recovery is in sight, we're comfortable with the quality of our portfolio, we're confident with our current level of for.
<unk> and are well positioned going forward.
Turning to slide 22 provision for credit losses was $32 million in Q2 down from $147 million in the prior quarter with a larger quarter over quarter reversal in provisions for performing loans, partially offset by increases in impaired loans.
Provision on impaired loans of $246 million was up $10 million from last quarter, largely due to higher provisions in retail as we had expected partially offset by lower provisions in our corporate and commercial loans.
In Canadian personal and business banking, we recognized a higher provision in credit cards, mainly attributable to a portion of the balances that were previously part of our proactive payment deferral program and then ultimately remain delinquent and written off this quarter.
We had recognized additional performing allowances last year through management overlays to address this cohort, which we transferred from stage 2 to stage 3 as part of our performing provision reversal this quarter.
Our business and government portfolio performed well with lower impairments and a few reversals overall in Q2.
This quarter, we had a provision reversal of $214 million in our performing portfolio.
More than half of this reflects the net transfer of performing provision to impaired provision for loans that became impaired this quarter, including the transfer in respect of our cards portfolio that I previously mentioned.
The balance reflects the net impact of forward looking indicator improvements.
<unk> credit judgment, and other movements, including portfolio growth parameter updates as well as credit migration.
While our models indicated a larger reversal in performing provision, we continue to exercise judgment and offsetting a portion of those reductions reflecting ongoing uncertainty.
Turning to slide 23, we provided details of our allowance coverage by line of business.
Our allowance coverage ratio was down from the prior quarter driven mainly by the expected write offs on credit cards. However, the allowance overall is still flat to a year ago, when performing allowance increased meaningfully in response to the onset.