Q1 2022 Canadian Imperial Bank of Commerce Earnings Call
Yes.
[music].
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 would 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, followed by her entrepreneur with him, our Chief Financial Officer, and Shawn Beber, our chief risk Officer.
Also on the call today are a number of our group heads, including my top of Chinese U S commercial banking and wealth management, Terry column capital markets, Laura Detore, Attanasio, Canadian personal and business banking and Jonathan towers, Canadian commercial banking and wealth management. They are all available to take questions. Following the prepared remarks.
During the Q&A to ensure we have enough time for everyone to participate and finish on time, we ask that you. Please limit your questions and re queue.
Noted on Q2 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'll now turn the meeting over to Victor.
Thank you, Jeff and good morning, everyone.
I'll start our call today with some comments on our first quarter results and the operating environment. I'll, then turn the call over to Raj.
To review our financial performance in more detail.
Earlier this morning, we announced another quarter of record results with adjusted earnings of $1 9 billion Canadian dollars or $4.08 per share, which is up 14% from last year.
Our performance was supported by top line growth of 11%, which drove positive operating leverage.
Our first quarter results also underscore the ongoing strength of our highly connected franchise and.
Increasingly supportive economic environment and steady execution against our strategic priorities.
We're earning business from new clients, we're deepening relationships with existing ones and we're continuing to build our CIBC franchise with the long term in mind.
We also reported an adjusted ROE of 17, 6% and a CET one ratio of 12, 2%.
Being 170 basis points above the regulatory minimum.
Credit quality remained strong as the economy improved and our clients to maintain high levels of liquidity.
This morning, we also announced the proposed two for one stock split.
Be voted at our annual meeting in April .
Our stock price has appreciated significantly thanks to our collective focus on living our purpose and driving consistent financial results.
Now a good time to announce a split which would make our shares more accessible to many retail investors.
Turning to our business results.
In our Canadian consumer franchise, we delivered market share gains in deposits and loans that will that will be further advanced when we officially become the exclusive provider of Costco Mastercard's in Canada.
This serves to grow and diversify our credit card portfolio and we're looking forward to welcoming many new clients to our bank.
We also continue to invest in our digital banking capabilities to meet the needs of our clients today and in the future.
Just one example, we recently announced the Fintech partnership with Encino to digitize and automate the client journey, enabling a faster more efficient and more transparent experience for our business owners.
And earlier this week, we announced an exclusive partnership with pollinate to launch till by CIBC in Canada Chill spelled T Y L is a cloud based digital first platform for small and medium sized businesses.
That enables entrepreneurs to accept payments administer loyalty programs and gain insights into their business.
Already operating successfully in markets, such as Australia, and the United Kingdom with very positive feedback from business owners.
We view this as an opportunity to bring an improved modern service to over 1 million merchants in Canada and strengthened our CIBC client offerings in business banking.
In our North American commercial banking and wealth management business. Our unique structure provides us with an aligned focus on the private economy in both traditional and emerging industries. We co locate our teams. We serve are entrepreneurial clients in an integrated fashion and we drive solid cross business referral.
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Our structure, coupled with a constructive economic environment led to double digit loan growth and solid banking growth solid deposit growth in commercial banking on both sides of the border.
Wealth management activity also remained strong with double digit growth in assets under management in both Canada, and the United States driven by market activity strong investment performance and solid net flows.
And capital markets robust client activity in foreign exchange and equities drove double digit growth in our trading revenue.
In the U S. We are delivering on our objective to grow with revenue increasing 36% from the prior year.
As well our capital differentiated capital markets franchise, a business that is highly connected to the rest of our bank continues to deliver strong results revenue from nontraditional capital markets clients increased 17% over the prior year.
Within our direct financial services business, we made further enhancements to our global money transfer capabilities by enabling a real time direct money transfers to eligible visa debit and credit card holders in over 80 countries.
Decided capability comes at a time when client demand for digital and content contactless banking options continues to grow. It's one of many examples of how CIBC is innovating at the forefront of the digital banking experience for our clients.
During the quarter. We also advanced our shared ambition of building, a more sustainable future and creating social and economic opportunities for underserved communities, including an announcement of a new $100 million commitment dedicated to investing in low carbon and client climate tech funds to support new climate innovations.
Our continued focus on enhancing environmental sustainability was also recognized by C. D P who reaffirmed our a minus rating, placing CIBC amongst the highest ranking Canadian financial institutions and in the top tier of banks globally.
More details on our progress on this and other important ESG initiatives will be available at our March publication of our sustainability report.
Now before I turn the call over to Raj I'd like to share my thoughts on the operating environment. We can all see that there's a fair amount of uncertainty driven by geopolitical tensions supply chain disruptions and inflationary pressures. These factors may have an impact on economic growth and client activity in the near term.
Recognizing this economic backdrop, the most important thing I'd like to stress.
Is that we've demonstrated over the past two challenging years that we have a strategic playbook that will not only support our clients, but also manage our risk.
And then allow us to invest for future growth, we have a well diversified resilient portfolio, a strong balance sheet prudent risk management and a dedicated CIBC team that will continue to deliver for all of our stakeholders and with that in mind and with it.
Those are comments I'd like to turn it over to Raj for his commentary.
Thank you Victor and good morning all.
Starting on slide seven we are pleased to have delivered another quarter of strong growth and profitability, while maintaining the resilience of our balance sheet. This performance was enabled by the investments we've made in our client focused diversified business and purpose oriented team.
Diluted earnings per share was $4.03 for the quarter, excluding the amortization of acquisition related intangibles and expenses associated with the acquisition of the Costco credit card portfolio adjusted EPS was $4.08, while adjusted ROE came in at 17, 6%.
Strong growth in revenues and pre provision pretax earnings underpinned this quarter's results and credit quality remained strong as Sean will cover later in our presentation.
The balance of my presentation will refer to adjusted results, which exclude items of note starting with slide eight.
Adjusted net income of $1 9 billion for the quarter was up 15% from the prior year, while pre provision pretax earnings of $2 5 billion were up 11%.
Revenue was $5 5 billion up 11% year over year, driven by broad based volume growth resilient margins and robust fee income across our bank, including strong performance in our trading and wealth management businesses.
Expenses were up 1% sequentially and 10% from the prior year largely due to performance based compensation continue to increase in investments to fuel sustainable growth the impact of inflation and increasing activity, including business development across our business.
Slide nine highlights the drivers of net interest income excluding trading NII was up 11% from last year due to robust growth in client business on both sides of the balance sheet.
We anticipate continued NII growth supported by volume and strong margins, assuming the rising interest rate expectations embedded in the current forward curve are realized.
Total bank NIM was up two basis points sequentially underlying this Canadian personal and commercial banking NIM was largely stable up one basis point sequentially benefiting from continued deposit growth and in aggregate relatively stable margins otherwise.
P N C. N M is positioned to continue improving assuming the current forward curve helped by growth in higher margin unsecured lending, including the impact of the Costco credit card portfolio.
NIM in the U S segment was down three basis points relative to last quarter, primarily as the impact of higher interest, earning assets more than offset NII contributions from deposit growth consistent with our prior guidance. We continue to anticipate downward pressure on NIM as loan growth outpaces deposits and P. P. P income subsides.
Slide 10 provides an overview of our sensitivity to interest rate increases and instantaneous and sustained 100 basis point increase across all interest rates applied to our balance sheet as at quarter end would have an estimated benefit of around 450 million on net interest income over the next 12 months approximately 60.
Per cent of the sensitivity is to short term rates, while the remainder is driven by the gradual repricing of our balance sheet to longer rates. As a result of this continued repricing all else being equal NII would be expected to benefit by over 800 million in the second full year. Following this type of rate shock.
Turning to slide 11, noninterest income of $2 4 billion was up 11% from the prior year driven by growth in market related and transactional fees robust client activity drove trading revenues, 20% higher than the prior year with particularly strong growth in equities and foreign exchange.
Both in card credit and deposit and payment fees was also robust reflecting the rebound in economic activity over the past year our.
North American wealth management business continued to benefit from both market appreciation and client flows driving strong growth in mutual fund and an investment management and custodial fees, which in aggregate were up 16% from a year ago.
Turning to slide 12 expenses were up 10% year over year with higher performance based compensation being the most significant driver. Excluding this expenses were up 7% driven in part by higher investment related to strategic initiatives to drive our continued growth excluding these initiatives expense.
The increases were most significantly driven by inflation increased travel and business development activity and general business growth offset in part by efficiency improvements from past investments in business and infrastructure simplification.
Looking ahead, we intend to continue balancing our ongoing investments with efficiency improvements and expense discipline to achieve our financial objectives in fiscal 'twenty two and beyond.
We said in the past we have the ability to manage the pace of investment in the face of a more challenging operating environment in order to work towards a positive operating leverage target.
Turning to slide 13, our balance sheet remains strong as we continue to deploy our capital and liquidity resources to support organic growth across our client franchise.
We ended the quarter with a CET one ratio of 12, 2% down 13 basis points from the prior quarter strong internal capital generation in the quarter was largely offset by organic R. W. A growth to enable our clients' ambitions.
Capital was negatively impacted this quarter by a reduction in unrealized gains in our H portfolios. The continued phase out of the transitional ECL add back and our share buybacks.
Going forward, we will continue to prioritize the deployment of our balance sheet resources towards organic growth and return of capital to shareholders, while maintaining a resilient balance sheet position.
Starting on slide 14, we highlight our strategic business unit results net income in Canadian personal and business banking for the quarter was 697 million up 7% from a year ago pre provision pretax earnings of over 1 billion were up 11% from the prior year, reflecting continued momentum in our consumer.
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Revenues of $2 2 billion were up 8% from the same quarter last year, largely due to NII supported by broad based volume growth and double digit growth in fee income, which benefited from mutual fund commissions and improved consumer activity.
Expenses of $1 1 billion were comparable sequentially and up 5% from the same quarter last year, driven by employee related expenses and higher spend on strategic initiatives.
Moving on to Slide 15, net income in Canadian commercial and wealth management was 462 million up 31% from a year ago.
Pre provision pretax earnings of $624 million were up 21% from a year ago benefiting from an improved commercial outlook stronger markets and increased client activity.
Commercial banking revenue was up 24% from a year ago, driven by 19% loan growth and 12% deposit growth over the same quarter last year wealth management revenue was up 16% from the prior year, driven primarily by higher fee based assets and commissions, which benefited from market appreciation and positive net sales and increase.
Transaction volumes.
Expense growth of 18% was in large part due to higher revenue performance, but also reflects increased strategic investment.
Slide 16 shows U S commercial and wealth results in U S dollars, where we delivered net income of 188 million up 21% from the prior year.
Pre provision pretax earnings of $242 million were up 4% over the same period as continued growth in strategic client relationships draw drove broad based growth in funds managed.
Revenues were up 10% supported by strong growth across both commercial banking and wealth management units commercial banking momentum continued to benefit from the economy economic recovery driving average year over year loan growth of 13% in the segment excluding P. P. P forgiveness.
In our wealth business solid AUM growth of 16% benefited from strong client flows and market appreciation despite being somewhat tempered by this market performance.
Expenses were elevated in Q1 as anticipated up 16% over the prior quarter.
Over the prior year, the increase was driven primarily by ongoing investments in our team and business infrastructure to support our U S franchise as it continues to scale.
We expect sequential expense growth to moderate in the coming quarters.
Slide 17 speaks to our well diversified capital markets business net income of $543 million was up 10% from the prior year.
Pre provision pretax earnings of $708 million were up 9% underlying that's revenues of 1.3 billion were up 11% driven by strong performance across all businesses, particularly in equities and foreign exchange corporate banking and direct financial services expenses were up 14% driven by employee related compensation.
<unk> as well as continued investments in talent and technology in support of our strategic growth.
Slide 18 reflects the results of the corporate and other business unit net loss of $47 million in the quarter compared to a net loss of 59 million in the same quarter last year due to lower provisions for credit losses, offset partially by lower pre provision pretax earnings.
As highlighted in the past expenses in this segment are impacted by the timing of the enterprise initiatives expenses were up 7% from a year ago, but down 22% sequentially as the prior quarter included higher costs associated with these initiatives, including the launch of our new brand. We anticipate a net loss between 50 to 100 million a quarter in this segment.
Going forward.
In conclusion, we started the year with strong momentum across our business with a record quarter, which demonstrates once again, the competitiveness and earnings power of our diversified franchise, we continue to leverage our strong balance sheet and profitability to support our clients' fuel organic growth and increased distribution of capital to our shareholders.
All while maintaining the resilience to withstand stress in the advent of deteriorating macro conditions.
We expect our continued strategic investments to sustain this momentum, but we maintain the flexibility to adapt our pace of execution to any changes in the environment in aggregate this positions us well to drive strong shareholder returns relative to the industry in a period of elevated uncertainty with that I'll turn the call over to Sean.
Thank you for ACH and good morning.
In our first fiscal quarter of 2022, our businesses performed well across our bank, while navigating more volatile markets and changing conditions.
Credit quality remained strong.
As we anticipated we're starting to see some normalization in our retail credit portfolios. There are clients continued to exhibit higher savings and payment activity than prior to the onset of the pandemic at.
At the same time this quarter saw higher case counts and hospitalizations as a result of the omicron variant the return in some areas have more restricted public health measures and the continuation of supply chain disruptions together with geopolitical developments. These conditions have contributed to higher levels of inflation and market volatility we are monitoring.
These developments closely.
And while uncertainty persists, particularly given the events over the last 24 hours our allowance levels are strong and provide coverage for a variety of outcomes.
Turning to slide 21.
In Q1, the provision for credit losses was $75 million compared with a provision of 78 million last quarter.
Provisions on impaired loans was up modestly at 126 million in Q1.
Impaired provisions were up in Canadian personal and business banking due to higher write offs and higher delinquencies and in U S commercial and wealth due to higher impairments.
In Canadian commercial and wealth and capital markets impaired provisions were lower as a result of a few reversals.
And our performing portfolio, we had a provision reversal of $51 million this quarter, primarily driven by a favorable change in our forward looking indicators, partially offset by credit migration, which we have been expecting to see increase in our retail portfolio as clients begin to revert to pre pandemic spend patterns.
Overall credit performed well this quarter, reflecting the strength of our portfolio and underwriting discipline.
Slide 22 details our allowance coverage by line of business in Q1, we had a slightly lower allowance dollar level from the previous quarter, resulting from the reversal in performing provision and higher impaired losses.
Our coverage ratio was down by three basis points quarter over quarter, mainly driven by our portfolio growth.
We continue to feel comfortable with our current coverage, which remains above pre pandemic levels.
Slide 23 illustrates our lending portfolio mix, which remains consistent with previous quarters, reflecting good diversification and strong overall credit quality.
Our total loan balances were 483 billion over half of which are mortgages.
The average loan to value for our uninsured mortgage portfolio was currently 48% with an average LTV for uninsured mortgages originated this quarter at 66%.
The business in government portion of the portfolio has an average risk rating of equivalent to a triple B and continues to perform well.
Slide 24 provides an overview of our gross impaired loans.
Overall gross impaired balances were up slightly in Q1.
Compare balances and retail remained flat, while we had higher impairments in U S commercial and wealth as mentioned earlier.
Notwithstanding a slight increase in the gross impaired balances in the quarter compared with Q4.
Both the gross impaired loan ratio and our new formations are still lower than our pre pandemic run rate.
Slide 25 details the net write off and 90 plus day delinquency rates of our Canadian consumer portfolios.
Well net write offs in our retail portfolio remained relatively flat in Q1, we are seeing an increase in the 90 plus day delinquencies on a quarter over quarter basis, and a few portfolios we expected to see an increase in delinquencies and write offs from the lows experienced in fiscal 2020 one.
The benefits of government support are removed in clients' liquidity and spending patterns start to normalize.
You experienced this quarter is aligned with our expectations and are somewhat favorable to our initial forecast.
Lastly, as we work towards the closing of the Costco portfolio in early March we've been focused on integrating the data and clients into our systems and calculations, you'll see the impact of this in our Q2 results overall.
Overall, the credit quality of the Costco portfolio compares favorably to our existing cards portfolio.
In closing we started fiscal 2022 with continued strong credit performance against the backdrop of uncertainties impacting markets globally.
Our 11th allowance levels are strong and remain above pre pandemic levels.
We are monitoring developments closely as expectations for inflation the rate environment, and geopolitical conditions evolve and how that may impact our outlook.
And we are well positioned to support our clients through the continued uncertainty.
Now I'll turn the call back to the operator.
Thank you, we'll now take questions from the telephone lines. If you have a question. Please press star one on your devices.
Pat.
Please press star one at this time, if you have a question.
And the first question is from John Aiken from Barclays. Please go ahead.
Good morning wanted to dive in a little bit in terms of the domestic commercial loan growth that we saw.
5% growth sequentially and as noted a 19% year over year I was just wondering if we get a little more color in terms of what type of activities are driving this what are you seeing the business is doing what's the sense of the pipeline through the through the remainder easier.
The volatility that we're seeing in the economy and what type of competitive response are you seeing in terms of in terms of the market share growth, but presumably you're getting.
Thank you for the question John So for the quarter, our loan growth for the quarter and for the year diversified by geography diversified by asset class in quarter, one specifically, 25% of the growth came from our real estate business. The rest came from diversified.
Notwithstanding all the challenges you here demand for clients products as high.
They can push through price increases.
Supply chain challenges aren't really impacting went inventory comes in late clients are able to sell it. So when we talk to clients, they're talking about growth. They are talking about investment and it's reflected in our loan growth.
This quarter about 40% of the growth came from new clients, 60% came from increases some of the M&A some of it natural growth.
Interestingly the pipeline going forward are strong.
It's stronger than I've seen it since 19, so continues to be good you see how credit quality very strong. So overall, we're feeling pretty confident.
And the competitive environment, what are you seeing any pressures on pricing more or people move down the credit curve credit groups.
Nothing more than we thought it's a it's an aggressive market pricing are we don't really see you know theres deals from time to time, where people are stretching and when people stretch too far we're not there.
We know our clients well, if we stretch it for our clients.
So overall nothing I've seen over the last year or so that's any different from history, it's a competitive market and we're winning.
Great I appreciate the color.
Thank you. The next question is from Ebrahim <unk> from Bank of America. Please go ahead.
Good morning.
I guess just going.
Going back to slide 12 around expense growth.
Talk to US I think there's a lot of concern last quarter can you just talk reacted negatively to our guidance for negative operating leverage in the first half year over year.
Efficiency ratio was relatively flat when we think about the 7% or the thing 10% yet your expense growth.
Is this the high watermark of both in terms of dollar and closely and should we expect it will tend to trend lower through the course of the year and what does that imply when you think about operating leverage either quarterly basis full year any color there would be helpful.
Good morning Ebrahim. Thank you for the question. It's a good question and we think about this topic a lot because we believe managing our resources and deploy capital prudently for our shareholders is a it's one of the key things. We do here. So let me let me let me start with reminding everybody, how we think about our investments in <unk>.
Managing our cost base and as I said, we are very disciplined and deliberate in terms of how we allocate capital on behalf of our shareholders and we think in this environment, where the banking landscape continues to evolve and uncertainty exists it's important to allocate capital to invest to transform our bank and to create sustainable competitive advantages.
And that's what we've been doing and alongside our balance sheet, we do see the expenses coming through our income statement as one of the key resources, we have to invest and we manage it that way. Our overall objective as we said is always to increase investments to generate growth, while reducing operational expenses through efficiency and discipline and through that overall.
All generate topline strong topline performance and generate positive operating leverage over time and we've done that successfully if you look at the pandemic years, we've invested heavily in our business and our team and our clients were seeing great results.
Is it part of that we're seeing the market share gains and momentum across all of our businesses. We've seen the accelerated topline growth you are seeing that this quarter.
Double digits and same with last quarter and we've achieved if you look at that two year period, we've achieved slightly positive operating leverage despite the increased investment and despite some of the disruptions to revenues from the pandemic and so coming into this year. We've guided to do the same thing and I think where we are now looking at Q1 things look like they are at.
We're ahead of plan internally, we are delivering what we expected from our strategic initiatives in fact, a little bit ahead in terms of benefits realization externally, we're seeing a little bit of pressure from inflation, maybe a little bit more than what we thought that's in that 105 on the slide here and we're obviously seeing with the higher performance out performance based <unk>.
<unk>. So I think this is all according to plan and with this 10% number here, we achieved slightly positive operating leverage which is better than what we had guided to and that's because of that topline performance. We've seen the revenue growth outpace the higher expenses that are being driven because of that revenue and that inflation piece. So when we look at.
At it forward from here, Yeah, we do think that on a full year basis, the 10 per cent watermark, whether its high watermark or not that will depend on performance. We think at this point performance will continue to be strong and its continued strong performance exist. This year will probably end up high single digits, I wouldn't say double digits, but probably too.
Towards the high single digits expenses total rather than mid single digits because of that performance, but at the same time, we would feel confident about delivering that positive operating leverage now if the uncertainty that we're seeing does manifest in a slower top line environment, we have levers we can pull.
We have identified contingency actions, we can take pacing of our investments and being thoughtful around that and we will still try to strive as I said in my remarks to try to get to that positive operating leverage.
And just a clarification on those rats, one when you talk about high single digits went back off a stronger revenue backdrop are you assuming some benefit from rate hikes in Canada and the U S. In in in that statement and if some component of the $71 million on that slide does that roll off or does that become part of the run rate going forward.
Thank you.
Yeah. Thank you. Thanks for the follow up Ebrahim I think you know when you. When you think about this on the strategic investment side. Those are investments that we're making that are going to continue increasing so we see for the foreseeable future here, we're going to have that.
Level of investment continue and and N b sort of more elevated.
Some of that turns into ongoing our ongoing revenues for us and then some of it is going to be ongoing D. O, but we think that investment level is going to continue.
Thank you.
Thank you. Thank you. The next question is many grommet from Scotia Bank. Please go ahead.
Hi, good morning, Harry.
Segment, we're seeing average loan balances on a sequential basis up about 10% and I'm just wondering what's driving that.
Utilization or are there other factors pushing those balances up as well.
Good morning, many thank you for the question as you know within capital markets, we provide lending solutions really to our well diversified client franchise. This is truly a client driven business.
So that would include loans to our personal clients in indirect banking that simply in direct investing investor's edge.
That would also include corporate clients, particularly as we grow in selected industry verticals in the U S.
It really continued to maintain our leadership position in areas, such as renewables and energy transition.
And then of course institutional clients, which include insurance companies asset managers pension plans and private capital on both sides of the border the.
The majority of that loan growth is from corporate and institutional loan growth, particularly in the U S, where we see about 70% of that growth.
We have a we have been strategically and deliberately growing our loans in the U S, including institutional clients, where we're providing asset based financing that have very strong returns and really our very well collateralized. So to answer your question. It's very well diversified there is some increase in utilization as well, but it really is driven by our client demand for.
This resource in particular, as we deepen relationships and build our client franchise.
And in terms of that personal side of the business what kind of growth are you seeing there.
We're seeing a single digit growth in the in the simply platform.
We have seen some some growth as well and the investor's edge portion as we.
Strive to grow market share so, it's very well diversified across the platform, but the majority of the growth is the corporate institutional loan growth.
And so just as a follow up I guess, what you're saying is this is really what we're seeing is not so much.
So we're not seeing.
Accounts get getting more nervous from a risk perspective. This is actually sort of oh positive growth rather than people drawing on their lines, because they're getting a more.
More risk averse is that correct. Yeah, that's absolutely correct, we've seen very robust client opportunities over the past few quarters.
You've seen our strong loan growth numbers were really happy with the results and comfortable with the risk as they grow that franchise.
Thanks.
Thank you. The next question is from Doug Young from Deutsche Bank Capital markets. Please go ahead.
Hi, Good morning, Victor I wanted to go back to just a comment you made on your partnership and I, probably get this wrong, but with Kyle.
T y L.
The cloud based platform for businesses and.
Just I'm wondering whether you can talk about is this an anticipation of the launch of open banking in Canada, because like you say that because Australia and U K as were two areas, where they open banking doesn't exist in the SME seems like it's a tremendous opportunity for open banking. So help me just to get a little more detail I'm not.
Sure Doug Good morning, Let me first address open banking and it was a question that was asked in the last quarterly webcast and it's one I want to reaffirm that we are ready for open banking, we well come open banking, we encourage our government policymakers to think about both the offense and the defense and open.
Banking when it comes to our bank, specifically, we're well set up for it both through our personal and business banking franchise as well as through our direct financial services franchise, we've got strategies that cover the map and allow us to compete very effectively.
Today, we specific well this week, we specifically announced two fintech related investments that relates specifically to our business banking franchise in our personal bank. One is the encino platform that'll make lending easier the til platform. It still not T Y all I learned that as well on the way it's been very successful.
All implemented by National Australia Bank and by Nat West Bank, We've made an equity investment in the underlying a company called pollinate that runs till we think it's a real opportunity for us to serve small and medium sized business clients, Laura and her team have been working with our technology team on the at the forefront of that somebody's going to hand, it off to her to talk.
About why til is an important aspect of competing as the world changes.
Sure. Thanks, Thanks, Victor and thanks, Doug for the question. We're really excited with this partnership we are looking forward to be able to offer our business clients are more services. So this is really about having more of an integrated ecosystem for payment processing.
So we think this gives us a great advantage, where we can combine payment processing and small business banking services under one service provider and when we think of them.
The work will be doing with encino and that should actually help us as we digitize I'd say to grow faster and really offer better services and experiences to our client base.
Yeah.
I appreciate the color and then just.
One for Raj.
You may have disclosed this in here and that you have I apologize, but you talked about the impact of Triple P. Forgiveness on our Nims have you quantified what that impact was on U S. Nims in a consolidated nims in and how you anticipate that to kind of run off over the next year.
Yeah. Thanks are certainly happy to take that it's embedded in that other when you look at our NII slide in the waterfall chart in the bottom right corner there you'll see there is the other buckets within that other bucket is the impact of our P. P. P prepayment activity in the P. P.
Income this quarter.
But I can tell you breaking that out as this quarter. It was actually down a bit we started seeing that moderating so on a sequential basis. It was a it was a negative to NIM, but it was offset by other general prepayments and repayment activity happening we sent the overall to positive in that other bucket going forward you know I'd say.
There's probably a few basis points single digit low single digit basis points left in terms of help to the NIM from P. P. P and we do anticipate it to go away here in the next quarter or so that's a little bit unpredictable, but that'll go away. That's the impacts to the U S NIM and it really isn't a material amount of NII.
Total bank and so yeah, we don't anticipate it impacting total bank NIM.
I appreciate the color. Thank you.
Thank you. The next question is from Nigel D'souza from Veritas investments. Please go ahead.
Thank you good morning, I had a question first on based on my calculations. It looks like you still have a sizable amount of.
Allowances on performing loans remaining from what you built through the pandemic and could you give us some color on whether there is a likelihood that you may not be able to fully release those excess allowances given the headwinds that we're seeing junior politically economically on inflation and interest rates.
Should we start assuming that a good portion of those allowances me not be released.
Thanks for the question Nigel So we did build provisions as you noted a throat 'twenty 'twenty and then had been on a trend for the last several quarters in terms of releases. There are a couple of different moving parts in terms of how that performing provision behaves and and I should say from a coverage perspective, you know we peaked at it.
89 basis points were down at 61 basis points and we started immediately prior to the pandemic at 51 basis points. So as that coverage ratio has come down it's been a combination of releases as a result of the improving economic backdrop and the economic outlook are continuing.
To improve but also as a result of portfolio growth and so you've seen you know we've had strong portfolio growth over the course of the last couple of years and so as we add provisions performing provisions are in you know in relation to that portfolio growth that starts to if you will consume.
Some of that performing P. C O I build from here I mean, we've certainly got uncertainty in the environment, we have talked in prior quarters about the fact that the outlook. If it continued to improve we would expect to see those releases will assess.
The uncertainties today as we go quarter, you know as we move forward into a into subsequent quarters, but that trend has been one that we've been witnessing over the course of the last several quarters in terms of their releases as well as the consumption through.
Organic growth in the in the portfolio. So you know, we assess that every quarter and as we update our F. O I's that'll help guide in terms of what what ultimately happens with those provisions.
Okay, great and.
If I could kind of just drill down a little bit further into that when I look at your S. Allies on slide 35.
And your indicator on the household debt service ratio could you give us a sense of your assumptions for rate hikes that are baked into your base case forecast and does the basic assumption differ for your upside and downside case.
Yeah, so that ratio we've built in our assumption was for 100 basis points of interest rate increases and.
And inflation based on our economic are an economic teams, our outlook, which was sort of in a 3% ish range.
And so that's built into those answer those forecasts and then from there. We've we've moved it up and down across the the upside and downside cases, but a from a base case perspective 100 basis points of interest rate as part of that outlook for the next year.
Okay. So it sounds like Youre beefing up the economic outlook, rather than the bond market pricing at least at least six rate hikes, but yeah. That's a that's useful color I appreciate it. Thanks.
Okay.
Thank you. The next question is from Sohrab.
Please go ahead.
Yeah. Thank you I just wanted to quickly go to Laura Laura the segment.
The Canadian personal and small business segment.
Improvement in efficiency ratio.
Quarter over quarter versus last year, and probably the lowest since I don't know Q1 'twenty.
Back then you had much higher net interest margins. So can you just talk a little bit about how much of this is because of management of expenses as opposed to.
Efficiency pickups from prior investments.
And where do you think this may kind of trend understanding that it's hard to talk about a particular segment, but I'm just trying to understand how you how you're thinking about this.
Good morning, sorry, Robin Thanks for the question.
But as Raj mentioned earlier when Ebrahim asked his question. So there's a bit of a you know derivative of that.
A lot of what we're seeing is the the the investments and the hard work that the whole team at CIBC. His put in which is allowing us to deliver I'd say some real quality volume growth. So we're seeing great top line growth. We've put in a lot of work to ensure that that will be consistent and sustainable.
As <unk> mentioned, we're going to continue to do that.
That said, we do expect to AR to continue to spend and invest in our strategic initiatives. So I would expect we're going to see volatility quarter to quarter as we do that but again as <unk> said, we're gonna be prudent in terms of what we do we're pacing our investments.
We are continually looking at ways to simplify how we do things in order to deliver a more bottom line to our stakeholders.
So hopefully that answers your question.
It does but can I, just drill down a little bit for example, FTE count is up.
Versus last year like your efficiencies have improved so is it is it is it just more of that variable comp based FTE do you expect the FTE trends to continue I'm, just trying to kind of get a feel for how what sort of control you have your over your expenses and how much. If this is.
The Bachelor revenue, but no I think we have a really good control over our expenses a lot of what you're seeing there are increases in productivity.
So we've talked about in previous calls some of the great tools, we've put in place for our team members, whether that's E. CRM our goal planner et cetera. So we have a lot of tools that are allowing our team members to be much more productive.
And stuff like tail end and these will be additive to the productivity.
Absolutely we need to I mean, we need to start by implementing them rolling them out.
They are as.
Good for us from a defensive perspective in terms of keeping our existing client base happy and bringing them the tools and experiences are they need them and it's also about growth for us and it will allow our team members to be more productive once we have those rolled out as well.
Okay. Thank you.
Thank you. The next question is sound like Gabriel to Shang from National Bank Financial. Please go ahead.
Okay. Thank you.
Question on your rate sensitivity.
I'm not sure if you've mentioned this in the past, but when you give them that are you are assuming.
Give me what assumptions you've made about the surge deposit surge deposits are those not included or excluded from your guidance.
Then as far as the pace of rate hike you know what do you assume as far as passing through the deposit betas are or you're saying, 50% 75%.
We will give you a specific number but just to kind of get a sense of where that is.
Yeah, I think so happy for them.
Question, Gabriel and so I think to start when you look at the disclosure there are a lot of assumptions in that as you mentioned with respect to the deposits that are more transient in nature. Those are included in this number when we provide that now we have treated those as more transient and so we've been.
<unk> and hedge them accordingly, and we do anticipate some of that to moderate and so yeah. The way, we manage that appropriately and we feel confident about the NII impact from those deposits and how that will progress from here, but it is included in that sensitivity in terms of the assumptions we make in this goes a bit to to ebrahim.
Follow up question earlier, what do we assume generally as we've said before when we talk about outlook and it was all over my script, we base. It on the forward curve. So when we talk about our outlook in terms of top line when I talk about operating leverage expectations for this year all of that assumes that the increases that are in the forward.
Curves are today.
If you look at since the end of January and end of the quarter. When we first looked at this writing.
Despite everything that happened yesterday that was a bit of disruption, we're not far off where we were before yesterday and in fact rates. If I just look at you know three to five year in Canada. You are in the teens basis points. Even ahead on the swap curve, where you were at the end of January and so you've seen material run up over 100 basis points and based on.
Our sensitivity you know you can do the math on how much you would expect that to be at 22 earnings so that.
That is something we expect but as we said earlier if that.
If there is any changes to that then we can manage that and one of the changes could be the assumptions on sensitivity as you mentioned that the first thing I'll say is when you look at our deposit only about a third of it frankly is sensitive debase beta assumptions. Some of it is noninterest bearing some of it into it.
Is indexed right to fly them et cetera, and so the beta assumption really comes in only about a third of the deposits. We model that on the basis of past experience that includes modeling in any comeback city that we would have experienced in the past, we think about what the future environment might look like and all of that is reflected in our outlook and it's reflected in the sensitivity that we have.
Disclose now could it be different yes, there's always risks around that but that's manageable if we see a little bit of variation in betas and frankly, you could have both ways right. You can have opportunities to lag on the way up in terms of deposit repricing or there could be competitive pressures that push betas. It a little bit further so in either direction are we have the ability to me.
Manage that and we feel confident the topline will behave generally as we've outlined.
Well that's.
A lot to chew on.
My next questions on the commercial growth.
Okay.
John can you talk to me about the impact of our lending to private equity sponsors like the for the businesses that are requiring and.
If you do any co investment alongside these partners coops, I mean I've heard about.
These types of borrowers being pretty important influence on commercial loan growth from all the banks, so maybe throw some numbers around there.
So thank you for the question. So we don't we don't generally co invest so let's start with that.
Okay.
In terms of our growth this quarter I'd say less it's not a big part of our business right. We have an $80 billion loan book this would be a very small part of that it probably contributed a few points of growth, but nothing material everybody's focused on it as leverage on a bit higher in some cases, yes loan funds have come in and they've made the market more aggressive we focus.
On a few sponsors.
We're close to them, we get a big part of their business.
And loan books in good shape, so they're active for sure there's lots of private capital as you know so pick your sponsors go deep with them following our clients good things happen.
So it's not like half of our growth or anything like that right.
No no.
No no not not not not even close.
And what's the sign up bonus is going to be on the Costco card Laura just kidding.
Oh absolutely.
Right.
I Hope you are you have hired Gabriel.
Yeah.
My wife is a costco shoppers anyway.
Okay.
Thank you. The next question is from Darko <unk> from RBC capital markets. Please go ahead.
Hi, Thank you good morning, I have a question on your capital markets business.
And what I'm interested in understanding is as.
Now risk weighted assets. So your market risk didn't move quarter over quarter. It was a pretty big jump in trading securities and those are average balances so perhaps.
Maybe there was maybe that's a nose dive at the end of the quarter, but can you help me understand why risk.
Risk weighted assets, especially in market risk.
Didn't move quarter over quarter as quite contrary to what we saw yesterday.
At RBC, where they had a relatively big change in market risk and they suggested that there was inventory holds and so on so I'm curious as to maybe how you're managing.
I'm also curious as to how that works going forward in this volatile environment. So maybe you can just talk about the movement in market risk for me. Please.
Good morning, Darko, So clearly trading securities have increased quarter over quarter and year over year reasonably high percentages of 16, and 23% really due to.
Market appreciation, we've seen growth in our U S platform and crude including are our prime services business and our equity financing businesses really supporting our clients and providing hedging solutions. So we're seeing a market appreciation, we're seeing and those businesses very well diversified by client by geography and also.
By product I really it comes down to providing hedging solutions are the trading revenues were obviously significantly higher partially on the back of that and that is commensurate with the gross outgrowth of our client franchise. There were some other RW increases maybe I'll pass over to Sean to comment on that.
Darko. So there was there was increases in our market risk RW, a as a result of var and as far but those were offset in part by our changes in our incremental risk charges as a function of updates to models. So that was a benefit this quarter.
Okay.
And so.
And basically the read through that is does your your actual balances are up it didn't come down like spot balances didn't come down towards the very end of the quarter.
And so maybe in this increased volatility here can you just talk about how.
How trading is holding up in and.
If these are securities that are they're really for hedging purposes, I shouldn't be concerned about trading losses is not is that a fair statement.
That's a fair statement as you know Darko, it's a it is a it is a very well diversified business hits, we devote our var. We devote all of our resources to our clients. It's a purely a client driven franchise, we're building that franchise and so we're seeing more opportunities to deploy resources to our core clients and it's working well and where.
Seeing our growth across the platform across geographies across industries into the new economy, and we're very pleased with those results were very very very comfortable with the risk and we see more disruption in the markets and we continue to handle that very well.
Okay, great. Thank you very much.
Okay.
Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead.
Can you just touch on this part of Arcos question to be asked specifically.
The momentum is continuing into subsequent quarters on the trading side.
Good morning.
So I guess I'll, just reiterate again, well diversified business and as Victor said earlier differentiated capital markets platform, we're really focused on maintaining that leadership position in our domestic market where.
We're growing our U S platform, specifically in the new economy around renewables energy transition private capital and the product capabilities and I mentioned Prime services. As an example, we're deepening relationships with our U S corporate clients and commercial clients with our partners at Bank USA under Mike appetite Us we've.
We've seen significant growth as a result of that and at the same time, where we're enhancing our connectivity across our our commercial and wealth and retail client base. So it's very well diversified to answer. Your question are we gave you our outlook.
A quarter ago, where we said we would we were confident we could drive $600 million plus and pretax pre provision pre tax earnings and we're confident that we can continue to do that going forward.
With a little help from market tailwind, perhaps as we've seen this quarter.
Now, let me ask in a different way than was there anything specific this quarter on.
On the trading side.
Any sort of special circumstance that would have driven such high trading revenue that you.
Maybe you haven't seen in previous quarters anything special this quarter, because it's up about $200 million more than $200 million from Q4 to Q1.
Yeah quick quarter, four tends to be a slightly weaker quarter in the industry a quarter one quarter. One it's it's nice growth commensurate with the growth of the franchise I would say that I go back to my earlier statement. This is a well diversified business so across the platform and in particular, we've just seen a very strong client franchise interest in <unk>.
And so we're working with our clients more closely than ever I think we are still with our clients and worked with them very closely in difficult times and as we move through this pandemic, we are seeing our franchise grow very nicely.
Okay.
So the answer is no nothing stood out Okay. Let me go to Vic.
If I could so this quarter.
Loan growth across the franchise looks exceptional.
And when I see that out in my mind sort of race Institute a couple of things either youre going to give it back on the margin or we're not seeing that long term losses are gonna P. C. Also just going to elevate because you've just maybe you've changed.
Your lending practices, a little bit are the third option, which is I suspect what youre going to highlight is that the bank has improved its a better bank now than it was.
Two years ago or whenever that is so assuming that that's your position and I suspect that Ed.
What is actually different today from what the bank looked like a year or two years ago, that's allowing for this market share on a sustainable basis.
Mario Thank you for your question I think you know as you've been following our narrative and of our evolution is the bank has substantially changed over a number of years and the primary focus has been the culture of the bank. The collaborative nature of how we serve our clients and a day in and day.
Our focus on making sure that we can meet our clients' needs and go deeply in meeting those needs of existing clients and new clients.
If you look back over the last seven years and I look for some proof points is what's happening well our client experience scores have improved more than anybody else in the industry and dramatically and we still aren't happy with where we are that is a reflection of how clients feel about how we're serving them that's true in every.
<unk> business across the bank, what Youre seeing is a bank that's client focused that's bringing the entire resources of our bank to serve our clients, that's managing well within our risk appetite and that is investing in the underlying technologies to.
To modernize our bank as well so clients can self serve on stuff that they can do day in and day out on their own but meet with our relationship managers, where we're also investing across all of our businesses in private banking and capital markets commercial banking and personal banking to manage those relationships and that is the bank that we are today, that's the bank that we will.
Would it be and you should expect to see US continue to deliver good results to our shareholders really good client experience results and quite candidly really good employee net promoter scores, which is also something that I take great pride in people feel good about our bank people feel good about our client centric strategy and that should translate to good financial results.
Thank you thank.
Thank you.
Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead.
Hi, Good morning, maybe got going back to John or Sean can.
Canadian commercial site, then you kind of talked about the improved commercial outlook, but just on the credit side I noticed last year I think the impaired loans was just one deep N zero beeps. This quarter. So a genre time as theyre like metrics like watch list that you could may be a you know.
Talk about in terms of.
You know, how you envision and normalization and impaired loans.
This year or next.
Thank you Scott So again, our fiscal 'twenty, one was remarkable from a loan loss perspective in and it's a lumpy business right. So 21 was excellent the start of 'twenty. Two has been very good. The watch list looks good we watch we we look at things by risk rating size of credit the numbers are down.
There's nothing we see that causes us any great concern all I'll pass it over to Sean and Casey has anything to add but so far so good and confidence the underlying confidence of our clients is good.
And you see very few clients today are going backwards.
These are up margins are good people are doing well.
I know, it's uncertain, but so far it's.
Sean.
The outlook is based more on a on a a view towards some level of normalization over the course of time how quickly that normalization comes is you know a function of what the economic backdrop is going to look like there's been you know theres additional uncertainty at this stage than there would have been when we are you know when we put opinion R. F.
Oh, why but we'll see what that looks like you know next quarter, but to John's point, we feel very good about our where the portfolio sits today are and will continue to monitor for that and as John mentioned, it's it's lumpy. So are you know we're always on a watching for those types of stresses.
To develop but no dramatic at this stage.
And just lastly, John you you you kind of side of the slide slide five you've launched the new CIBC family Office building up the team, perhaps you could maybe talk about the.
The buildup.
So opportunity within that segment, and maybe how intertwined with Baldwin and your commercial clientele.
Thank you Scott, it's it's a big deal for US right, we put the commercial and wealth business together, because we knew what was coming on the private capital side. When you kind of clients would be exiting there'll be lots of money to be made.
Entrepreneurs, who make money we've helped them make the money via the commercial bank They trust us to manage the wealth.
Family Office with just the natural evolution of our vials of our value proposition and where we're again, it's going well we've had more sales I tell people. The story in the last two or three years have been more the company sold for a greater than $250 million and I saw in my prior 10 years and in banking.
So entrepreneurs are getting wealthy.
Voucher to serve them and the family office is a piece of that and the referrals family office or not between commercial and wealth are up big.
Right. Thank you very much.
Thank you and the final question will be from Mike <unk> from Stifel. Please go ahead.
Good morning, a question for Sean just wanted to quickly ask about the trend in insolvencies and maybe this is more so on the consumer side. So are there any impediments right now in this environment with Covid and maybe the courts being backed up is there any sort of backlog building in terms of when things are.
Or maybe running a bit more smoothly that you get a rapid increase in insolvency. So I guess, what I'm asking is are there any hindrance.
Hindrances in your ability to petition someone into into insolvency at this point in time.
Yeah, I think that's that was more of an issue earlier on in the pandemic. We have started to see and we're not seeing it in our portfolio just yet, but we have started to see a an uptick in for instance business bankruptcies as I say, we're not seeing it in our portfolio as yet.
We're not anticipating a significant wave of that at this stage and believe we've got you know an appropriate level of provision coverage for this.
You know the distressed, but we anticipate over time in the portfolio just from a normalization perspective as opposed to any deterioration.
Okay. Thanks for that and then just one quick numbers question for Raj just looking at the gains on financial instruments of $2 59, this quarter, a somewhat elevated versus the recent run rate, but a very lumpy number I'm wondering can you comment on what drives this.
Most of this shows up in the corporate segment.
Is it something that you're just purposefully can do in sort of pull the trigger on when when it's opportunistic or is it more so driven by market conditions.
Thanks for the question, Mike, We we don't manage any of our portfolios on an opportunistic basis and the corporate and other segment. We've got treasury portfolios of HQ L. A and that portfolio grows as the H greatly requirements of the bank grows as the balance sheet grows we manage those pretty stable NII in there.
There is time to time opportunities to rebalance those portfolios in order to optimize our returns and yields and that's what we do but it's not a lever we pull opportunistically there can be noise. It can be market driven it could be rebalancing driven but certainly not something we do all right.
Okay. Thanks for the color.
Thank you.
Including the question and answer session I will turn the meeting back over to Victor.
Alright, Thank you operator, and all of you for asking your questions. They were very technical in nature and I hope we answered all of them I want to take this opportunity to thank our incredible CIBC team, who continues to operate with a client first mentality, which is a critical component to the success of our bank.
Our strong performance this quarter highlights the momentum across all of our businesses as we continue to build on our 2021 accomplishments and execute against our very clear strategic priorities. This combined with a resilient balance sheet is enabling us to invest in client focused profitable growth initiatives.
And continue to position CIO D C for the future.
Over the past few years, we have invested significant resources to enhance our banking capabilities to grow market share and to streamline our cost base. I think you can see all of this in our results. We've seen evidence of our strategies success and are probably in our past investments as we deliver profitable growth.
And volume growth were a very different bank today with a collaborative culture that's on the ascent.
We're going to stay focused on our client first strategy with an investment roadmap that drives profitable growth over the short over the medium and over the long term I want to thank you for your interest in CIBC and we look forward to speaking with you on our next call take care.
Thank you. The conference has now ended please disconnect your lines at this time and thank you for your participation.
Yeah.
This conference is no longer being recorded so it's closer to home.
T.
Okay.
Yeah.
Yeah.
Okay.