Q2 2022 Canadian Imperial Bank of Commerce Earnings Call
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[music].
Please standby your meeting is about to begin.
Good morning, 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.
Begin this morning's presentation with opening remarks from Victor noted, our president and CEO , followed by her entrepreneur with Jim <unk>, Our Chief Financial Officer, and Shawn Beber, our chief risk Officer.
So on the call today are a number of our group heads, including my top of Titan U S commercial banking and wealth management, Harry Culham capital markets, Laura <unk>, Attanasio, Canadian personal and business banking and Jonathan towers from our Canadian commercial banking and wealth management, they're all available to take questions. Following the prepared remarks.
<unk>.
During the Q&A with a hard stop at 830, we ask that you limit your questions to one.
As noted on slide two 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 I'd like to open the call with a few comments on the macroeconomic environment, followed by a summary of our second quarter results.
There's no doubt we're all in a very fluid environment first and foremost our thoughts are with those who have been affected by the war in Ukraine.
Beyond the human impact the conflict is exacerbated COVID-19 related supply chain disruptions and contributed to inflationary pressures around the globe.
Central banks around the globe are responding by raising interest rates to cool inflationary pressures, which is leading concerns to an economic slowdown.
During times like this our unrelenting support for our clients together with our diversified business model, our strong balance sheet.
And our prudent risk will drive consistent sustainable performance for CIBC.
You can see this resilience in our financial performance.
Against this macroeconomic backdrop, we reported solid results this quarter underpinned by our strategic focus on investing for profitable and enduring growth.
Revenue was up 9% over last year, driven by broad based loan and deposit growth.
Fee income and strong client base trading activity.
Adjusted earnings of $1 $7 billion or $1 77 per share.
Were down modestly from the prior year as we were starting to see a normalization in provision for credit provisions for credit losses.
We also reported an adjusted ROE of 15, 2% and a CET one ratio of 11, 7% well above the 10, 5% minimum requirement.
Having delivered solid financial performance on behalf of our shareholders in the first half of the year today, We also announced the two and a half cent increase to our common share dividend to 83 cents per share while maintaining our payout target payout our payout ratio target of between 40 and 50%.
Note that the dividend also reflects the previously announced two for one stock split that took effect earlier this month.
Yeah.
So turning to our business results, our Canadian consumer businesses demonstrated continued strength during the quarter with growth on both sides of the balance sheet.
Excluding contributions from a Costco Mastercard acquisition card purchase volumes were up 22% from a year ago, most notably in discretionary spending such as on hotel Entertainment restaurant expenses as well as for transportation services economic reopening took hold.
During the second quarter. We also completed the acquisition of the Costco credit card portfolio in Canada.
Adding one third to our total purchase volumes.
We're very pleased to welcome more than 2 million new clients to CIBC.
Early performance of the portfolio has been positive new account acquisition.
Purchase volumes and balanced growth are all tracking ahead of expectations, we have initiatives in place to deepen relationships with our newly on boarded clients and look forward to reporting on.
On our progress to you in the in the quarters ahead.
We also continue to build relationships with their existing CIBC clients by making investments for the future.
Post quarter end, we launched CIBC smart start no banking and no fee banking and no fees self directed trading solution to help Canadians up to age of 25 get a head start on their financial journey better said, if you're under 25 year Bank for free and you trade for free at our bank, where the first among the major Canadian banks.
After this and we believe it will further our momentum in new client acquisition.
This program simplifies our existing offerings for youth and students, but providing a market leading solution to this cohort.
Over the last 12 months, we've seen a 32% growth in our student population and then you offering will further support this segment.
In North American commercial banking and wealth management loan demand increased on both sides of the border fueled by our existing client base to support their usage increased working capital requirements and from new client relationships.
In wealth management volatile markets, driven by geopolitical concerns dampened asset growth to single digits in Canada with a slight decline in the U S. And this compares to double digit growth in both regions last quarter now in spite of this market volatility we continue to deliver solid net flows across our wealth businesses in both regions.
In capital markets, our focus on supporting clients through volatile markets generated strong trading revenue.
As well our direct financial services business continued to benefit from volume growth in both simply financial and a currency conversion business associated with our international student pay and international students banking offers.
Overall, each of our businesses contributed to solid results.
Now we're proud to be recognized this quarter by Media Corp, Canada, who named CIBC as one of Canada's best diversity employers for the 12th consecutive year and by equity Leap, who ranked CIBC. The number one gender equality employer in Canada for the second consecutive year.
At CIBC culture matters, providing an inclusive environment to attract and retain talent with differing ideas and insights is a cornerstone of our bank's culture.
But having a team that reflects our clients and communities, we can better deliver on our purpose of making our clients' ambitions a reality.
Now looking ahead, we're well positioned to continue to deliver for our shareholders.
In an environment, that's increasingly fluid one thing remains unwavering our focus on what we can control.
As we did at the outset of Covid, we will continue to demonstrate our resilience as we adapt to the changing economic environment with an emphasis on agility and an emphasis on stewardship.
Day, CIBC is a bank with a streamlined and increasingly digitized infrastructure, our collaborative culture and client first strategy will enable us to drive profitable growth over the short over the medium and over the long term you're going to hear more about our strategy our capabilities and our vision for the future and I have.
The opportunity to connect with our leadership team more directly at our upcoming Investor day, and now with that let me turn the call over to Raj to review, our second quarter results in more detail over to you <unk>.
Thank you Victor and good morning, everyone.
Our CIBC team continued to deliver solid growth and profitability this quarter fueled by the disciplined deployment of balance sheet resources and targeted investments against our client focused strategy.
Diluted earnings per share was $1.62 and excluding the items of note detailed in the appendix to this presentation adjusted EPS was $1 77.
Pretax pre provision earnings growth momentum remained strong while pre provision.
Provisions for credit losses against performing loans trended higher due to a more pessimistic economic outlook and the initial I FRS nine expected credit loss against that Costco credit card portfolio treated as an item of note Shawn will cover credit provisions in further detail later in our presentation.
The balance of my presentation will refer to adjusted results, which exclude items of note starting with slide eight.
Net income of $1 7 billion was comparable to the prior year in a row you remained above our 15% target pre provision pretax earnings of $2 3 billion were up 7% from the prior year and revenues of $5 4 billion were up 9% supported by broad based volume growth stable margin.
Trading and fee income.
Expenses were up 1% sequentially or 11% from the prior year largely due to continued investments inflationary headwinds and performance based compensation across our business.
Living into revenue further slide nine highlights the key drivers of net interest income excluding trading NII was up 13% from last year due to robust growth in funds managed on both sides of the balance sheet, we anticipate NII growth to remain strong in the back half of the year benefiting from continued volume growth and the interest rate outlook embedded in the forward.
Kurt.
Total bank NIM was up one basis point sequentially and underlying that is Canadian personal and commercial banking NIM was up two basis points benefiting from the impact of the Costco credit card portfolio and rising interest rates, partly offset by changes in mix and competitive pricing.
PNC NIM is positioned to continue improving on the back of rising interest rates and growth in higher margin unsecured lending.
Consistent with our prior guidance NIM in our U S segment was down six basis points over the last quarter, primarily due to lower nonrecurring items, including prepayment income.
Slide 10 provides an overview of our go forward sensitivity to interest rates, we continue to be positioned to benefit significantly from rising rates.
Turning to slide 11, noninterest income of $2 3 billion was up 5% from the prior year market related fees were up 6% helped by strong growth in trading revenues, particularly in the interest rates foreign exchange and equities.
Firstly, lower underwriting and advisory fees were impacted by a more modest industry issuance and deal volumes.
Transaction related fees were up 9% from the prior year benefiting from credit as well as deposit and payment fees.
Turning to slide 12 expenses were up 11% over the prior year or 9%, excluding higher performance based compensation driven by strategic initiatives, most notably the Costco credit card program and investments in our U S platform as well as the impact of inflation on baseline operating expenses.
While inflationary pressures have been more elevated than originally anticipated we continue to target neutral to positive operating leverage for the fiscal 2022.
Over the last several quarters, we successfully deployed excess balance sheet resources towards organic growth across our franchise, but our capital and liquidity position remains strong as highlighted on slide 13.
We ended the quarter with a CET one ratio of 11, 7% down approximately 50 basis points from the prior quarter driven largely by the closing of the Costco a credit card portfolio and the impact of market volatility in the quarter on both the value of fair value OCI securities and market related argue otherwise.
We expect capital ratios to be more stable going forward as internal capital generation funds organic growth and return of capital to shareholders.
Starting on slide 14, we highlight our strategic business unit results net income in Canadian personal and business banking for the quarter was $577 million down 4% from a year ago, driven by higher provisions for credit losses pre.
Pre provision pretax earnings of $962 million were up 9% from the prior year, reflecting share gains as we continue to grow our consumer and business franchise.
Revenues of $2 1 billion were up 10% from the same quarter last year due to broad based volume growth, including the Costco card portfolio and higher fee income, partially offset by margin pressure, particularly in mortgages.
We have added some incremental disclosure on this page highlighting the diversified nature of our revenue growth, which is supported broadly by contributions across our Canadian franchise.
Expenses of $1 2 billion were up 3% sequentially and 11% from the same quarter last year, which included a one time recovery as highlighted in my remarks at the time.
The remaining growth was largely driven by higher strategic investments and employee related expenses.
Moving on to Slide 15, net income in Canadian commercial and wealth management was 480 million up 20% from a year ago.
Pre provision pretax earnings of $648 million were up 23% from a year ago benefiting from strong volume growth in constructive markets.
Commercial banking revenue was up 24% supported by robust double digit loan and deposit growth, which is expected to moderate going forward.
Wealth management revenue was up 9%, primarily driven by higher fee based assets, which benefited from net sales and market appreciation over the last year.
And increased expenses were in large part due to higher revenue performance and investments in strategic initiatives.
Net income in U S commercial and wealth with $152 million in U S dollars down 17% from the prior year driven by higher credit provisions.
Provision pre tax earnings of $228 million were up 2% over the same period, we continue to execute on our plans to scale our U S business organically by simultaneously investing in our client base to drive revenue growth as well as our operational and risk management infrastructure in order to keep pace with the scale of the business and.
Short or long term growth ambitions.
Revenues were up 10% over the prior year supported by strong growth in average loans and deposits and fee income.
Expenses were up 1% sequentially and 18% from the prior year largely due to our ongoing investments in client facing capabilities and infrastructure across our U S operations.
We expect expense growth to moderate in fiscal 2020 three as we complete the ongoing foundational investments towards the next phase of our organic growth.
Slide 17 speaks to our diversified capital markets business net income of $540 million was up 9% from the prior year, while pre provision pretax earnings of $724 million were up 10%.
Revenues of one 3 billion were up 10% driven by strong performance from our global markets corporate banking and direct financial services, partially offset by lower investment banking revenue as both the origination and advisory activity was more muted year over year.
Expenses were up 10% as well driven by employee related compensation and.
And continued investment in support of our strategic growth.
Slide 18 reflects the results of our corporate and other segment net loss of 137 million in the quarter compared to a net loss of $60 million in the same quarter last year. The decline in profitability. In this segment was largely related to treasury driven by increased funding issuance as well as significant market volatility and rapid increase in credit spreads experienced in that.
Florida.
We anticipate losses in this segment to remain elevated in the short term if the current market conditions persist.
To close our second quarter results demonstrated continued momentum across all of our businesses notwithstanding a more uncertain operating environment.
Our balance sheet continues to provide us with significant flexibility to deploy capital in support of our clients to fuel organic growth and enhance shareholder returns.
Thanks to our client focused strategy diverse business mix and disciplined approach to capital allocation across our client franchise, we are well positioned to respond to a changing operating environment in order to continue delivering growth and solid profitability with that I'll turn the call. It was Sean.
Thank you for ACH and good morning, our credit performance was strong this quarter and our portfolios are performing well we've continued to support our clients while proactively managing our underwriting activity in response to the evolving environment and we remain comfortable with our risk levels and coverages.
As Victor mentioned in the second quarter of 2022, we also closed our acquisition of the Costco credit card portfolio, which is reflected in our Q2 results. It's a very high quality portfolio and credit quality and performance has been in line or slightly better than our expectations.
Slide 21 details our provision for credit losses on both a reported and adjusted basis a.
Our reported PCL was $303 million in Q2, compared with the provision of $75 million last quarter excluding.
Excluding the performing allowance related to the Costco credit card acquisition, which is treated as an item of note. Our adjusted PCL was $209 million in Q2 <unk>.
Provisions on impaired loans was $196 million in Q2.
Impaired provisions were up in Canadian personal and business banking due to the impact of rising interest rates on our modeled stage three allowances and higher write offs as clients have begun reverting to pre pandemic spending patterns. This is aligned with our expectation and net credit losses continued to perform better than pre pandemic.
Provisions in business and government loans were up this quarter due to slightly higher impairments and fewer reversals.
The adjusted provision for our performing portfolio was $13 million this quarter, reflecting some deterioration in our forward looking indicators from last quarter.
We're pleased with the continued strong performance of our portfolios.
Turning to slide 22, our allowance coverage ratio was down a net three basis points quarter over quarter, mainly attributable to our portfolio growth and impaired allowance release, partially offset by the building allowances associated with the Costco portfolio acquisition.
Our allowance dollars were flat quarter over quarter.
We continue to be comfortable with our coverage ratios, which remain above pre pandemic levels.
Slide 23 details our lending portfolio mix.
Distant with previous quarters, our portfolio reflects good diversification and strong overall credit quality.
Against the backdrop of an evolving mortgage market with respect to our mortgage portfolio I'd make a few observations.
The average loan to value for our uninsured mortgage portfolio has been trending down over the past several quarters and is currently 46%.
The majority of originations over the last two years, including this past quarter has been with our higher credit quality clients, who have deep imbalanced banking relationships with us.
The loan to values of new originations has trended down over time from 70% in Q2 of 2020% to 65% in Q2 of 2022.
Credit scores have been favorable deposit balances have increased as have client incomes and debt service metrics have remained stable over the past year.
We're pleased with our origination activity and the strength of our portfolio.
And turning to our business and government portfolio. The average risk rating has been stable remains equivalent to a triple b and continues to perform well.
Slide 24 details our gross impaired loans overall gross impaired balances were down in Q2.
Retail impaired balances were down slightly while the business and government portfolio experienced a larger decrease due to higher write offs.
New formations remained stable and low from a historical perspective, and both the gross impaired loan ratio in new formations remained lower than our pre pandemic run rate.
Slide 25 illustrates the net write off and 90 plus day delinquency rates of our Canadian consumer portfolios.
And that write off dollars trended higher in Q2 as expected as clients have begun reverting to pre pandemic spending patterns.
The new Costco card portfolio also contributed to some of them small amounts of the write off dollar increase this quarter in line with our expectations.
Overall retail 90, plus days delinquency rates remained relatively flat in Q2 with a decrease in residential mortgages, partially offset by a slight increase in personal lending and the impact of the Costco card acquisition.
In closing we continue to see strong overall performance, we expect to return to more normalized credit losses over time the performance year to date has been favorable.
We are of course monitoring closely for potential impacts from the pandemic, the inflation and rate environment in broader geopolitical developments that could affect our outlook I'll now turn the call back to the operator.
Thank you.
We will now take questions from the phone lines. If you have a question. Please press star one on your telephone keypad.
And your first question is from Ebrahim Poon of wallet from Bank of America. Please go ahead.
Hey, good morning.
I guess, maybe just sticking with expenses.
If we could talk to.
The breakdown that you provided on slide 12 in terms of the makeup of the expense growth this quarter.
As we look into the back half, but remind us how we should think about you did operating leverage or year over year expense growth and also talk to us about.
The flexibility to pull back on expense spend, particularly as we look out into next year.
On the one hand inflationary pressures are going to probably push expenses higher just give us a sense of like how do we think about expenses in the back half of the year and as we think about 'twenty three I D N a.
Not going to give any guidance, but just thought process around investment spend versus.
And he has to kind of pull back if you need to.
Okay.
Thank you Abraham part of the question and happy to provide some color and we'll certainly get a lot more into our 'twenty three plans in Investor day in a couple of weeks here, but that's con.
Context, I'll remind everyone. How we've spoken about our investments and increases in our expenses and our targets from a financial performance perspective, which have not changed we continue to target overtime pre provision earnings growth and positive operating leverage and we continue to believe that we have the ability through our strategy and Eric.
Capital allocation approaches to to make adjustments in order to respond to the environment and deliver that and so as I look at this year, we had promised 5% to 10% pre provision earnings growth and positive operating leverage we talked last quarter about the fact that there is some puts and takes but we felt overall pretty good about being able to deliver.
That in fact on the pre provision side to some extent, we feel we will deliver more than what we had expected to deliver.
And so we're staying the course in terms of our approach, but we are aware of a lot of the things that you're talking about we look at the environment and you know on this chart here I'll highlight we've got the inflation impact and the normalization of the environment impact and that sort of half ish of that 5% operating cost increase it's been probably about 1% more pressure there than we had expect.
But against that we have had successes in our efficiencies which have been in some cases outperforming our expectations. We have looked at our strategic investments and paste them to some extent until we've already been reacting and we have the ability to react through the rest of the year and I will point out in our strategic investments, you'll see two big buckets, we've highlighted.
Costco and that's been ramping up over several quarters now as we as we were preparing to bring that program on and we had a partial impact of those expenses. This quarter, we'll have the full impact next quarter and after that that will start plateauing.
Our investments in the U S franchise, which again has been ramping up but we see that plateauing towards the end of this year and so overall, we will continue investing at a high level, but that accelerated investment in the step up in the increase in expenses of that was causing us.
There'll be some room to for that to moderate and so I would expect going into the back half of the year and into next year some of that moderation we have expected.
Leavers to pull again to move that around by a couple of percent if we need to obviously for this year everyday that passes there's less and less of that lever, but net net I think we'll be able to offset some of the headwinds that we'll be able to deliver a better pre provision earnings result than what we expected in that range.
And we are still striving for that positive operating leverage right right side of neutral for this year.
Ebrahim just to build on Roger's remarks. This is all consistent with what we've telegraphed to our investors we are investing to grow grow our client franchise within during value and you see that in terms of our market leading revenue growth our market, leading pre provision growth, our strategic and focused way of growing market share profitably.
By deepening client relationships are improving client experience scores. So all of these investments and I look at them as investments are delivering growth above market and above our peer group and I think that's the most important thing to note here is the linkage between what we've telegraphed what we've done what we've delivered and what we will continue to deliver going for.
Sure.
Thank you.
Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead.
Oh, Thank you good morning.
I've been in Iraq, maybe just a technical question on the Sip I skipped slide eight theres another large gain on the Oh, Yeah, I think it was like 286.
Like last quarter, just maybe maybe some context around that and maybe some.
Some guidance on that is going to kind of persist going forward or should that moderate towards historical standards.
Sorry, It was a it was a bit muffled in the beginning so we didn't hear the beginning part of your question.
Just in the supplemental I think it's slide eight there was a large gain of $286 million on the.
Instruments, and just wondering what that why did you get a large gain last quarter as well.
Certainly a lot higher than historical standards.
Yeah, nothing I'm not.
The thing that I would highlight what without respect that would be something on an ongoing basis.
Okay.
And maybe just on mortgages are you talking about margin pressure is that due to competition mostly.
Yeah, and we are seeing and Laura can jump here from a business perspective, but we did what I referenced some of the pressure on margins and there was some of that pressure on the market just as we said on the <unk> side.
Yeah, Hi, Scott.
Yeah, we did see a lot of them I'm going to say inflow margin compression and the whole industry has seen that let's say the market has been incredibly competitive and our economic environment did see our funding costs I'd say rise faster than client rates. So our expectation when it comes to.
Mortgage inflows spreads is that we expect them to slowly improve.
When we enter the back half of the year and that's as we see sort of the increased pricing where kids through its way through the system.
I think you've seen we've taken a.
Market leadership position in raising prices over the last few months when it comes to mortgage pricing. So we're working hard to restore I'd say more sustainable margin. So as we get through the back half of this year, we should see some of that margin compression start to come off in the mortgage book.
And maybe if I sorry, if I jump in on your question I think you had the wrong slide reference I think you're referring to slide six and you're referring to the fair value P&L. That's that's just related to the trading revenue and so the strong trading revenues coming from the other income typically come in in that line. So you saw last quarter strong trading revenues reflected there in this.
The strong trading revenues.
Okay. Thanks, Rob Thanks, a lot.
Thank you.
Next question is from many grauman from Scotiabank. Please go ahead.
Hi, Good morning, just a question on cards first just in terms of numbers that the card fee line down.
Sequentially is that just seasonality or is there something else there driving that.
Yeah.
Good morning Manny.
I'll take that.
So on cards are we're actually seeing I'd say continued improvements in purchase volumes. So when I exclude Costco were actually up almost 30% year over year and I think we're up about 30% from 2019 levels. So we have seen I'm going to say.
Full recovery if you will in the categories that are travel hotel entertainment. So everything is good if you're looking at quarter over quarter, where you see if you will things coming down a bit that's really just seasonality, but when we go back over the years in and look at quarter over quarter seasonal decreases.
This is actually been one of our better quarters. So we're feeling pretty good about our card performance.
What I would say, though is that our interest bearing balances those did remain flat on a year over year basis and again, they were also down a bit quarter over quarter, that's all seasonality.
And I do think as I've mentioned in previous calls it's going to take some time before those increased purchase volumes translate into a revolving balance growth, but it is coming in and when it does I would say that we are very well positioned for growth just given again the strong value propositions of the cards that we have out there.
We've been leading the market on new account sales and cards, excluding Costco and as of March. We now have the the Costco card portfolio and the new account growth on that it's still early days has been well well well above expectations. So I think things are looking good.
For us on a go forward basis.
Thanks for that and your comments.
Good segue to the second part of my question was just about you know.
Thinking about the card spending versus borrowing.
What that tells you about the health of the consumer obviously everyone's worried about.
The recession downside risks, but when you when you look at that I'm. Just wondering if if there is any do you see any signs of stress there or actually when I look at it tells me the opposite story. So just wondering on the perspective there in terms of the health of the consumer as you see it through the lens of your card book.
Yeah, we're feeling really good about the I'd say the health of the consumer we're seeing them again, we thought through the pandemic. We continue to see I would say very prudent client behavior. When we look at our whether its cards or our other unsecured lines and we look.
Utilization rates, if you will oh things are actually much better than they were pre pandemic and so.
Utilization rates are down I wanted to see about 20% when we look at our unsecured lines or even HELOC. So if we go back to you know pre pandemic 2019 compared to today and so we keep we see people just didn't lessen in our cards business, our revolve rates from 2019, they're down.
Call it 7% to 10% so we're seeing very prudent behavior. When it comes to how people are managing their debt and how theyre, making payments on their credit cards.
So very very pleased with the performance that we're seeing from our clients and very well positioned strategically for growth going forward. What we've built in what's happened here with their card portfolio with a market leading portfolio. Many you look at the travel card portfolio. The non travel card portfolio and CIBC has the best.
Card portfolio in the marketplace. The two 2 million plus newly on boarded clients from Costco most of them don't bank with us and a large majority are affluent and a significant minority are small business owners. Both of those will contribute to increased growth going forward and that's why then.
Message about investing for the future is an important narrative for us that differentiates us from the rest of the marketplace, where the well one of the few banks in North America that are investing and growing at the top end of the market and a lot of that is due to these investments in the card portfolio, our U S business innovation.
The list goes on and that's why we're confident going forward that we're going to be able to continue to drive the liver.
Leading growth.
Okay. Thank you very much for it.
Yes.
Thank you.
The next question is from Gabriel <unk> from National Bank Financial. Please go ahead.
Good morning, My question for Sean I mean, the change in provisions are caused by the additions to performing excluding the Costco and stuff I mean, it looks driven mainly by our adjustments to your economic indicators forward looking indicators I'm seeing more conservative versus last quarter.
Indian GDP U S GDP forecasts in the Canadian housing price.
Index.
Oh is it.
There any.
One of these factors are much more influential than the others just to kind of get a sense of the GDP in Canada and U S is more important than the housing price forecast.
Great question Gabriel Thanks, Thanks for the question.
<unk>.
You're right the F L. A I R would've driven the performing build excluding the Costco acquisition. This quarter, we're very pleased with the performance from an impaired loss perspective on the portfolio.
Given the deterioration in the F L a quarter on quarter.
Sort of resulted in a flattish small build but the the more significant in the context of this quarter. The more significant item is the debt service ratio.
<unk> ER, which is reflective of the higher interest rate environment and some of those knock on impacts and so that's really one of the the more influential ones this quarter the GDP.
Deterioration in the growth forecast.
<unk> some of the business units as well, but I'd say D. S. R.
Does the was one of the more sensitive ones this quarter.
It's not it's not just money don't listen these are it's in the it's in note six okay Yep.
Okay.
Thank you okay.
Thank you. The next question is.
From Mario Mendonca from TD Securities. Please go ahead.
Good morning, Sean can you help me understand.
And I think you described it but I think I can I could do with a better understanding of the increase in impaired.
C L a in the Canadian personal and business.
I didn't see any deterioration in delinquencies or formations.
Has that increased predominantly costco or is there something else going on there.
I know, it's a remember that the.
The impaired losses also have a modeled component to them.
And so when the when the F L I and again the debt service coverage for both personal and for mortgages when that change.
Change occurred in the forecast that has a knock on impact both from a performing perspective, but also from a impaired loss perspective for those portfolios. So that's what you're seeing more than half of the build.
In the P. B B results was it was a reflection of the modeled F. L wise and Costco would be a modest portion of them.
Yeah.
Now I don't expect you to comment on other banks, but CIBC is the only one where I saw this play out.
And no case that I see this play out for any other bank is it just all the banks have their own sort of models and sensitivities and we shouldn't expect it to match quarter to quarter.
Yeah, I can't really comment on the other banks we.
We've built our models are we obviously follow <unk> nine based on our interpretation and understanding of it when we have input at our F. L. I F. We have generated the result that you've seen so you could see variability quarter on quarter. We've also had significant growth in the portfolio.
So that also impacts are the performing provision we've had some release you'll have seen in capital markets. There was a a release that related specifically to oil and gas given the improved outlook for the improved.
The improved results and outlook, but you know from quarter to quarter as we've talked about it as as the macroeconomic environment is it deteriorates, we may see a build and if it improves.
Improves then we could see releases, but quarter on quarter, we had.
A modest deterioration and so that came through our our our results. Okay then abroad.
A broad question and then probably for Victor on Iraq.
All of our banks have.
Use their capital to grow in different ways. Some are doing it through acquisition or that Cibc's approach has been to grow our WMA organically, but it would appear to me that with the capital ratio checking back a little now and your guidance that it should maybe remained stable going forward would I be correct in suggesting that the bank will.
Manage the RW weigh a little bit more or manage that growth a little more closely by that I mean, we may not see our waa growth at the same pace, we've seen in the past.
Mario Good morning, that's a good question I'd highlight a couple of things one you're absolutely right that our focus is on organic growth and that's why you'll see that reflected in every single business unit that we run you see growth and its client focus growth. If you lift the hood on that growth there are deep meaningful client relationships from personal bank.
King right through the capital markets.
At 11.7, we feel very good about where we're at we have the cushion to deal with any market volatility. They may come to all the banks in the banking sector and it allows us the room to continue to grow you know you may have seen the peak in terms of high growth rates, but we will continue to pace to be at the top end of the market when client really.
She ships when profitable market share going forward Youll see some basel related changes next year, not a lot to capital and that will give us continued excess.
Excess capital to continue to grow and deploy that capital through the various avenues that we've articulated in the past. So we feel good about our strategy of organic growth, we feel good about our level of capital and we feel good about our level to continue to grow at the top end of the market do it profitably and do it sensibly and Raj I don't know if you'd like to add anything to.
Got it.
As Victor covered this was a deliberate strategy Maria so maybe the only thing I'll add right. As a reminder, as we were coming out of the pandemic with peak levels of capital and liquidity. We had telegraphed that we made a conscious decision to deploy that capital for growth organically and we've also communicated the reason we did that and we will talk about.
More about that in Investor day is we've done good M&A in the past and we believe we can continue to do good M&A, but organic growth returns are always superior, particularly in the short term and as long as we have good opportunities to grow organically, we feel that as a better use of capital than any other avenue, we have including returning capital to shareholders.
We are focused on generating tangible value and growing tangible value for our shareholders and that is the best lever, we have and so we've leaned on it until we've deliberately been bringing down our excess capital position through organic deployment to your point that continue this quarter I take out some of the market market volatility, which will be back and forward takeout Costco, which is a one time.
You'll see that we drew down on capital even on an organic basis and that was deliberate and planned at the levels. We are now as Victor said, we feel comfortable there is still a buffer but from this point on I would expect it.
More balanced where as I said in my remarks generation will be offset by the deployment and the return of capital. So we will be generally around these levels plus or minus is what we expect on capital, but that still allows us with that level of capital deployment given the investments we've made so far and some of the investments. We've made now will allow us to grow.
No more capital light growth on the back of those Costco is a good example, we have RTW as against that portfolio, but now there's a lot of franchising opportunities that will be more capital light and so that's what allows us to now continue to grow half their revenue and pre provision earnings momentum, but keep capital more flat from here.
That's clear thank you.
Yeah.
Thank you. The next question is from Lamar Prasad from <unk> Securities. Please go ahead.
Thanks. My question is for Sean maybe just coming back to the response to Gabriel's question on the debt service ratios are impacting the performing double this quarter should we expect additional builds if interest rates continue to move higher.
Because as you are aware consensus estimates or bank of Canada interest rates, they still contemplate a number of further rate hikes.
Throughout the course of 2022 and 2023, so I'll leave it there.
Good morning, Mark.
So the F L I contemplate a rising rate environment to their forward looking so we built into the forecast that raising that rising rate environment I'd say, we've captured our current view of it maybe an extra 25 basis point move.
In the outer quarters, but we've reflected our view of what that rising rate environment is going to be so unless that.
That outlook changes materially then wouldn't expect to see additional builds just as a function of that.
Okay. That's great. Thanks, guys.
Thank you. The next question is from Sohrab <unk> from BMO capital markets. Please go ahead.
Sean you're I guess, you're on this block to that I'm, just going to come back to you I just wanted to.
I hear you on the Ifr S and forward leading indicators in the models and.
One of those tools I guess management teams use but as the chief risk officer, when you stand back.
And you think about qualitatively.
Yeah, so the quality of the portfolio and the growth at <unk>.
Bank has been delivering.
Do you feel adequately reserved.
Good morning, Sarah its a great question I'd say, yes.
The the <unk>.
Portfolio continues to perform well when we look across the various businesses. When we look across the growth that we've achieved across our retail and our business and government portfolios, we're very comfortable with the underwriting.
That we've had in place I think it positions us well as you know the way the models work if there's a deterioration we said that we.
We have the results from last quarter, we reflect the change in the economic outlook.
And then reflect that in our in our performing provisions and so this quarter as I said, you wound up with a a flattish performing provision, but feel very good about our portfolio and the road ahead, we don't see near term.
Stresses we've seen some we've talked about this in prior quarters, we expect to see some normalization of those loss rates over time as things get to some level of sort of pre pandemic activity I expect that sort of over the coming several quarters.
But.
There's the uncertainty out there I think is reflected in the in the performing provision we feel good about our allowance coverages, which remains strong.
And just as a just as a kind of a dent into that to you I think you mentioned the GDP growth forecast is one of the forward leading indicators to higher rates and I think the debt service ratio.
Is it fair to say that there was a countervailing balance here because of unemployment rate and that.
Is that yet another area that I guess it could come in at negative here are you are you how should I think about how you have factored unemployment rate outlooks I suppose.
So again, you're thinking like that yeah. In note six we disclose our are our forecast for the unemployment rate there have been small changes there, but we will we will continue to factor that into the analysis going forward is one of the.
Certainly one of the F O wise as I was saying earlier the debt service coverage was particularly impactful one this quarter.
It's all for me.
Thank you. The next question is from Nigel D'souza from Veritas investments. Please go ahead.
Thank you good morning, I had a follow up again on your allowances for performing loans and I wanted to tackle it a different way.
When I look at your disclosure on stage two loans.
Based on my math for personal and credit card loans, you have about 20% of both portfolio sitting in stage, two and that's relative to stage two loans running at about 10% prior to the pandemic. So I'm trying to get a sense of what's.
What's the rationale for about 20% of that portfolio being in stage two.
What's preventing the migration of those loans into back into stage one.
So as you recall, we had builds over the course of 2020, we started from a coverage perspective on our performing balances at.
35 basis points.
We're now at 45 basis points after having released provisions over the course of time.
To the extent that you know as the environment continues to improve.
Then we would expect to see some of that that migration happen, but as I said with the F. L is moving the way. They have we're we're watching that migration closely. It's it's a it's still reflective of our view overall are performing build.
So I'm trying to get a understanding here because these two loans represent a significant increase in credit risk. So should we interpret that as your extra credit judgment that.
The percent of your personal credit card portfolio.
Exhibiting a significant increase in credit risk with some honourable to a significant increase in credit risk well. It did we did recognize that over the course of 2020.
And to the extent that are that we continue to look at those portfolios and in summer.
Some areas continue to exercise that same judgement, we're watching for that those indications of of continued positive migration that you could see that coming through in subsequent quarters.
Have you seen maybe a reflection of the of the build over the course of 2020.
And I assume that's the same rationale for your mortgage book with a 6% stage two versus closer to 3%.
Correct.
Okay, Great. That's it for me thank you.
Thank you.
The next question.
Uh huh.
I'm Danielle thanks aftermarket.
Hi can you hear me.
Yes, I hear you Doug.
Okay perfect.
Just on the commercial loan growth, obviously very strong in Canada, and the U S. An area that obviously and the team has been quite focused on I'm. Just more curious what are you hearing from businesses because it does seem counter to what the feeling out there.
And I've had this question for many people.
About what.
When you read the paper every day and more importantly, so well.
Well, that's one part of it and then what level of growth should we expect this to normalize or is this a level of growth that you think you can continue to drive over the over the coming year.
Good morning, and thank you for the question as John Hotel, Luis I'll start and then pass it over to my colleague Mike.
So last quarter when we I was asked the question about confidence in the environment I classified business confidence is very strong and today three months later, it's still strong.
It's a nudge down for sure but people are still feeling good demand for product is there.
Price increases continue to get passed on.
Labor remains a challenge supply chain is hit and Miss some people tell me, it's getting better some people worse, but overall.
People remain confident.
So in terms of Canada and growth I mean, this quarter was particularly strong I think we were 6% quarter over quarter in loan growth I don't think youll see that I think you'll see us go back to our normal healthy historical rates low double digits.
And I think we'll outperform the market.
Michael I'll pass it to you.
Thank you John So it's more of the same in our commercial book and with our clients and in the U S. As John just described our clients remain confident.
They're a bit more cautious as they you know they're dealing with as you mentioned supply chain issues employee shortages and inflations inflation, but they're focused on growth, they're borrowing to rebuild our inventories and that's reflected in our revolver utilization getting back up to more historical levels and on the <unk>.
State side, they're there they're building to meet our housing demands in the U S.
So for our commercial clients.
Can describe the sentiment as as good as confident and what they're telling US mostly if you had to sum. It up is that demand and revenue is not an issue for them, they're experiencing margin compression that's a bit of concern, but they're still looking at growth like John in the U S.
We see this.
This very healthy growth that we had in.
In the U S.
Which on a spot basis.
Got to 18% year over year, we see that moderating, but we still expect to see growth in the double digit range moving forward.
And just a quick follow up maybe for Canada, and the U S is there a particular.
Sector, where you're doing particularly well or sectors that you are particularly you're taking more market share.
And in Canada about 40% of our growth has come from real estate our 15th.
15% has come from innovation banking will talk a little bit about that on Investor day, that's been a focus for us and I think where we're doing very well there and the rest is a very broad based by industry and by geography, Mike.
A little bit different in the U S and a bit of a reversal from prior quarters, our C&I portfolio and businesses and customers or led the way on growth the past couple of quarters. In this this this past quarter in particular.
We've also seen a you know.
A fair number of payoffs in the real estate area, but it's it's a reflective of our growth that our strategy in the U S where our network of offices.
Around the country, where we've brought in new teams, new bankers new products, they're all coming online and a lot of that stuff on the C&I side, and we expect that to continue going forward as part of the investment in organic growth at both Victor and harass you mentioned.
Earlier.
Put simply it's working.
Thank you.
Thank you. The next question is from Saree I'm over here from BMO capital markets. Please go ahead.
Do you know you're getting rewarded sort of complying with the rules here.
Alright capital markets, I mean, I think our loan growth there.
Keep on looking at it elsewhere, but you're up I think 30% plus in our.
Loans in the capital market segment.
Trading revenue.
At a record level.
What are you doing differently, there and how sustainable is this.
Thanks very much for the question. Good morning, So you know it's.
It's more of the same I'll be I'll be honest, we are we have a well diversified franchise in terms of the loan growth. It is very well diversified across our corporate franchise across our institutional client franchise, which would include insurance companies asset managers pension plans.
But capital in both sides of the border.
As I think I mentioned last quarter, we expect to see lending growth taper off.
Throughout the year and in fact quarter over quarter growth on average balances was 8% down from 10% last quarter, but more importantly, we're seeing growth across the platform. We're seeing a very very good results with our with our trading businesses.
Quite often in the less capital intensive businesses such as foreign exchange.
We saw a 26% increase year over year.
In our in our trading revenues.
<unk> is working extremely well to deliver capital markets.
Across our franchise.
Including our commercial wealth and retail clients. So we've seen revenue growth in the U S of around 30% year over year and double digit growth servicing non traditional clients I just mentioned so really it's all coming together delivering for our franchise across our bank the capital markets product suite.
Quite optimistic on the outlook the pipeline is quite strong the.
The environment is the environment, but we're standing with our clients. It's a it is a cycle tested business. So I'm optimistic that given the strength of the pipeline that we can continue to deliver on that $600 million plus P. P. P T earnings growth.
So Rob just to build on Harry's comments, our capital markets business as another point of distinction from our bank relative to our peer group not only is our strength in Canada. Notable our growth in the U S. Notable but one in every $4 in revenue in the capital markets business connected to our overall bank and retail wealth management and commercial.
Banking and other retail banking partnerships that we have outside our country through our direct financial services business again, it's something that we'll highlight more deeply at Investor day.
Thank you.
Thank you there are no further questions on the phone lines at this time I will turn the call back over to Victor.
Thank you very much operator, and thank you for your great questions I wanted to just close off by taking this opportunity to thank our 45000 CIBC team members, who play a critical role in bringing purpose to life for ourselves and for our clients each and every day and to our shareholders and to all our sell side analysts. Thank you for your continued support and for your good questions.
And we will speak with you in a couple of weeks at our Investor day, where you'll learn more about our bank and you get to spend more face time with our leadership team look forward to seeing you then have a good day.
Yeah.
Thank you.
The conference has now ended please disconnect your lines at this time and we thank you for your participation.
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