Q3 2022 Canadian Imperial Bank of Commerce Earnings Call
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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.
Good morning.
This morning's presentation with opening remarks from Victor.
Chief Executive Officer, followed by <unk>.
Our Chief Financial Officer our.
Our chief risk officer.
Also on the call today are a number of our group heads including.
U S commercial banking and wealth management, Harry Culham capital markets in direct financial services Laura Detore.
Canadian personal and business banking.
Canadian commercial banking and wealth management.
If you take questions following the prepared remarks.
Usual during the Q&A.
Enough time for everyone to participate please limit your questions to one and then.
Q if need be.
As noted on slide two of our Investor presentations. Our comments may contain forward looking statements, which involve assumptions and have inherent risks and uncertainties actual results may differ materially.
I'd like to turn the meeting over to Victor.
Thank you Jeff Good morning, everyone and thank you for joining US today. My remarks. This morning will include comments about our third quarter results and the operating environment as well as a summary of our key strategic priorities, which we outlined to you on Investor day.
Roger will then provide a more detailed review of the quarter, followed by Sean will cover our credit performance after which all of us will be happy to take any questions you may have.
Against an increasingly challenging macro environment, our CIBC team delivered solid third quarter results with earnings of $1 7 billion Canadian dollars.
Revenue growth of 10% was underpinned by strong net interest income and fee growth as well as a 19% year over year increase in our connectivity revenue.
Our asset quality remains very strong with a net write off ratio that is well below our pre pandemic levels.
Our earnings generate a return on equity of 15, 1%.
Capital position remains strong with a CET one ratio of 11, 8%.
The results were driven by organic growth in all of our businesses, we delivered solid volume growth in both consumer and commercial loans and deposits and higher fee income. We also had strong contributions from direct financial services, Inc.
Differentiator for CIBC, which I'll speak to later.
Let me turn now to our business segment highlights starting with personal and business banking.
Our consumer segment continues to see good momentum as we remain focused on executing against our strategy.
Our priorities are to gain market share in the high growth high touch affluent segment, while delivering exceptional client experiences to all of our clients through leading edge technology.
As a proof point, our strategic investments and providing personalized advice are contributing to solid client acquisition growth.
On a rolling 12 month basis, and excluding our Costco acquisition. We've added over 300000 clients, 25% are which are in the affluent segment. This compares to a baseline of 11% and our current book of business.
Continuous improvements, we're making to our online banking platform have also been recognized with three awards this quarter.
Number one ranking from J D power for online banking customer satisfaction.
And two leadership awards and the digital bankers 2022 global digital client experience banking awards.
Our commitment to making our clients lifetime ambitions, a reality led to our recently announced partnership with willful.
Online parts for them for World creation.
With this collaboration we can offer our clients peace of mind through a convenient and affordable online a state planning tool.
Going forward, we will continue to seek new and innovative enhancements to our digital banking platforms as we advance our digitization strategy.
Our business with the affluent segment.
Yeah.
So turning to our North American commercial banking and wealth management platform, we see continued solid loan and deposit growth on both sides of the border in commercial banking.
Despite economic uncertainties entrepreneurs remain cautiously optimistic about near term growth opportunities.
As a result, we expect to see continued growth with our clients across our commercial business banking business.
Our wealth management segment also performed well.
The market declines in AUM were offset by positive net sales.
We remain focused on growing our private wealth business to generate stable fee based revenue as well as increasing connectivity with the rest of our bank to drive referrals and to deepen client relationships.
Our capital markets business performed well in a volatile market with topline growth in all business segments benefiting from increased advisory services.
Foreign exchange trading revenue and growth in our direct financial services business.
The latter was helped by rising interest rates robust volume growth and new client relationships in both simply financial and in our alternate solutions group.
We also increased currency transactions, which arise from a recovery in travel and continued growth in our international student banking offer.
As we enter the second half of this year, the geopolitical tensions and macroeconomic challenges from the first half are expected to continue leading to more tempered outlook for second half GDP performance in both of our operating regions.
Now despite the economic uncertainties are.
The I B C team remains confident in our ability to navigate the market.
Serve our clients and create long term value for our shareholders, while maintaining a disciplined approach to risk.
We are a client centric growth strategy disciplined leadership team and an ability to manage the pace of our investments as the economic environment evolves.
As presented at our Investor Day in June our client focus strategy consists of three priorities.
The first of which is to focus on growing our high share of high growth High touch segment, where we're well positioned we have close to 4000 and CIBC professionals dedicated to building our business with the affluent and high net worth client segments.
We have a unique co location of our commercial and wealth management professionals to drive long term relationship opportunities in the private economy.
Our second priority is to continue to elevate the CIBC banking experience for our clients.
Through investments in Digitization cloud based technology, and further increasing connectivity across our businesses.
We're focused on continuously adapting to the evolving financial services landscape.
And our third priority is to continue to invest in our future Differentiators that will make a difference to the growth profile of our bank.
Differentiators include our direct financial services business.
Apprised of simply financial investors edge, and our alternate solutions group.
All of which are well positioned to reach higher growth digital savvy and volume value conscious clients.
Another differentiator is there.
Innovation banking franchise, which supports early stage companies in technology life Sciences health care and clean tech sectors.
We're also focused on modernizing our payments platform to better serve our clients' attitudes behaviors and preferences of consumers and retailers evolve.
And our leading renewables and energy transition platform to support our clients on their journey to a low carbon economy.
So in closing we're mindful of the challenges of the current operating environment and we're confident that we have a strategy and a foundation in place to look to deliver sustainable value consistently to all of our stakeholders. Our CIBC team has demonstrated a resilience and challenging environments in the past and will continue to demonstrate that resilience.
Going forward and with that I'll turn the call over to Raj.
Thank you Victor and good morning to all of you.
Our team delivered yet another successful quarter in Q3, resulting in reported net income of $1 7 billion or diluted earnings per share of $1 78.
Excluding items of note adjusted EPS was $1 85.
While provisions for credit losses against performing loans trended higher driven by the negative shift in the economic outlook credit performance remained strong as evidenced by an impaired loan loss ratio of 12 basis points, Sean 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.
Executing against our strategic priorities, we outlined at our recent Investor day, we maintained the strong growth momentum across our bank pre provision pretax earnings of $2 5 billion in revenue of 5.6 billion were both up 10% from the prior year supported by broad based balance sheet growth improving margins as well as <unk>.
Higher trading and investment gains.
The strength of our Canadian P&C franchise underpin this quarter's results delivering revenue and pre provision pretax earnings growth of 16% and 19% respectively over the prior year.
Total bank expenses were up 2% sequentially or 10% from the prior year as the impact of inflation and increased strategic investments begins to stabilize.
As highlighted on slide nine net interest income growth continues to be strong up 14%, excluding trading compared to the prior year.
NII was helped by diversified loan and deposit growth across our franchise up 16% and 12% respectively over the prior year.
Total bank NIM was stable sequentially and up four basis points excluding trading.
Canadian personal and commercial banking NIM was up 13 basis points, mainly due to product margins, which benefited from higher interest rates, partly offset by lower margins on new mortgage originations growth in higher margin assets and elevated mortgage prepayment activity also supported margin expansion.
NIM in our U S segment was down three basis points over the quarter, primarily due to lower prepayment and investment gains, partly offset by higher product margins.
We anticipate NII growth momentum to remain strong in the medium term supported by volume growth and higher rates, but expect some offsetting pressure from mortgage origination spreads in the short term.
As shown on slide 10, we continue to be positioned to benefit from rising interest rates. We've included additional disclosure this quarter to provide more color on our interest rate sensitivity over 80% of the benefit from 100 basis point rate increase relates to the structural repricing of capital and deposit balances across our various segments.
As depicted on the slide the Canadian P&C businesses account for approximately 65% of this NII increased primarily due to expansion of deposit margins.
Turning to slide 11, noninterest income of $2 3 billion was up 8% from the prior year trading income as well as investment management and custodial fees were up from the prior year, despite market driven sequential declines.
Market related fees, excluding these items faced headwinds from market conditions, this quarter, which negatively impacted assets under management and commissions on securities.
Transaction related fees were up 6% from the prior year benefiting from credit as well as deposit and payment fees.
Client card activity continued to improve and purchase volumes now exceed pre pandemic levels.
Turning to slide 12 expenses were up 10% over the prior year or 11% excluding performance based compensation, resulting in relatively neutral operating leverage on.
Ongoing strategic investments contributed 5% to year over year expense growth with investments in our U S platform and in our Canadian affluent strategy through the acquisition of the co brand portfolio accounting for over half of the increase.
Excluding strategic investments in addition to business as usual growth expenses were impacted by higher inflation and normalizing travel and business development costs, we expect inflationary factors to start stabilizing over the next few quarters and we're proactively managing the pace of our strategic investments to deliver against our operating leverage targets.
In the context of a moderating market environment.
Turning to slide 13, our capital and liquidity position remains strong this quarter as we continued to deploy balance sheet resources towards organic growth across our client franchise. We ended the quarter with a CET one ratio of 11, 8% up four basis points from the prior quarter as a result of internal capital generation, partly offset by organic growth.
And risk weighted assets, we continue to expect internal capital generation and organic deployment to be largely balanced going forward and our current capital level positions us well to withstand any emerging risks.
Starting on slide 14, we highlight our strategic business unit results net income in Canadian personal and business banking for the quarter was $637 million, reflecting our continued progress in strengthening our consumer and business franchise pre provision pretax earnings of $1 1 billion were up 14% from the prior year and 11.
1% from the prior quarter.
Revenue was up $2 3 billion were up 13% year over year supported by 17% growth in net interest income and stable noninterest income expenses of 1.3 billion were up 6% sequentially and 12% from the same quarter last year, driven by higher strategic investments, including costs related to the co brand portfolio.
And employee related expenses.
Moving on to Slide 15, net income in Canadian commercial and wealth management was $484 million pre.
Pre provision pretax earnings of $668 million were up 13% from a year ago benefiting from strong results in commercial banking, partially offset by the impact of unfavorable markets on the wealth management business commercial banking revenues were up 27% driven by double digit loan and deposit growth increased client transaction activity.
<unk> and favorable margins, we expect lending and deposit growth to continue but to moderate from current levels over the next few quarters wealth management revenue was comparable to the prior year.
As higher fee based revenues and net interest income in our brokerage and private banking businesses was offset by the impact of 5% lower AUM driven by market depreciation as well as lower commissions due to decreased transactional activity.
Increased expenses were in large part due to the higher performance and continued investment.
Net income in U S commercial and wealth with $162 million in U S dollars down 28% from the prior year due to normalizing credit provisions compared to a reversal of provisions last year.
Pre provision pretax earnings of $225 million were marginally lower than the prior year revenues were up 8% over the same period supported by strong growth in loans and deposits and stable margins, excluding the impact of lower prepayment activity.
Expenses were up 4% sequentially and 18% from the prior year, partly due to our ongoing investments in infrastructure and client facing capabilities across our U S operations, we expect expenses to stabilize starting next quarter as we complete the ongoing investments.
Slide 17 speaks to our diversified capital markets business net income of $447 million was down 9% from the prior year, while pre provision pretax earnings of $606 million were comparable.
Revenues of $1 2 billion were up 5% from last year, a stronger trading direct financial services and corporate banking revenues were partially offset by lower underwriting and investment banking expenses were up 12% driven by employee related expenses as well as continued investments.
Slide 18 reflects the results of corporate and other segment.
Our net loss of $50 million in the quarter compared to a net loss of $74 million in the same quarter last year revenue was comparable year over year, while expenses were lower due to timing of strategic initiatives and lower enterprise costs retained in the center consistent with our prior guidance, we anticipate quarterly losses in this segment to remain.
And the $75 million to $225 million range.
To close were.
Proud of the results our team delivered this quarter, we maintained strong revenue momentum across the business in a less constructive environments, while our disciplined resource allocation framework allowed us to proactively manage execution of our strategic initiatives and drive improving operating leverage despite continued investment as we look.
Forward, we remain confident in our strategic plan and are well positioned to continue delivering value for our stakeholders and a broad range of economic outcomes and with that I'll turn the call over to Sean.
Thank you for ACH and good morning all.
Our overall credit performance remained strong this quarter, reflecting the resilience of our portfolio notwithstanding various headwinds impacting the overall economy.
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.
Slide 21 details our provision for credit losses.
Our PCL was 243 million in Q3, compared with a provision of $303 million last quarter on a reported basis or $209 million on an adjusted basis provision.
Provisions on impaired loans was 156 million in Q3.
Impaired provisions were down quarter over quarter across our businesses other than in Canadian commercial banking and wealth management. We've tried a small provision this quarter versus a recovery last quarter.
The relatively low level of impaired provisions this quarter was partly driven by a few provision reversals in our business and government loan portfolio.
Impaired provisions in retail remained stable quarter over quarter and continued to perform better than pre pandemic levels provision.
Provision on performing loans was $87 million this quarter driven by deterioration in our forward looking indicators from last quarter and other portfolio movements.
Turning to slide 22, our 11th allowance coverage ratio remained flat at 58 basis points in Q3.
Allowance dollars were up quarter over quarter, mainly due to an increase in performing allowances mentioned earlier, partially offset by a decrease in the impaired allowance.
Slide 23 details our lending portfolio mix.
Consistent with previous quarters, our portfolio reflects good diversification and strong overall credit quality.
Our total loan balances were 517 billion of which 56% is real estate secured lending.
Our variable rate mortgage portfolio accounts for a little over a third of our mortgage portfolio and show strong credit quality and performance.
The average loan to value for our uninsured mortgage portfolio has decreased further this quarter and is now at 45%.
We published data indicates a small drop in the housing price index and should that continue we would expect average loan to value to increase somewhat over future quarters, but still provide strong coverage.
Provide more comments on our mortgage portfolio in a few slides.
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 details our gross impaired loans.
Gross impaired balances were down in Q3.
Retail impaired balances were up slightly while the business and government portfolio experienced a decrease principally due to write offs of two loans.
Despite the slight increase quarter over quarter, new formations remained stable and low from a historical perspective.
And both the impaired the gross impaired loan ratio and new formations remained lower than our pre pandemic run rate.
Slide 25 details, but net write off and 90 plus day delinquency rates of our Canadian consumer portfolios.
Net write off dollars trended higher in Q3 as expected as client activity continues to revert towards pre pandemic spending patterns.
Overall retail 90, plus day delinquency rates remained flat in Q3 with a delinquency dollar increase in credit cards and personal lending.
As I've noted in prior quarters, we continue to expect an increase in retail delinquencies and write offs from the lows experienced in fiscal 2020, one as clients' liquidity and spending patterns normalize over coming quarters.
Slide 26 provides an overview of our Canadian real estate secured personal lending portfolio.
Our business strategy has been to focus our origination efforts with clients, where we have deep and balance relationships and we've seen that in our results almost three quarters four quarters of our mortgage originations over the last two years I've been with clients, where we have those relationships.
88% of mortgages are owner occupied with the balance being principally investor mortgages.
Investor mortgages are subject to heightened credit qualification and as shown on this slide demonstrates strong performance. The compares favorably to owner occupied mortgages.
Our late stage delinquency rates across these portfolios continue to remain low and stable with the Vancouver, and Toronto portfolios outperforming our Canadian average will continue to take a prudent approach and are closely monitoring as interest rates rise and markets evolve.
On Slide 27, we've included additional disclosure on the portion of our mortgage portfolio that will be renewing in the next 12 months.
Over that period 19 billion of fixed rate and 7 billion of variable rate mortgages contractually come up for renewal.
Almost all of our variable rate mortgages have fixed payments during the term and are therefore impacted by rising rates through an extension of amortization rather than an immediate change to the monthly payment.
At renewal mortgages are reverted to the original amortization schedule, which may require additional payments.
At this time, we see only a small portion less than $20 million of mortgage balances with clients that we see as being at higher risk from a credit perspective, Andrew the ltvs are in excess of 70%.
We actively monitor our portfolios and proactively reach out to clients, who are at higher risk of financial stress and we don't expect to see material losses from our portfolios.
Slide 28 shows our FICO score and LTV distribution in our Canadian uninsured residential mortgage portfolio.
Only 4% of our uninsured mortgages have a current FICO score of 650 or less than 3% of the portfolio have ltvs over 75% and less than 1% of our uninsured mortgage portfolio has both a score of 650 or less and an LTV over 75%.
In closing we continue to see good overall performance this quarter, our portfolio's exhibit strong credit quality driven by our disciplined underwriting through the cycle and we're pleased with credit performance to date.
We continue to expect a return to more normalized credit losses over time and maintain prudent allowance coverages.
And as economic conditions evolve, we work proactively with our clients who are more at risk to provide solutions that ultimately drive positive outcomes.
I'll now turn the call back to the operator.
Thank you.
Please press star one at this time, if you have a question.
And your first question is from John Aiken from Barclays. Please go ahead.
Good morning was hoping that you could give us a bit of an update in terms of the Costco portfolio. How the performance has been <unk> been working through the system and whether or not you can speak to any early wins in terms of cross selling into that customer base.
Good morning, John It's Laura happy to take that question.
Maybe I'll just start from a financial perspective are to say that we do continue to track within our expectation of delivering a positive net income within two years.
So that's good I'd tell you, we're really pleased with our strategic investment as we've talked about it really is a key part of our strategy to grow in the mass affluent segment.
When we look at the early client results, we're really encouraged them I'd tell you that the portfolio has performed well above our expectations and that's in terms of client migration engagement purchase volumes and new client acquisition, we're actually about two times greater than we had expected when it comes to new client.
<unk>.
So feeling really good about that and when it comes to the strategic if you will value of this acquisition. It was all about franchising these affluent clients.
What I'd tell you is while the bulk of our activities really start to kick off this fall we've already made some pretty encouraging progress. So we've franchise about 20000 clients. So far so early days, we're only five months in but we're really pleased with our momentum.
When we think how early on we are so thanks for the question John .
I Wonder if I could just do a quick follow on with the plans that you have later on in the year should we continue should we expect to see continued expenses for two are to pursue that strategy.
I would tell you yes over the next few quarters. So we did show I think in our disclosures the Costco.
<unk> contributed about 3.5% increase to our expenses and so you can expect to see that are in the next few quarters.
I think great. Thanks Horton St. John just just to reaffirm what Laura was saying as we strengthened our hand in the credit card segment and we're a strong number three and we're chasing a number two or number one we've got an opportunity here with a very very attractive client base things have gone really well and the growth prospects over the medium term.
Our what we're particularly encouraged by especially with the franchising opportunities. This this falls into the heart of our affluent segment growth strategy that we laid out on Investor day.
Great. Thanks for the color guys I'll I'll requeue.
Thank you. The next question is from Ebrahim, Pune wallet from Bank of America. Please go ahead.
Hey, good evening.
Yes immediately.
You can just spend some time in terms of the margin.
Oh fourth question, one that we think about the margin at the top of the house it give us a sense of the.
The outlook for defeating an.
He's getting head into liability sensitive so.
Keep going higher than 141 million should continue to go down and then it does give us.
Some color around the trajectory for the margin on the puts and takes both in Canadian and U S. B N T.
Deposit pricing pressure that you're seeing in the U S. In particular, thank you.
Thank you Ryan and thanks for the question.
In general we feel very good about NII trajectory as I said in my remarks, as well as the NIM outcomes over time, but let me give you a bit of color on it in terms of total bank because you know that the mix across the business can affect that and so the mix this quarter on a sequential basis was actually.
Positive to total bank margins as was as was the P. M C.
The increases that we saw in the Canadian business the trading side was negative, but that's why we'd like looking at it from a non trading perspective right because they are trading what happens is between the NII line in the other income line, depending on what markets are doing and how our desks are positioned in terms of what the client flows are in the underlying and then what hedges on some.
Those trades would be sometimes that the hedges are in the money, sometimes the underlying is more profitable and so it can move around between those two you have to look at trading overall and so trading I would look at the results this quarter, which are more than $60 million up year over year. So strong was out there and we expect to see good trading volume.
Going forward now let me go back to the non trading side on the non trading side. The two big components of what we always highlight for you that Canadian margin in the U S margin.
Both of them will have long term positive long term and medium term positive trajectory benefiting from good strong margins in the product and rising interest rates, what we see in Canada. As we said is there's a few basis points positive per quarter is the underlying momentum from interest rates, we have some mix elements that.
Helped us this quarter, we had some mortgage prepayments that helped this quarter. So some of those elements may moderate but that upward trajectory of a few basis points over the medium term I would expect in the short term might be a little more stable and that's because we're expecting some of that prepayment activity would be lower and because some of the mortgage origination margins and the shore.
Term looking a little bit tighter than what we would have usually hard. So those are the elements of the Canadian wine in the U S margin.
Our U S margin strategy is very similar to the Canadian one we hedged the U S interest rate exposure, we have a structural interest rate hedging program, we have a longer duration of equity that we sat on those and we do that deliberately to protect margins to create stability in NII and when you go back to pre pandemic levels to now and you look at it.
Our margins relative to what you may see in U S. Mid market banks are either U S units of other banks, we've had tremendous stability and we compare favorably the current margins where they are in the U S are better than they would have been if we hadn't hedged but on the flip side, you'll just see slower participation in the rising interest rates. So we'll see.
The same thing that we'll see margins rising overtime.
But there'll be a little bit more stable in the short term.
And that's just as a follow up if you can talk to what you're seeing in terms of deposits.
You can book in the U S and Canada. Thank you.
Yeah, maybe maybe I'll start with that and.
Maybe the businesses can jump in as well Ebrahim. So are we we are seeing very strong momentum on margins on deposit. So most of the benefit from rising rates comes in on the deposit side you would have seen over all disclosure. We provided we have 25% of our deposits are noninterest bearing those benefit from rising rates. If you look at the interest bearing part of the port.
Oh, Yeah, that's not term that 50 basis points, it's split half and half right have sort of made what we would call mid beta so sensitive to betas and half of it really indexed and so not that much sensitivity to betas, where we have beta sensitivity, we've held very well I would say at least as good as the assumptions in our interest rate sensitivity disclosures.
And so are we we don't see anything in the short term that would change that.
When you look at the U S, particularly the U S. It makes us even better in that 35% of our deposits in the U S are noninterest bearing and that's been pretty stable balances have been growing percentage has been pretty stable and again, our betas seem to be holding so if you feel comfortable about deposit margins going forward.
Yeah.
Thank you.
Next question is from Gabriel to Shane National Bank Financial Please go ahead.
Good morning, I've got a.
Great questions, but I'll stick to one actually its not that great.
Wanted to delve into the expense commentary a little bit.
If I look at the first half excluding variable comp Ah.
The 10% growth this quarter.
The initiative spending and all that or Costco.
We're at 11.
And it sounds like we could be running at that rate.
A little while just just.
You know if you can kind of give me the glide path over the next four quarters because of a figure out some of that should fade, if only because we've got easy comps.
Good morning, Gabe, It's Raj happy to take that let me backtrack for one second let's say our approach to investing in our bank and investing in our strategy and the financial targets. We're striving for it. It remains consistent it's done that for the last couple of years, we have a well thought out strategic plan, we outlined at our Investor day, we're actually.
And against that plan and we're getting the results as you see so financially we've guided that that will translate to accelerated revenue growth share gains, 7% to 10% pre provision earnings growth positive operating leverage over the medium term and we've been delivering on all of that you mentioned some of the results on the expense side, but I would look at all of it right all that over the 12 months.
If you look at the last four quarters trailing we've delivered revenues that's been 10% and we've been delivering our expenses, 11% on a 12 month basis, 10% this quarter right.
In terms of this quarter I'm happy to give you a little bit of color or increased expenses or a large part as we've highlighted in the presentation still are impacted by the investments as well as inflation piece in the quarter, you know 5% of it was that the investments about half of that as we've highlighted.
Costco in the U S and so the number Laura I gave three and a half percentage Costco to call. It three 5% of the P. B B expenses on a total bank basis, it's about one and change and combined U S and Costco is it two and a half we show both of those are plateauing and so I would look at those we have a full quarter of expenses related to Costco.
This quarter, there was some variability going forward, but largely stable and our U S investments are plateauing and so we expect starting in Q4, the sequential expenses in the U S. Our two also a plateau and so those will contribute to the stabilization. We are proactively managing the remaining part of the portfolio in order to solve for our operating Todd.
Gets operating leverage targets in the inflation elements as well we see over the next few quarters, that's probably about a third to a half of the remaining expenses. We've highlighted there on the slide and we see that moderating over time, so where do we go we're focused on delivering what we've committed to we've guided to high single digits.
T P. This year and neutral ish operating leverage we feel very good about delivering the pretax pre provision and we continue to work on the operating leverage this quarter, we delivered near neutral operating leverage despite some pressures on revenue from the markets that we're in test unanticipated and we're focused on continuing on that positive operating.
It should actually next quarter and going forward.
And getting to that mid single digit expense growth over time that we've talked about at Investor day, as we get into next year.
That's well outlined.
And Gabriel just you know we have as a leadership team an overarching view on growth.
<unk> growth and we need to invest to generate that growth across all of our businesses. We have the goal of being top of class in everything that we're doing everything that we laid out for you on Investor day being number one in affluent client growth being number one in client experience investing in our future Differentiators all of.
These investments are driving the kind of results that you're seeing in or bank market share gains topline growth margin expansion and and we will continue along that path from time to time, you may see the operating leverage lag in the U S business, that's the case and I'm going to hand, it off to cap in a second the bottom line is that our view.
On growth in the U S is quite optimistic but our focus is on organic growth and we're gearing up for more organic growth in the commercial bank, which is why we're investing we're gearing up for more growth in our wealth management segment, which is why we're investing so maybe you can just give a flavor as to what is going on in the U S. Why we where we're going into the into the new year.
When it comes to our financials and our strategic growth priorities. So thank you Victor.
Again, as we outlined on Investor day, where make is simply making investments in our people our technology our product offers and our infrastructure teams are in the U S and we're doing all of that to fuel organic growth and we've that we've achieved and <unk>.
<unk> four for the coming quarters and years as Harry mentioned, starting next quarter, we expect those our expense levels to plateau and combined with our robust revenue growth.
And all of our U S businesses, we hope to achieve in the U S. Commercial wealth segment, a positive operating leverage by mid next year.
Great. That's very helpful thorough and enjoy the rest of your summer.
[laughter].
Yeah.
Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead.
Hi, good morning for Harry on capital markets are generally resilient on a segment basis, but whenever your peers yesterday God took a write down on the leveraged loan book and I was wondering if you can comment on Oh, you're kind of buckets, you Watson and that if you see any issues near term.
Well. Thank you for the question you know as I mentioned in the past and Investor day in other calls we really do have a differentiated platform.
That is highly connected with the rest of our bank and we're building a true client centric north American business that delivers relatively lower volatility.
Pre provision earnings so with that backdrop.
We're highly selective and disciplined with respect to the area, you're referring to it's a very small area essentially immaterial part of our business and we're really focused on our client needs and so we experienced no losses due to this exposure in quarter, three and really feel comfortable with our platform as we move forward in that respect.
Okay. Thank you very much.
Okay.
Thank you. The next question is from many grauman from Scotiabank. Please go ahead.
Hi, Good morning, just a question on your estimate of the impact of the Canada recovery dividend.
Based on the drop that was just made public I believe in August nine and just wondering.
How much certainty you have and in that number are given that it's a dry.
The fact that you gave the number I guess a good indication that you don't see this changing too much by the time it gets finalized.
Yeah.
Yeah. Thanks for the question Manny.
Wouldn't read that into it in terms of how much certainty we have and the number calculating the number is pretty easy given the draft legislation. So we have lots of certainty in the number given the draft legislation as we said in our disclosures, but its draft legislation, it's still up for public comment and if there's legislation changes then.
The number will change, but we felt it was important since we can calculate the number to disclose that to our shareholders. At this point in time and I would say our capital position, we're very comfortable it can absorb that right. If that were to come in all at once and impact capital. It's 18 to 20 basis points of capital and it still allows us to stay around the capital.
The levels that we discussed at Investor day continue to invest in our business. So it's not going to be that significance to us and so we disclose the number we thought it was the right thing to do.
Alright that makes sense, so just to clarify it it's reasonable to assume that it could still change though right.
Is that a fair assumption.
Yeah, I know as much as you do on that its draft legislation and it will at some point, presumably get finalized.
Thanks Rich.
Thank you.
Next question is from Sohrab <unk> from BMO capital markets. Please go ahead.
Thank you Sean just.
A quick one for you I think you had some interesting stats here one of which was the average yet.
Credit quality of the business and government book is investment grade at Tat Triple B do you have a sense of a.
What it would've been five or 10 years ago.
And is there is there any reason to believe that in the next cycle and because of the improving credit quality there.
Also in retail I suppose being more secure that your through the cycle kind of P. C L shouldn't be door.
We have been over the last five to 10 years. Thank you.
So rob Thanks for the question. So we're very comfortable with our business and government portfolio across the board obviously over the last several years, we had the acquisition of the private bank now CIBC Bank U S. A and so its profile is very strong we're very comfortable with the portfolio that we acquired it has performed in line with our expectations.
Patients we've continued to.
Maintain our underwriting discipline through cycles are including recent originations we feel good about those originations across the commercial and corporate banking platforms and similarly with our our retail.
Portfolios again.
Strong and steady and consistent underwriting discipline and our clients are in.
In good shape coming into this.
Whatever this new period.
They ultimately unfold having come through the pandemic. We saw good client behavior, we saw deposit balances and investment balances and Bureau scores all improve so you know.
From a from an overall perspective, we've given some guidance during the Investor day as to what we would expect our our impaired losses to be over the coming years, and we don't we're not a we're not changing that perspective today.
Thank you.
Thank you.
The next question is from Nigel D'souza from very Taos investment Research. Please go ahead.
Thank you good morning, I had a couple of questions for you on Europe .
Variables, if you could bear with me.
Outlined on slide 37 the.
The first was on household debt service ratio outlook. It looks like that was revised lower this quarter also philosophy I'm wondering what led to a downward revision in your outlook.
Has there been a change in your outlook for interest rates just trying to get.
A sense of why you expect the DSO to be lower.
Yeah. Good morning, So yes, there was a a small change in the interest rate outlook in the outer years, and so that really.
Impacted principally on the mortgage D. S are our calculations in the model so.
That's really what's driven that are that change quarter on quarter.
Okay, I assume that you're assuming all your revision was the lower pace of interest rate hikes and all the other interest rate cuts.
That's correct.
Yes.
Okay, and then sticking with the theme.
You're all looking at your downside scenario or the H B I you have a decline in the first 12 months, which makes sense. That's typical but you also have a sustained decline in the remaining forecasters, but wondering what your rationale was there for the HDI to continue to decline not just in the near term, but over the medium term.
In your downside scenario.
Yeah.
But again, it's it's a downside scenario. So what is it anticipates a longer period of low AR growth. In fact this quarter, it's more of a recessionary sort of profile than it was in prior quarters. So over that the period that the F.
L I.
Cover we saw some some reduction there and you know that it's the it's the outlook from our macro economics Department, we build that into our models and incorporate that as part of our overall assessment of the quarter, but that's that's really what's driving the change quarter on quarter.
Okay and last question for me on this.
Canadian versus U S GDP plus all the scenarios you have cats.
You'll see growth outperformed the U S and find a sense of again, what's the rationale there and what we're actually seeing right now is perhaps more interest rate sensitivity.
And the Canadian economy. So why do you expect them to outperform even in your downside scenario you have U S and a mild recession, but Canada.
After the recession GDP standpoint.
There's a few things Vicki economists have been looking at including sort of the starting point from where the recovery happened between Canada and the U S. Canada was slower.
To recover so we've got a bit of that I would say relative a tailwind if you would between the two geographies. We also have certain elements within the Canadian economy from a commodities perspective and strong employment that are you know they continue to.
To provide some level of cushion to the Canadian economy relative to some of the other headwinds and so it's a it's a bit of a relative a call based on those factors that results in a bit of a different perspective on where G. D. P goes from here.
Okay. That's it for me thank you.
<unk>.
The next question is from Mario Mendonca from TD Securities. Please go ahead.
Good morning, <unk> could you help me reconcile two things that you've offered on this call so far that.
Hard for me to see how they come together one you said that you don't expect a lot of margin.
Approval in Canada, and the U S and those personal and business banking segments.
In the near term and fairly modest going forward.
But your sensitivity.
<unk> suggests this is in your presentation.
That there is meaningful upsides in NII from changes in the rates is the reconciliation of those two concepts really that the margin and the NII benefits will accrue to the center of the house in Treasury and not the segments is that the right way to reconcile those two.
These statements.
I wouldn't say so yeah. So if you look at the sensitivity and and you run the numbers on the 354 million plus 100 remember that's over.
Four quarters in the first year and if you run the math on basis points. So the total bank rights at total bank NIM that four basis points.
And so if you look at that on a segment basis and you looked at it on a quarterly basis and you get to something that's again in that modest quarter over quarter impact perspective, as that ramps up right and so when you look at even to date, if I look at what's happened from an interest rate perspective, if I look at quarter over quarter trajectory.
Truly isolating the impact of interest rates as those have started coming up that's what we've seen a few basis points positive contribution to the margins in P&C to the margins overall to the bank. So that's what we expect from interest rates and that's part of the gradual repricing of the balance sheet as we manage that our interest rate sensitivity.
Two our targets.
So overtime it does add up but we do expect good healthy momentum, it's just comes slowly quarter over quarter.
And then the year to sensitivity, we do offer a similar explanation that it might just be slightly better in year two.
But it is entirely consistent with your guidance then on on what margins can do.
Yeah, that's right and actually what happens right as you get its slower a year or two part because if you look at the first year.
Hey, Matt.
I don't have that would that we disclose that's due to short term rates. That's basically the short resets that happens within a quarter, even and then the rest of it is the longer term repricing that takes several years to price through once you get to the second year and that interest rate sensitivity. It's just assume that you get this 100 basis point increase in rates stay there.
And so there is no more a short term impact so it's just that ongoing repricing of the long exposure.
It's even more gradual when you get into a second here.
I think I got it. Thanks, So I just add one other point is that our ability to grow market share is not factored into that so if you actually look at the flows on money and at CIBC, where we're number two in the market today.
And you know our goal is to be number one. So we are focused on continuing to grow deposits from our client base continuing to grow investment management business from our client base and as we go forward and we see the balance shifting perhaps away from loan growth and continued deposit growth we are going to be driving those numbers going forward Mario and just watch out for that across all of our.
Businesses.
Victor do you not that he mentioned is new we believe that the ITC was 11, 8% capital ratio can support that type of market share gains I think deposit growth actually contributes to capital our capital origination as does investment management, we're very focused on that.
Got it thank you.
Yeah.
Thank you.
The next question is from Lamar Prasad from core Mark. Please go ahead.
Thanks, I was just kind of come back to a more detailed question on the sub pack. So page if I got it.
Page six Oh interesting to them that are there can you talk a bit about what drove that increase of 114 million. This quarter typically it is below $70 million.
Yeah. Thank you I. Thank you for the question of are happy to happy to take that one so let's say, there's a little bit of accounting noise here in technicality between the different line items. So let me try to decompose that for you and leave you with the punch line. So the large fluctuation in that line.
This quarter, if you dig underneath it is specific to the sub a line that's gains and losses on non trading derivatives, and that's where we had 76 million quarter over quarter increased $53 million year over year increase so that's basically that movement. There's two things that impact that one is a lot of our treasury activities related to again.
Trading derivative used for hedging and hedging of interest rate positions hedging or funding that we issue both on the interest rate on the currency side and then also financing activities in capital markets. So sometimes derivatives are used in those structures wherever financings securities positions, providing leverage to clients and so.
And so that can come through that line item and so the noise part theres about 30 to 35 of that number or whether you look at it on a year over year or quarter over quarter, that's actually noise. That's offset in other line items. So this is similar to what I was saying on the trading thing, sometimes you've got an underlying position and that comes through.
NII and then there's a hedge on it with a derivative and that comes through this line item to 33 five if this is offset either in NII declines or declines in the FX other than trading line. So that I would consider as there was no net impact to our revenues the remainder of it is real and really if you look at it quarter over quarter.
$40 million of that that's related to our treasury hedging activities, which had a positive impact as well.
The only real net.
Net revenue benefit that I would highlight the rest of it is noise.
Okay understood. Thanks, a lot and then just sticking with that that same schedule is not interesting to them. The card fees I know this has come up.
But it's the lowest level in two years, you've added on the Costco portfolio purchase volumes are increasing so can you talk to me a little bit about you know why is that card fees line not not increasing the number I'm, referring to the $98 million.
Yeah, Thanks, Omar and a good a good question on that one as well so as the Costco portfolio has come in and actually put some pressure on the card fees M. P. B B and remember we had talked about this a little bit in the past the way the revenue on that program works. There is revenue in the fee line item, but there was also expenses that go.
As a contra revenue on that line item related to points and so forth on the cards. So the Costco program on its own as it came in at about call. It around $30 million of pressure on the fee line item. That's in now on a go forward basis I don't expect it to put it is going to be neutral on.
A few line items, so going forward quarter over quarter as we grow the program no contribution to fees, but also no further pressure.
That puts pressure on that line item. If you look at it now relative to prior quarters, but it won't going forward and on the NII side it more than offsets that and that's how the revenues of that particular program come in so hopefully that's helpful.
That is thank you.
Yeah.
Thank you.
The next question is from Mike respond Novick from K B W. Please go ahead.
Hey, Good morning first question just a couple of numbers questions for me maybe for John .
Just looking at that.
Canadian wealth. So I'm just taking your adjusted numbers and correct me if I have the numbers wrong here, but when I calculate Canadian wealth on it. So it looks like you had a pretty sizable decline quarter over quarter in the adjusted earnings number it looks like it's all revenue driven.
Comment on Canada World, specifically this quarter, yeah. So the flow piece of the Canadian wealth business was very good.
On a retail mutual fund basis were in line with the industry the industry soft and Gundy, we had a record flows we've had record flows in the third quarter of record flows year over year. What you see there is just a market fluctuations. It's a purely it's a Canadian business markets were choppy in Q3.
And that's the nothing else, but the market and reasonable flows within that market.
Okay, I guess I'm just surprised by the magnitudes there just based on my numbers, it's $94 million this quarter down from 139. It just seems like a sizeable decline just even given the marquee conditions anything else in that anything related to mix or what the flows have been.
Closer to home.
It's it's market, there's nothing else in there.
Okay. So no no no difference in the flows that are coming in being maybe a little less profitable tight.
Laura tight.
Right.
So again the industry and retail mutual funds those are the best those are the best margin flows. The industry is as negative on flows in Q3, I think we ranked number two in the industry less redemptions than most in our gundy flows are at record levels. Now Gundy flows are always our full service brokerage flows are lower margin.
But that one that would not explain any of of the drop the drop is market.
Okay I appreciate that and then a quick one for Laura I just wanted to ask about the Canadian residential mortgage book.
And if you look at page 34 of your report to shareholders. It shows that 22% of your book is greater than 35 years on amortization and I think that was 12% last quarter. It was zero at the end of last year.
Uh huh.
I I don't know off the top of my head I'm guessing, that's probably higher than peers.
But is there any reason to.
Look at this and think that maybe Cibc's board would be so on the mortgage side in Canada or just more highly levered than what we see what appears any color on that.
Sure.
Yeah, Mike I'm happy to answer that and Sean can can add on if he likes yeah I don't see any issue with that as you know and Sean talked about it with the rising rates and the variable rate mortgages with how our our book functions.
You see increased capitalization as rates rise because our clients payments that are under a variable rate mortgage doesn't change until they hit a threshold and so that's why you see higher amortization, Sean talked about it what we're seeing is our clients proactively start to make payments. So that's why you see.
<unk> increased our amortization, but nothing to worry about as Sean pointed out and a lot of that will get reset at renewal time from our clients. So not concerned I dunno shifts to add up.
Go ahead Mike.
Sorry about that.
Sorry go ahead, Sean My apologies.
Look I'd just say that this is a function of as we talked about it's a fixed payment, but the more as interest rates rise more of the.
Fixed monthly payment goes towards interest rather than principal, which then just mathematically extends the amortization.
And if in fact continues to a level then.
Clients can start to capitalize that interest, which we're not seeing a current rates, but to the extent that rates continue to rise you could see some of that happen and then as we've talked about in prior discussions in fact capitalization continues to a level.
It's what we call the designated amount, which is 105% of the original principal amount then they didn't need to be an immediate payment to deal with that but at this point the 22% of the portfolio, but that has extended the amortization beyond it was really the mathematical outcome of more of the monthly payment going towards interest rather than principal and all.
Automatically therefore, extending out with the calculated amortization would be based on that payment.
Okay got it and then just your knowledge, Sean or Laura would you be would you think that CIBC would have a higher number than peers.
Because it is a structure on that variable product is pretty similar for most of the banks.
I'm just wondering if it's something that's maybe a bit more elevated CIBC and why that would be it would suggest potentially maybe borrowers taking on a bit more leverage.
With respect to the most recent originations any any thoughts on that I havent seen the other results I'd just say that this is.
This is the way the product would work given that we've got that fixed monthly payment that doesn't adjust with interest rates and as Laura said, we are seeing some clients just are proactively making payments to keep that amortization flat, but you don't have concerns based on what we're seeing to date in terms of credit quality or issue.
She was a building.
Okay. Thanks for the color appreciate it.
Yeah.
Thank you. The next question is from Doug Young from danger, I think capital markets. Please go ahead.
Yeah.
Good morning, and thanks for taking the question hopefully this will be relatively quick but victor at the very beginning you talked about the addition of 300000 clients I think that was Canadian banking and you gave some stats around that what I'm, particularly interested in is where those clients are going are you having success attracting them into core deposit.
Town square paychecks are going into is this more mortgage origination is that the cros.
Across all of it and how much and how many of these clients would be multiple product clients and how is the cross selling them outside of just trying to get a sense can you talk about growth. Yes. It's obviously an important part of that so just color would be much appreciate it. Thanks, Doug and then if you go back to first principles in our key strategic priorities to grow within the affluent segment.
Over index there so as we took you through the data on Investor day.
And Jane Laura's presentation, she outlined our current portfolio of clients, 11% of our households are in the affluent segment.
Our strategy is to over index on that and to grow our market share in that affluent segment. When you see a spring and 300000 clients, 25% of which are in the affluent segment that strategy is on track.
Overall clients in the affluent segment tend to have deeper relationships with us. They go through the CIBC gold plant or platform. They tend to have business on both sides of the balance sheet that is exactly the kind of business. We're focused on building that is highly aligned with the strategy that Laura has a lot of outlined at Investor day, and we continue to live.
We're on that or I don't know if you want to add anything to it but we're highly encouraged that one of our key priorities is well on track and we plan on delivering on that quarter after quarter after quarter.
Well said Victor I stat that are to your question where are we seeing it it's across all of our products, but really leading the way in this rate is in the deposit side. So with every day banking products and so that is how we see real engagement with our clients. So we're really happy.
With with how we're leading in that regard so thanks for the color Doug.
Go ahead, Laura on the deposit deposit side is this more on the term side is this more a checking account can you give a little more granularity on that side, yeah. Its a across the board.
That we're seeing it so again very solid and we continue to see really impressive new client acquisition and retention in our everyday banking accounts. So those are our transactional accounts.
Okay I'll leave it there thanks.
Thank you.
And gentlemen, that's all the time, we have for your questions I will now turn the call over to Victor. Thank you operator, and thank you all for your very insightful questions and we hope we answered them to your satisfaction I just want to close by saying a couple of things. The solid results. We reported this quarter demonstrate our strength and agility in a challenging economic environment.
As we've laid out to you at the Investor Day, we have a strategic plan that's built for sustainable growth and our continued capital strength enables us to focus on targeted high return investments to deliver value to our shareholders over the long term our senior leadership team at CIBC is highly focused on delivering against these objectives.
We're going to continue to take a disciplined approach to our risk and expense management, we're gonna proactively calibrate our gross investments to changes in economic conditions, if things get better we'll continue on that path if things soften up we'll adjust accordingly, but we're always focused on strategic growth for the long run and we're going to continue to leverage technology to improve.
The efficiency and the banking experience, we offer to our clients. So in closing I'd like to thank our entire CIBC team for being on purpose as we deliver for all of our stakeholders and I want to thank you for your continued interest in our bank your investment in our bank and we look forward to speaking with you.
At the next quarter call and certainly in between them take care enjoy the rest of summer.
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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It's closely Hosni. Please also as you see.
Okay.